ShaRon Lewis is facing a 50% hike in the payment on her adjustable-rate mortgage next month. This week, she discovered she can’t qualify for a new loan with payments that she could afford.
Athough she’s willing to sell the West Hills home she’s owned for two years, she has been told it won’t fetch what she paid for it. “I have to laugh to keep from bawling,” the 30-something Lewis said.
Her situation is becoming increasingly common across the country amid the implosion of the business of bad credit mortgages.
Many would-be home buyers, and homeowners who want to home mortgage loan refinance, are finding that virtually overnight their status has changed: They no longer are eligible for the kind of easy-credit loans that helped millions of people join the ranks of property owners during the housing boom.
On Friday, Calabasas-based Countrywide Financial Corp., the nation’s No. 1 mortgage lender, told brokers it would stop making adjustable-rate loans covering 100% of a home’s value for customers with low credit scores and unverifiable incomes.
Susan Bies, a governor of the Federal Reserve, said in a speech Friday in Charlotte, N.C., that the troubles of sub-prime borrowers represented the “front end” of a wave the central bank was monitoring.
“This is not the end; this is the beginning,” she said.
A surge in the number of homeowners defaulting on sub-prime mortgages has triggered the collapse of more than a dozen lenders in recent months. Under pressure from federal banking regulators, lenders that are still standing are shutting out customers they were eagerly embracing just six months ago.
Even some borrowers already in the pipeline are being rejected.
“You don’t know how frustrating it is to [have] a client who was approved for a loan 60 days ago, and then the bank calls to say it won’t honor the deal,” said Philip X. Tirone, a senior loan officer with United Pacific Mortgage in West Los Angeles.
As recently as two months ago, consumers could qualify for a home purchase loan or a home mortgage refinancing even if they had low credit scores and no cash for a down payment. Not anymore.
“You’re back to real credit standards,” said Scott Simon, a mortgage expert and money manager at Pacific Investment Management Co. in Newport Beach.
In effect, the industry and new borrowers are paying the price for what many critics say were absurdly generous lending terms in recent years. In 2005 and 2006, mortgage brokers would joke, “If you can fog a mirror, you can get a home loan.”
Click here to read the rest of this Los Angeles Times article.
Is a Wall Street resurgence in the works for mortgage lenders?
Fremont General Corp. and NovaStar Financial Inc. led home loan lender shares higher for the second day in a row Wednesday, buoyed by a report showing an increase in home loan refinancing.
The Mortgage Bankers Association said mortgage applications rose last week to the highest level in almost three months, paced by a 15 percent surge in refinancings.
The perceived risk of owning low-rated subprime mortgage bonds held steady after declining for four consecutive days.
Fremont, a California mortgage lender, told its employees that five or six prospective buyers are in talks to buy its residential mortgage business - news that also helped push the stock price upward.
“The market has been chaotic, but we think it has been overdone,” said David Hendler, an analyst at CreditSights Inc. in New York.
“People kind of sell and ask questions later.”
The shares of bad credit home loan companies, which tend to lend to the riskiest borrowers, led by New Century, plummeted Monday as concerns mounted that rising default rates would push them into bankruptcy.
More than two dozen bad credit mortgage companies have already gone out of business, ceased operations or sought buyers since the start of 2006.
Subprime borrowers, typically people with poor credit or heavy debt loads, pay 2-3 percent more for a mortgage than less risky customers.
Moreover, many such loans are made at adjustable rates, leaving them prone to default if borrowing costs rise or lenders tighten standards.
Subprime lenders are backed by financing from larger banks and securities firms. Some of those stocks are smart buys now because the concerns that they’ll be hurt by subprime defaults are overblown, analysts say.
“The market has already fully punished [these stocks] for their involvement in subprime,” the analysts wrote.
New Century disclosed Friday that it faces a criminal probe and might need waivers from its own lenders to stay in business. On the same day, Fremont said it would stop issuing home loans to people who can’t pay and announced plans to get out of the subprime lending business.
As home sales slowed, lenders loosened approval standards to keep business flowing. The mortgage market hasn’t contracted enough to force out all the companies who relaxed too much, however, cautions Eric Sieracki, CFO of Countrywide Mortgage.
“If we’re fortunate, we get rid of the excess capacity and everybody lives profitably ever after,” he said, adding that he doesn’t see rising subprime defaults as a precursor of similar problems with prime rate loans.
“Let’s face it. No offense to the subprime consumer, but they haven’t seen fit to focus on their credit and maintain a great credit record.”
Shares of Countrywide, the nation’s biggest mortgage company, have dropped 12.5 percent this year, a sell-off that’s been “overdone,” according to Piper Jaffray Inc. analyst Robert Napoli.
Only 9 percent - a small number - of all Countrywide mortgage originations have qualified as non-prime, he said in a report to clients Wednesday.
SOURCE: Chicago Tribune
Edward Booker is one of nearly 3 million homeowners with adjustable-rate mortgages who’ve had trouble paying their bills. Like Booker, many of them won’t be able to refinance their loans once the interest rates start rising.
At that point, they’ll have to tighten their belts, sell their homes or lose them through foreclosure.
This month, the mortgage payment on Booker’s Chicago home rose $200, to about $1,300. It’ll go up again in September. He wants to mortgage refinance, but he fell behind on payments after his wife died of cancer in 2005, so no lender wants to take the risk.
“I’m just trying to hold onto my house until I can figure out something else to do,” says Booker, 58, a former rail-car inspector who’s on disability.
Since the start of the year, more lenders have been shutting their doors to people such as Booker, just as those homeowners’ interest rates are rising. They’re slashing bad credit home loan programs, known as subprime, that helped fuel the housing boom. And they’re raising the bar for homeowners and first-time buyers to qualify for new mortgages.
The trend accelerated last week after federal regulators proposed stricter guidelines for banks that make subprime ARMs. The move followed Freddie Mac’s decision to drastically raise the criteria for the subprime ARMs it would buy and to require better proof of a borrower’s finances.
The industry is reacting to the waves of subprime borrowers who’ve defaulted on their ARMs in recent months. The tighter controls should help prevent future borrowers from getting in over their heads, while protecting them from predatory home loan lenders. But the sudden shift in lending rules could also threaten the homeownership gains made by families since 2000, weaken the recovery of the housing market and potentially slow the economy.
“It will be a very severe correction (in subprime lending), and I think it will last anywhere from six to 12 months, during which many of the lenders who have operated in this market will gradually get pushed out of business,” says Chris Flanagan, a managing director for JPMorgan.
Nearly two dozen subprime lenders have already closed their doors or been purchased, and a dozen more are in trouble, according to a report by Credit Suisse.
To stem their losses, lenders nationwide are notifying mortgage brokers to cancel loan programs. Many of them are:
•Reducing loans for 100% of the purchase price.
•Reducing the number of piggyback loans, whereby a lender makes one loan for 80% of the purchase price and a second loan for the remaining 20% of the price at a higher interest rate.
•Raising the required credit score.
•Requiring more documentation of a borrower’s income and scrutinizing the appraisal and comparable-home sales data.
“Some of these companies are yanking away six, eight (loan) products at a time, and the reps are just hanging on the phone with their mouths open, saying, ‘What are we going to sell?’ ” says Dave Tucker, owner of MileHighMortgage.com in Castle Rock, Colo.
That’s partly why he can’t help Anita Furakh and Bobby Pervez this time. Tucker helped them buy their first home near Denver two years ago with an ARM that covered 100% of the $195,000 purchase price. The young couple, with two children, made their payments on time until December, when Pervez traded in his car for a new one. That month, they were late on their Colorado mortgage. The timing couldn’t have been worse.
They needed to consider mortgage refinancing before the rate started rising this month. But their home’s value hasn’t gone up, and their credit score has gone down.
To continue reading this USA Today article, click here.
The following question and answer is courtesy of Bankrate.com. Its financial advisor responds to an inquiry regarding mortgage refinancing of a piggyback home loan:
Q: I recently learned that my credit union is offering a 100 percent, no money down mortgage available at a rate of 7 percent. I currently have an 80/20 mortgage on my home. The 80 percent first mortgage is a 30-year fixed rate at 6.375 percent and the 20 percent second mortgage is a home equity line of credit, at prime plus 2 percent.
Should I consider a second mortgage refinance and take out the one fixed-rate mortgage, as opposed to the two I currently have?
My home is worth approximately $327,000. The home loan balance on the first mortgage is $253,000 and the loan balance on the line of credit is $64,800. I’ve been in the home for two years, and expect to remain in the home for at least two more years.
A: I recommend that you stay with your current loans for a couple of reasons. First, you aren’t sure that you’ll be in the house for very long. Mortgage refinancing can be an expensive proposition. According to Bankrate’s 2006 national survey of closing costs, you should expect to pay somewhere around $3,000 to close that loan.
Second, your existing first mortgage is 5/8 of a percent less than the credit union’s mortgage loan rate. Saving 5/8 of a percent on a $253,000 loan balance doesn’t quite trump saving 3¼ percent on a $64,800 loan, but my guesstimate (below) has only a $525 difference in interest expense in the first year of the refinancing.
If you pay $3,000 to mortgage refinance, then it’ll take about six years to recoup that cost. You’re not sure how long you’ll be in the house, so it’s hard to justify it on that basis.As of February 2007, prime plus 2 percent equals 10¼ percent. That’s expensive for a HELOC, but it’s priced to reflect the lender’s risk when a homeowner has minimal equity in the property.
By your estimate, you have 3 percent equity in the home. I’ll be the first to tell you that I don’t know where interest rates are headed, but the expectation is that the prime rate is at or near its high for this interest rate cycle and its next move is expected to be lower.
Instead of refinancing both loans, focus on making additional principal payments on the line of credit to get to a point where you can refinance that loan at a rate closer to prime.
Closing costs on a new line of credit are measured in hundreds, not thousands, of dollars. That presumes that there’s no prepayment penalty on the line of credit. Check with your lender if you’re not sure about a prepayment penalty.
Don Taylor is a financial advisor for Bankrate.com. Below, he responds to a question from a confused homeowner …
Dear Dr. Don,
I am moving about 60 miles north of my present home. I need to sell my home … but am afraid it will not sell fast. I want to buy a home in the new area and get settled.
I am thinking about doing a 5/1 ARM on the new house while the other house is for sale. I have about $25,000 equity in the old house to put on the new house when it does sell. I could immediately [mortgage refinance] the new one when I get my equity out of the sale and go with a fixed-rate mortgage.
Do you think this is a good or bad idea?
Dear Kathy,
Closing on a new first mortgage is an expensive proposition. According to Bankrate’s 2006 national survey of closing costs, you could spend an additional $2,000 to $4,000 on that second closing, money much better spent elsewhere.
Your eagerness to refinance after the sale of your former home will depend on what interest rates you can currently qualify for in financing the second home and where home loan rates are when you sell your former home, but I don’t like the 5/1 ARM option you suggest.
The difference in interest expense between a 5/1 ARM and a 30-year fixed rate mortgage is just 0.14 percent. While you’re not likely to get these rates when financing a second home, the example below shows you that there’s not a huge difference in interest expense over the first year, and most of the difference in payments is going toward paying down principal.
And while I’ll be the first to tell you that I don’t know where mortgage rates are headed, there’s a lot more risk to the upside (higher rates) than potential for much lower fixed-rate mortgages after you sell your current home.
Depending on your credit history, the purchase price of the new house and the expected selling price of the old house, I think the first line of attack is to investigate a piggyback loan on the new property.
A piggyback loan has a first mortgage with a loan-to-value ratio of 80 percent or less, so there’s no private mortgage insurance, or PMI, requirement on the property. The second mortgage can be for up to 20 percent of the home’s value, depending on how much money you can put down prior to the sale of your home.
This second mortgage can be a home equity loan or a home equity line of credit, also known as HELOC. You need to be aware of any prepayment penalties on these mortgages if you plan on paying down the mortgage balance with the proceeds from the sale of your former home.
To read the rest of this article, click here.
The Wall Street Journal reports via the Spokesman-Review that with rates on many homeowners’ adjustable-rate mortgages rising, many Americans who would like to refinance into a new home loan are finding they can’t.
In some cases, that is because of a prepayment penalty, which would force them to come up with thousands of dollars if they sign up for a mortgage refinance in the first few years.
Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a lower, initial interest rate (or teaser rate) that rises sharply after an introductory period.
Other borrowers are getting caught short by a changing housing market — one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making home mortgages easier and easier to get.
The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are still able to qualify for mortgage refinancing but are finding it more costly than they expected.
These challenges come at a time when borrowers who took out adjustable-rate mortgages are facing higher payments. There are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association. The MBA expects borrowers to refinance as much as $700 billion of those mortgages.
Penalties assessed on mortgage prepayments are most common with option ARMs and loans made to borrowers with scuffed credit. Some 84 percent of option ARM loans made last year carried a prepayment penalty, according to studies that examine mortgages packaged into securities and sold to investors.
The challenges facing borrowers are becoming more apparent at a time when opportunities for refinancing are narrowing. Conventional 30-year, fixed-rate mortgage loan costs dropped to their lowest levels in 14 months in December, but have recently drifted higher.
Rates on 30-year fixed-rate home loans currently average 6.45 percent.
“The best deals in going from an ARM to a fixed-rate are passing,” says Doug Duncan, chief economist at the Mortgage Bankers Association. “If anything, rates are likely to move up rather than down.”
There are signs that some lenders are beginning to tighten their bad credit mortgage standards. The shift comes after a long period of liberal lending practices that made it easy for borrowers to finance 100 percent of a home’s value or get a mortgage without documenting their income and assets.
SOURCE: The Spokesman-Review
Mortgage refinancing is alive and well as 2007 gets underway.
There’s a reasonable explanation for this boom, explains Quicken Loans:
Low long-term mortgage interest rates continue to attract homeowners who are looking to refinance their existing mortgage, according to the latest Weekly Mortgage Applications Survey, released this week by the Mortgage Bankers Association (MBA).
The MBA reports that its Market Composite Index, which measures mortgage loan application volume, shows the number of people applying to refinance their mortgage increased 0.2 percent for the week ending February 2, as compared to the previous week.
Consumers looking to purchase a home seemed to stay on the sidelines, however, despite long-term interest rates that are as low as they have been in more than a year.
According to the MBA, the Purchase Index decreased 0.8 percent from one week earlier. There were fewer home loan applications sent in.
“Housing seems to have the wind at its back with long-term interest rates, which were already in the low to mid-sixes, falling slightly after last week’s Fed announcement, so it’s surprising to see that purchase activity actually tapered in the last week,” says Bob Walters, chief economist of Quicken Loans.
“Folks with adjustable rate mortgages see the opportunity, however, and are refinancing into fixed-rate mortgages before their existing mortgages reset to interest rates that are higher than current long-term rates.”
Need extra equity from your home? Consider cash-out refinancing. More owners these days are doing just that than ever before.
Why is this the case? It’s all about dollars and cents, according to Amy Crews Cutts, deputy chief economist with Freddie Mac.
Because home equity loans and lines of credit are most often tied to the prime rate (now at 8.25%) those options have grown more expensive, even as long-term mortgage rates have remained relatively low, with the 30-year loan averaging about 6.2%.
“It’s all about the prime rate,” said Michael Kodsi, chief executive officer of Choice Mortgage Bank in Boca Raton, Florida.
A good number of his clients would rather take cash out through mortgage refinancing — where their mortgage rate will be fixed — as opposed to taking out a loan tied to the prime rate, which has the potential to fluctuate and thereby “could go higher down the road,” he said.
Freddie Mac said 89% of the loans it owns that were refinanced in the third quarter of 2006 had loan amounts at least 5% higher than the original mortgage balances, the threshold for considering a loan a cash-out refinancing.
It’s the highest share of cash-out refinance loans reported since 1990.
Consumers cashed out a total of $82.8 billion during the quarter, down somewhat from $90.6 billion in the second quarter. And banks are seeing results of the cash-out trend, too.
“Banks have been reporting that they have not been getting the business of home equity lines as they had been before,” Cutts said.
According to the American Bankers Association, the dollar amount of home equity loans (including loans made through home equity lines of credit) has increased by an annualized 14.6% for the first three quarters of 2006, compared with all of 2005. That’s down from a 17.4% increase in 2005 and a 31.2% increase in 2004.
The “easy money” in 2004 was an effect of a prime rate at about 4%, said Keith Leggett, senior economist for the American Bankers Association. But as the Fed raised rates, thereby raising the prime rate, that easy money dried up.
“What’s happening, you’re starting to see the impact of higher interest rates,” he said. “As interest rates rose, that … translated into basically a slowing in the rate of growth in home equity lines and home equity loans.”
Mortgage refinancing anyway
Some owners aren’t refinancing only to get at their home equity. Instead, they’re “passive” cash-outs taken by those who are refinancing for a better rate, perhaps in response to an adjustable-rate mortgage reset that has adjusted higher, Cutts said.
In fact, it’s those who are facing adjustable-rate mortgage resets that seem to be the driving force behind an upswing in refinancing that started late last year, said Mike Fratantoni, senior economist at the Mortgage Bankers Association.
While locking in a good rate, some of these homeowners are using the opportunity to pull equity out of their homes while they have a chance - a move that perhaps helps them clean up credit card debt at the same time, said Keith Gumbinger, vice president of HSH Associates, a financial publisher of mortgage and consumer loan information.
That said, a growing number of homeowners recently have been increasing their mortgage rates through refinancing.
“The median borrower increased their mortgage rate by 12%,” she said, referring to statistics from the third quarter of 2006.
The borrowers considered for that statistic originally had fixed-rate home loans, but refinanced either to an ARM or another fixed-rate.
Brian and Lisa Wilcock looked at mortgage interest rates four years ago, did the math and came up with a plan:
- Because they intended to move in three years, they’d refinance their 30-year fixed-rate mortgage into a three-year adjustable-rate mortgage (ARM) at a lower interest rate and save hundreds of dollars a month.
It worked … for a while.
The lower rate shaved $375 off the mortgage payment on their Rochester Hills home. But four years later, they’re still in their three-bedroom, split-level house and have no plans to move. Their introductory rate of 4.37% reset last year, with a 1.25% cap that spared them the full brunt of the interest rate increase.
But that’s set to expire in April when the ARM resets to a rate that will likely be above 6%, reports RIS Media.
“It’s pretty much no-holds-barred and it gets painful from there,” said Brian Wilcock, 38, of his mortgage’s interest rate, which will climb yearly if he doesn’t refinance. Wilcock thought the family might have to relocate due to his sales job.
For the Wilcocks and thousands of other Michigan mortgage holders, those low three- or five-year teaser rates on ARMs are adjusting higher this year, and homeowners will feel the difference in their wallets.
Mortgage experts estimate that approximately $1.5 trillion worth of adjustable mortgages will reset by the end of 2007. Forecasts call for $600 billion to $700 billion of those loans to be refinanced into new loans, including fixed-rate mortgages.
Locally, lenders report an anecdotal upswing in clients home loan refinancing into 30-year fixed-rate mortgages. Last year, ARMs represented 30% of all mortgages, according to the national Mortgage Brokers Association. By 2008, the group estimates, the number will drop to 18%
“We definitely want to get into something more secure,” said Lisa Wilcock, 35, a part-time nurse and mother of two. The couple is mortgage shopping for 30-year fixed rates. “We don’t want it to keep rising and rising and rising.”
Monthly mortgage rate jolt
Just five years ago, adjustable-rate mortgages carried interest rates so low they allowed homeowners like the Wilcocks to lower their monthly mortgage payments by hundreds of dollars. First-time home buyers flocked to the loans as well, since they allowed often cash-strapped first timers to afford a larger house.
“There are more people now than ever with adjustable-rate mortgages,” said Greg McBride, senior financial analyst at Bankrate.com. “The problem — and you could see this coming a mile away — is that [mortgage rates] have increased and those same borrowers are coming up for a rate increase.”
If a homeowner in 2004 got a three-year ARM at 4% on a $250,000 loan, the monthly mortgage payment was $1,150. That payment today would increase to $1,500 monthly, lenders said. And figured at an interest rate of 7.5%, the payment would increase $509 more per month.
Still affordable
The good news is that the shock may be bearable for many. The MBA estimates that up to $800 billion of the home loans will simply reset, with owners making their new payments. Interest rates are currently hovering around 6.25% and most experts expect them to stay under 7% this year.
If a homeowner decides not to refinance home loans, the interest rate will rise at a capped percentage determined by the lender at closing. Typically the cap is 2% to 5%. And since an ARM can’t adjust above the current market rate,
“Nobody’s going to 9%, no matter what your cap is,” said Ken Mascia, president of the Oxford Financial Corporation in Birmingham.
Mortgage experts said ARMs still work for some buyers, especially those who expect their incomes to rise or those planning to live in their homes for fewer than five years.
The Wilcocks, meanwhile, will miss the extra money their ARM freed up monthly, but said they welcome the security a fixed-rate mortgage will bring.
“We feel like we’ve lived with” the ARM “for a year after it adjusted,” said Lisa Wilcock. “It did its job and it’s time to move on.”
“But it’s deductible!”
How often have you heard that from people, especially when they talk about mortgages? And more importantly, the Washington Post asks, what does it mean for you?
Let’s say you plan to purchase a condominium for $300,000 and put $30,000 (10 percent) as a down payment. You will need a $270,000 mortgage loan.
One lender has offered you a fixed-rate 30-year mortgage at 6.25 percent, with a monthly payment of $1,662.45. Another lender is trying to persuade you to take an adjustable-rate mortgage that will stay fixed for three years at 5.5 percent interest. The monthly mortgage payment for the first three years will be $1,533.04.
You analyze the numbers and see that there is a difference of $129.41 per month between each mortgage loan. But that’s not the end of your inquiry. You know that you are in the 25 percent income tax bracket, meaning that you are married and jointly you earn between $61,301-123,700.
That means that for every dollar you pay in home mortgage interest, you can deduct 25 cents on your tax return. So when you plug in these deductions, the difference between the two mortgages drops to $97.06 a month.
You should ask yourself whether the monthly saving of $97.06 for the three-year ARM is really worth it, taking into account that the payment on that home loan could jump considerably if mortgage rates are higher when it is recalculated in three years.
The deductibility of mortgage interest is one of the big breaks the tax code gives to homeowners, as well as points paid. Here’s a look at how deductions operate:
Mortgage interest: Interest on a 1st or 2nd mortgage is fully deductible, subject to the following limitations: acquisition loans may total up to $1 million, and home equity loans may total $100,000. If you are married but file separately, the limits are split in half.
For debt to qualify as an acquisition loan, you must buy or substantially improve your home with that money. If you apply for a home loan refinancing for more than the outstanding indebtedness, the excess amount does not qualify as an acquisition loan unless you use it to improve your home.
For example, let’s say your current home mortgage balance is down to $200,000, but because of the tremendous appreciation over the past few years, your house is now worth $600,000. You want to refinance and get some money.
Based on your credit and the equity in your house, your lender is prepared to lend you $450,000. That sounds great, but unless you use the money to improve the house, you will be able to deduct interest on only $300,000 - acquisition debt of $200,000 plus $100,000 in home equity.
Points: When you shop for a mortgage - which is something every potential home buyer should do - you get a lot of data thrown at you. One of the most important items you should understand is the concept of “points.”
Each point is 1 percent of the amount of your mortgage loan; you pay points upfront when you borrow. Points sometimes go by other names, such as loan discounts or origination fees. But for tax purposes, they’re points.
If you were to borrow $450,000, each point would cost you $4,500. Lenders can charge as many points as they want, but at some level, a loan becomes usurious, potentially illegal, and may represent what is commonly known as “loan sharking.”
Typically, for every point you pay a mortgage company, you should be able to reduce your interest rate by 1/8 of a percent. Because rates were extremely low in the past few years, borrowers generally have not wanted to pay extra cash just to get an even lower rate.
Points paid to obtain a new mortgage are fully deductible in the year they are paid by the borrower. The IRS used to require that the borrower write a separate check to the lender for these points; in recent years, the IRS seems to have backed off this position.
If you pay points to obtain a loan for conventional mortgage or home equity loan refinancing, in most circumstances those points are not deductible in full in the year they are paid. Rather, the IRS requires that you allocate the points by the number of years of your loan.
For example, you refinance and obtain a loan for $450,000. To get this new loan at a reduced interest rate, you opt to pay one point, or $4,500. If your loan is for 30 years, you can deduct one-thirtieth of the point each year, or $150.
However, should you pay off this loan early, either by selling the house or refinancing again, the balance of the unallocated (non-deducted) points can then be deducted on your income tax return for that year.
