Friday, March 30, 2007

Tough New Rules Limit Refinancing Options

By Peter G. Miller

RISMEDIA, March 30, 2007-Imagine driving along the highway. You run over some glass and a tire goes flat. It's no problem because there's a spare in the trunk.

For the past several years real estate buyers have had a financial spare tire, a back-up system that was always there if times got tough. But now that spare tire is about to disappear, a vanishing act that will surprise some borrowers and bankrupt others.

What happened?

The "smart" play in real estate between 2001 and 2006 was to buy as much property as possible, finance with little or nothing down and then make the smallest allowable monthly payments.

Such a strategy made sense in a world where home values "always" rose and lenders provided ideal forms of financing, loans where initial monthly payments equaled no more than the cost of interest and sometimes less.

But now the game has changed. Freddie Mac — a major buyer and packager of mortgages — has announced that starting in September it will substantially change the way it purchases subprime adjustable-rate mortgages (ARMs). From this point forward loans with little down and tiny payments up front are going to be much tougher to get.

Freddie Mac will not buy subprime loans unless the borrower is qualified to pay for the loan at its fully-indexed and fully-amortizing rate and not merely an upfront and low-ball "teaser" rate.

Freddie Mac will require stronger proof of financial capacity. For most borrowers this will mean showing tax returns and W-2 forms.

Freddie Mac wants subprime lenders to collect money each month to assure that property taxes and insurance are being paid.

"Right now," says Jim Saccacio, chairman and CEO at, a leading online marketplace for foreclosure properties, "the new Freddie Mac standards apply only to subprime loans, mortgages used to finance borrowers with high-risk credit records. However, the potential for excess risk also exists for loans for more-qualified borrowers. The result is that borrowers in every credit category would be smart to assume that mortgage standards are about to tighten throughout the marketplace."

Freddie Mac's rules are important because they create big profits for lenders. Freddie Mac buys loans from lenders-lots of loans. According to The New York Times the company has purchased subprime loans worth $184 billion.

The catch is that Freddie Mac only wants loans that meet its standards. If you're a lender you want to meet the requirements of Freddie Mac and other mortgage buyers because then your loans can then be quickly sold. Once sold, the cash you receive can be used to create new loans, new fees and new profits.

While the new Freddie Mac standards will plainly impact new borrowers, the real marketplace worry concerns those who now have loans but will need to refinance in the next few years.
Between 2001 and 2006 millions of properties were financed with interest-only and option ARM financing, loans which allowed borrowers to make low monthly payments during initial start periods, the first few years of the loan. Borrowers with such financing know-or should know-that once initial start periods end the loans can only be continued with far higher monthly payments, in some cases payments that will double.

Despite the potentially bankrupting impact of such larger monthly payments most borrowers did not worry and with some reason: As start periods ended properties could be refinanced so borrowers could get another few years of low monthly payments.

Now, however, the ground rules have changed.

First, if the original loan was obtained with a "stated income" mortgage application that contained-shall we say, "generous" and unchecked income estimates-new applications will demand verifications and proof. Without evidence of real income, borrowers will be unable to refinance.

Second, if the original loan application was obtained with a full-documentation application that had every number checked and verified.

In practical terms, suppose buyer Dixon qualified to borrow $200,000 in 2005. He now has the same income and credit, he can document everything, but his loan application will be judged on his ability to pay the real monthly cost of the loan and not just a payment based on an up-front teaser rate. The result? It may be that he can only borrow $175,000 in 2007.

This means Dixon cannot refinance unless he can also pay down a substantial chunk of his existing debt in cash-$25,000 in this example. Without the additional cash Dixon is effectively locked into his existing loan-the very loan that he doesn't want to pay or perhaps can't afford to pay once the "start" period ends.

For some borrowers the new rules mean existing loans-especially recent loans-cannot be refinanced. Unfortunately the alternatives to refinancing may also be unworkable because larger payments may be unaffordable; in slowing markets homes may not sell at a profit and rents may be insufficient to cover monthly mortgage costs. For too many borrowers, it will no longer be possible to delay mortgage problems by refinancing, an option that could have prevented foreclosure and bankruptcy.

Are the new standards too harsh? Did Freddie Mac do the right thing?

"Freddie Mac," says RealtyTrac's Saccacio, "deserves credit for being the first to make a terribly tough choice. It's the right decision, one that will be painful now but a strategy which will ultimately result in far fewer foreclosures, a reduced number of lender failures and smaller investor losses."

Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 90 newspapers.

Thursday, March 15, 2007

Report finds subprime loan servicers practicing forbearance

Long-term benefits of modifying loan terms a matter of debate
Thursday, March 15, 2007 By Matt Carter Inman News

A new report by Standard & Poor's Ratings Services details steps subprime loan servicers are taking to help borrowers avoid foreclosure, but doesn't attempt to gauge how successful those efforts will be.

With estimates of more than $500 billion in adjustable-rate mortgages expected to reset to higher interest rates this year, the willingness of lenders to work with debtors to avoid foreclosure could mean the difference between a soft and hard landing for some U.S. housing markets in 2007.

Loan servicers, who not only collect payments from borrowers but also handle defaults, foreclosures and the sale of real estate-owned properties, can "minimize losses to investors while providing assistance to thousands of homeowners in dire financial trouble," the Standard & Poor's report said. There's plenty of incentive for lenders, too, since the foreclosure process can cost $40,000 per home or more.

But subprime loans -- which can include "exotic" mortgages like interest-only and pay-option adjustable-rate mortgages, as well as hybrid 2-28 loans and 80-20 piggybacks -- are more complex to administer than 30-year fixed-rate mortgages, the report noted.
Some borrowers have complained that it's difficult to communicate with their lender, and that some are unwilling to discuss alternatives to foreclosure such as modified loan terms or a short sale. Standard & Poor's said discussions with loan servicers about their efforts to work with borrowers were "encouraging."

"Sound, proactive management, along with ingenuity, planning, and investment in staff and technology have put most servicers in a solid position to help borrowers work through the substantial difficulties they may be facing," the report said. "All of the servicers we contacted said curtailing defaults and engaging in early-stage loss mitigation are paramount for minimizing investor losses and keeping borrowers in their homes"

The point of the report, said Standard & Poor's Servicer Analyst Robert Mackey, is that "major servicers really understand that early intervention and loss mitigation is a much better way to address this" than proceeding directly to foreclosure.

J. Michael Collins, president of Ithaca, N.Y.-based MortgageKeeper Referral Services Inc., said that when borrowers get into trouble, "they tend to panic."

From his perspective, "Servicing could improve, so that people are not scared of the lender."
MortgageKeeper helps lenders find help for troubled borrowers by maintaining a database of nonprofits in 15 cities that provide counseling and assistance. The company has received "a lot more inquires lately," Collins said. "There are a lot of folks in the industry trying to figure out solutions."

Subprime loan servicers seem to be moving more quickly than prime lenders in adopting a "customer-oriented" approach in response to the current rise in loan delinquencies and defaults more quickly than prime lenders, Collins said.

"There is probably more they could do in the early stages, and be less confrontational," Collins said. "Many are starting to go in that direction."

Servicing loans can be a labor-intensive job, and some lenders outsource the job to companies that rely heavily on loan processing software and overseas call centers to reduce costs.
"I think a lot of folks think of loan servicing as a cost," Collins said. "When the goal is minimizing costs, they miss that this is a place where you can get a lot of added value."

In the long run, cost-cutting measures could actually increase expenses if more loans go into foreclosure.

"If I'm a borrower, and get shunted to a call center overseas, how much do I feel the lender trying to work with me?" Collins said. "This sort of laser-like focus on cost-cutting can result in worse borrower behavior, and less likelihood of getting those payments and a resolution."
Mackey said lenders understand the importance of loan servicing.

"Any staff reductions you're reading about (in the mortgage lending industry) today is on the origination side," Mackey said. "The servicers are adding staff because of the complexity and the volume of loans having trouble."

In his report for Standard & Poor's, Mackey found that many loss-mitigation departments are trying to identify troubled borrowers in the early stages of delinquency, reviewing accounts that are current to determine if they may be headed for trouble. Servicers are trained to spot problems based on conversations with borrowers, assigning them risk profiles that help loan administrators make early contact.

Standard & Poor's found that Saxon Mortgage Services Inc. calls and writes borrowers facing ARM resets, and offers repayment plans to those with escrow shortages beyond the traditional 12-month period.

When a loan is still in the early stages of payment default, "Our staff is attempting contact every other day until the customer is reached and a status on the account is obtained and hopefully a payment taken or a short-term repayment plan established a promise to pay is made," Saxon executive vice president Stella Hess told Standard and Poor's.

Saxon has reduced the number of accounts each agent handles, allowing them to devote more time to borrowers in need of consultation, Hess said.

Before referring any delinquent loan to a foreclosure attorney, a committee at Saxon conducts a review to verify the company has taken every possible step to mitigate a loss and stave off foreclosure.

GMAC ResCap Vice President Mitch Oranger told Standard & Poor's the company is sending staff to cities around the country with high foreclosure rates.

The company aims to make early contact with troubled borrowers, which can require verifying borrower information and authorizing skip-tracing even as a new loan is being boarded to its system, Oranger said.

In 2003, ResCap partnered with the City of Chicago, Neighborhood Housing Services of Chicago, the Federal Reserve Bank of Chicago, and others to form HOPE, a loss-mitigation effort that has expanded to 10 cities.

ResCap's foreclosure prevention team is also providing similar services in 12 other markets where foreclosures are rising and local partners want to provide local counseling to homeowners.
At Irvine, Calif.-based Option One Mortgage, all loans are eligible for loss mitigation, even those with first-payment defaults. Option One has opened satellite offices in areas with high foreclosure rates such as Detroit, Columbus, Ohio, Atlanta, Houston and Philadelphia.

Collins said Mortgage Keeper is talking to its lender clients about expanding its database of counseling and assistance programs for borrowers to another 10 cities. In discussions with lenders on where the need is greatest, California, Tennessee and Florida have emerged as likely candidates, Collins said.

Although Standard & Poor's did not attempt to gauge the effectiveness of efforts to assist borrowers, a report released Tuesday by the Center for American Progress looked at several foreclosure prevention programs.

The programs examined in "From Boom to Bust: Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures," included a mortgage foreclosure program in the Minneapolis-St. Paul area.

The program, created in 1991, provided counseling for 4,200 households and mortgage assistance to a smaller number.

A 2005 study found that 60 percent of households receiving services and 70 percent of those that received assistance loans were current on their mortgages 12 months after receiving services.

Most homeowners receiving services were able to reinstate their mortgages in approximately 9.5 months and pay back their assistance loans, and the rate of foreclosure by families served by the program dropped from 11 percent to 6.8 percent.

But the drop could have been because of the growth of nontraditional loans offered to borrowers with no equity and a state law prohibiting creditors from collecting deficiency judgments, which made lenders more willing to restructure loan terms.

Some experts think efforts by loan servicers to mitigate losses may have contributed to the current crisis in subprime lending, by obscuring the true risk of securities backed by mortgages and sold on Wall Street.

In a recent paper, "How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?" Joseph R. Mason and Joshua Rosner point out that loss mitigation may have long-term risks, citing studies that suggest the rate of re-default FHA loans with modified terms may be as high as 25 percent.

The Department of Housing and Urban Development requires servicers of FHA-guaranteed loans to attempt loss-mitigation strategies, Mason and Rosner note. Government-sponsored entities Fannie Mae and Freddie Mac have reported a success rate of nearly 50 percent in such efforts, they write.

"Given that subprime servicers have implemented some of the most aggressive approaches to servicing delinquent loans, it would be surprising if their workout ratios have not kept pace with the (GSEs)," they say.

These mortgages can be placed in pools of loans that back securities purchased by Wall Street investors, who may not be fully aware of the added risk of default, Mason and Rosner said.

"While the industry and HUD have frequently stated the social benefits and business savings of loss mitigation, scant data exists to analyze the ultimate effectiveness of these programs," they wrote.

As a result, historical data on delinquency and default may understate risk. That, combined with the lack of loan-level data about loss-mitigation efforts makes it difficult for investors in mortgage-backed securities to properly gauge their risk.

The rollover of nonperforming loans is considered one of the main causes of the savings-and-loan crisis of the 1980s, they noted, and can "create greater systemic risk" in the banking and financial industries.

The Standard and Poor's report, "Subprime Loan Servicers Step Up Loss Mitigation Efforts To Avoid Foreclosures," recognized such dangers.

If forbearance plans and loan modifications "are not prudently underwritten, delinquencies will only worsen," the report concluded. "Competent mortgage servicers should focus their most seasoned default management personnel on loss-mitigation negotiations, and that staff should receive continuous training. Senior management should closely monitor recidivism rates and forbearance break rates to ensure that the decisions being made by staff are sound and provide long-term solutions."

"I hope borrowers understand that it's always their best bet to contact the lender sooner rather than later," said MortgageKeepers' Collins. "The consumer psychology is often, 'I can take care of this tomorrow.' The longer they put it off, the harder it's going to be."


Tuesday, March 06, 2007

What to Expect from a Home Inspection

Agents frequently discuss home inspections with home buyers, since inspections are a valuable tool for them to use in deciding if they can afford a prospective home in its current condition. But inspections are also valuable tools for sellers, who can use pre-listing inspections to develop a check list of repairs to make before the home goes on the market – and while there are no time constraints relating to a pending transaction. Even sellers who don’t have time for repairs can benefit from a pre-listing inspection, because they’ll be able to anticipate what the buyer’s inspection will uncover and can use that knowledge with their Realtor® to set the best price possible.

Sellers frequently ask their agents how they can prepare their home for a buyer’s inspection. Aside from holding a pre-listing inspection, remind sellers that they can take the following steps to ace a buyer’s inspection:

Outside impressions: Advise the seller to clean the home’s exterior, and remove soil or mulch from contact with exterior siding. They’ll want to clean roofs or gutters, and double-check how water flows from downspouts and other pipes. Sellers should trim trees and bushes and remove roots that are near the home’s exterior or foundation. They may also wish to paint or repair weathered siding, bricks, and trims around doors and windows. All external wall penetrations should be caulked.

Interior efforts: Tell sellers to clean and replace heating and cooling filters or, at the very least, clean them. They’ll need to test smoke detectors and replace burned-out light bulbs. They should clean the chimney, fireplace, or wood stove, and have furnaces and air conditioners serviced. Moving furniture or storage belongings may be necessary so that an inspector can easily access attics, crawl spaces, the garage, and areas of the basement that contain major home systems. Sellers should keep utilities running if the home is vacant, and make sure windows will open and shut properly. Sellers may want to add insulation and ventilation to attics and make sure crawl spaces are dry.

Bathroom and kitchen work: Sellers will want to make sure plumbing works without leaking or perpetually dripping. They may also need to caulk around tubs or other fixtures. They should check that ventilation systems (range hood, bathroom fans or ventilation systems) work, and clear under-sink areas so an inspector can access pipes.

Gather documents: Before listing the home, sellers may want to organize service records and warranties for appliances in one place. This can help an inspector or buyer see what repairs were made to various home systems and how often or well various home systems and appliances were maintained. Sellers may wish to make a note of any warranties that are transferable to a new owner.

© 2005-2007 WIN Home Inspection. WIN Home Inspection is a registered trademark of World Inspection Network International, Inc., a franchisor of home inspection services.

Monday, March 05, 2007

A flood of foreclosures, but should you invest?

Experts caution potential buyers to do their homework
By Amy Hoak, Marketwatch

CHICAGO (MarketWatch) -- The number of homes in or nearing foreclosure is growing, and some investors are taking advantage of the bargains created.

But even with a steady stream of distressed properties coming on the market, jumping into foreclosure investing is dangerous, especially if you are not familiar with the process or new to real estate investing.

"Some people are using the phrase 'tsunami;' there's going to be a tsunami of foreclosures," said Dave Jenks, co-author of "The Millionaire Real Estate Investor." "For the people who are pros at dealing with foreclosures and have the infrastructure of information and wherewithal ... they will take full advantage of this."

Consider these recent statistics: 1.05 percent of mortgages were in the foreclosure process in the third quarter of 2006, according to the Mortgage Bankers Association. The foreclosure rate increased from 0.99 percent in the second quarter; the rate was 0.97 percent in the third quarter of 2005.

And RealtyTrac reported last week that the number of homes entering the foreclosure process increased by 19 percent in January, compared with December's numbers. Compared with January 2006, the number of homes in the process is up 25 percent. In 2006, a total of 1.2 million homes entered the foreclosure process, 42 percent more than 2005.

See Top Cities for Foreclosures

While there are opportunities to purchase homes at reduced prices in many markets, they're "cautious opportunities," said John Anderson, owner/broker of Twin Oaks Realty in Crystal, Minn., a suburb of Minneapolis.

Above all, you can't assume that just because a home is heading for foreclosure means that it is automatically a good deal, Anderson said. Remember, even for pros, foreclosure investing involves some risk, as does any purchase of "real estate as an investment, as opposed to a home (in which to live)," said Rick Sharga, vice president of marketing at RealtyTrac.

Doing the math

The transaction has to make sense financially, figuring in the costs of getting the property back into marketable condition, the value it's going to have at resale and the length of time it's going to take to find a buyer -- if you do, in fact, plan on reselling immediately instead of holding it to rent out or live in. It's also important to know if there are liens on the property.

Adding to the complexity of the investment are the various state and county foreclosure laws and regulations throughout the country. "This is hard work," said Daryl White, a foreclosure investor in Valencia, Calif. "Forget about 'If I can do it, you can do it'" lines from late-night television infomercials, he added. White, a subscriber of, a foreclosure listing service and educational Web site, uses a spreadsheet to figure the costs associated with investing in a particular property. When his analysis is complete, he can decide what to pay for the property.

The goal, he said, is to buy at 30 percent below the after-repaired market value -- half of the discount allows him to cover such expenses as holding costs and repairs while the other half earns him a profit. The formula is taught through In the "changing market" he's in, near Los Angeles, he has to factor in that houses are taking about three to five months to sell, which adds to his holding costs, he said. But even in a cooling market, a home that is priced right will sell, said Alexis McGee, president of It's important, she said, to pay careful attention to prices of comparable houses that are selling in a particular neighborhood to get an idea of what return an investment can bring. In fact, many who have had success in real estate investing will also recommend not depending on a strong market for a good return, Jenks said. "Most of the really good investors will tell you never rely on appreciation to make a deal work."

Homeowners in trouble

There are a couple of key reasons for the uptick in foreclosures, said Sharga, whose site also lists homes in the foreclosure process. For one, a slower housing market has stretched out the time it takes for a home to sell, making it tougher for families who must sell to strike a deal in time to avoid the foreclosure process, he said. Also at play is the rise in interest rates on adjustable-rate mortgages, at times squeezing "people who have overextended themselves in the first place."

Those looking to buy a home in the foreclosure process can do so during a few different stages. Some investors, including White, prefer purchasing homes prior to the actual foreclosure. Others make the investment later in the process, at a foreclosure auction. If the property is unable to be sold by the bank at a desired price, an investor can deal with the institution in buying what is called a real estate owned property, or REO. Each point has its own complications, so tread slowly and do your homework first, Anderson said. He recommends beginners start out by sitting down with a real estate agent who has experience in the arena, someone who has done it before.

Dealing with a preforeclosure, for example, often involves negotiating with a distressed homeowner -- and doesn't always shape up to be a comfortable situation."They (homeowners) don't want to be bothered or may not be as reasonable as they are under normal circumstances," Sharga said.

On top of that, there are a number of "foreclosure rip-off artists" who have taken advantage of people when they're most vulnerable, he added. White said he's often battling a negative image because people "don't see the white knight part of it," when, in fact, the sale of a preforeclosure home could help homeowners keep negative marks off their credit histories and also get at any remaining equity.

As a Realtor working with investors, Anderson said his first thought is to try and find a way to keep the homeowner in the house. If a sale must take place, he recommends the seller have fair representation before proceeding -- to ensure they get a fair deal.

Friday, March 02, 2007

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