New Guidelines Help Consumers Compare Loan Programs

HUD: Consumers will shop for loans

Rule changes could cut into industry profits

BY MATT CARTER, INMAN NEWS

Consumers will be less likely to accept overpriced loans, title insurance and other services — including those offered by businesses affiliated with real estate brokerages and builders — once new loan disclosure forms and settlement procedures are fully in place at the end of next year.

That’s according to a lengthy review by the Department of Housing and Urban Development of its proposed rule changes governing enforcement of the Real Estate Settlement Procedures Act.

In publishing a final rule in Monday’s Federal Register, HUD detailed numerous “significant” changes to its proposed overhaul of RESPA in response to feedback from industry and consumer groups.

When they announced the new rule last week, HUD officials emphasized concessions they made to the real estate industry trade groups, who were highly critical of the rule changes as first proposed in March. Industry critics said HUD has overestimated the extent to which consumers will comparison shop, and underestimated the unintended consequences of the rule change, such as consolidation.

HUD’s response to the criticism included dropping a requirement that consumers be read a lengthy script at the closing table, and shortening the standardized good faith estimate (GFE) from four pages to three.

More crucially, perhaps, HUD toned down but did not abandon measures intended to encourage consumers to shop for the best deal and create more competition between lenders and settlement services providers. The measures still in place could have a dramatic impact on the way those products are marketed and sold to consumers.

The overall goal of the new, standardized GFE is helping consumers compare different loan packages, HUD said. The new disclosures and procedures will empower consumers to compare not only the rates and terms of different mortgage offers, but the price services required by most lenders, such as title insurance.

Slack on tolerances

HUD said one way it is helping consumers comparison shop is by imposing tolerances on how much prices and fees quoted in the GFE can change before borrowers reach the closing table. Loan origination fees can’t change at all, and fees for required services won’t be permitted to change by more than 10 percent when they are provided by a company selected by the lender.

Trade groups representing lenders and settlement service providers were generally opposed to tolerances when they were proposed by HUD in March. In order to minimize the risk of violating the tolerances, some said, big lenders would have to contract with large settlement service providers, driving small companies out of business and reducing competition.

HUD said accurate estimates are crucial to empowering consumers to shop for the best deal, protecting them from “low-ball” offers that change at the last minute. But HUD said it did not intend to punish loan originators for unforeseen changes in a borrower’s circumstances or other factors beyond their control, such as government recording charges.

HUD says the final rule provides some additional leeway for fees to change due to unforeseen circumstances. If there are changes in the tax rate or the price of the property after the good faith estimate is provided, for example, originators can provide a revised estimate.

While transfer taxes will still subject to a “zero tolerance,” HUD acknowledged that government recording charges may not be be known until closing, and will instead be categorized with other settlement services that can change by 10 percent overall.

HUD will cut lenders some additional slack by giving them up to a month after a closing to correct any failure to achieve the tolerances. The final rule would give loan originators 30 days to “cure” violations by reimbursing the borrower by the amount the tolerances were exceeded.

If that sounds like a slap on the wrist that won’t deter loan originators from engaging in bait-and-switch tactics, HUD says that until Congress grants it additional power to enforce RESPA, it can’t legally impose fines for such violations.

But lenders won’t be able to break the rules with impunity, HUD says, because federal and state banking regulators can punish the companies they license for RESPA violations. In addition, aggrieved borrowers can bring civil suits under RESPA seeking redress, and lenders who sell loans on the secondary market can also be held liable by the investors who buy them if they break rules governing mortgage originations.

In its handling of tolerances, HUD says the final RESPA rule “seeks to balance the borrower’s interest in receiving an accurate GFE early in the application process … with the lender’s interest in maintaining flexibility to address the many issues that can arise in a complex process such as loan origination.”

Presented by
CAROL PERDEW
(209) 239-7979
wwwCentralValleyHomes.com

Homeowners Are Getting Help By HOPE NOW Program

Despite difficulties, homeowners finding relief with HOPE NOW program

By Jack Guttentag,
Inman News|

Editor’s note: A previous version of this story erroneously stated that the HOPE NOW Alliance of loan servicers charges borrowers for consultations. The consultations are free.

Q: “I have been giving my clients an article you wrote about a year ago advising borrowers having payment problems how to request a modification in their loan contract … Could you bring it up to date?”

A: A lot has happened since that article was written. Very shortly thereafter, the HOPE NOW program promoted by Treasury Secretary Henry Paulson began as an effort by housing counseling agencies and mortgage servicers to modify loans on a strictly voluntary basis. Since then, the first recourse of borrowers in trouble has been to call them at 1-888-995-HOPE. I have sent many people to HOPE NOW, with mixed feedback.

House prices have declined further in the last year, turning more borrowers “upside down” where they owe more on their mortgage than their house is worth. This induces some borrowers to stop making payments, which increases foreclosures. But price declines also reduce the amounts that investors recover from sale of the house following a foreclosure, which should increase the attractiveness of loan modifications as an alternative.

In addition, a full-fledged financial crisis has erupted, forcing the Federal Reserve to act as the lender of last resort to a series of weakened financial firms unable to meet their cash needs. The coverage of deposit insurance has been broadened and money market funds are now insured. In the works, furthermore, are plans to purchase mortgage assets from investors, to make direct equity investments in banks, and even to insure payment of principal and interest on mortgages and other assets.

An excellent study by Alan M. White provides some indications of what has happened to modifications during this tumultuous period. In a sample of subprime loans he examined, the mortgage payment was reduced in only about half the modifications, and the balance was reduced in very few cases. In many cases, the modification consisted of adding the amounts past due (“arrearages”) to the balance, which raises the payment. It is no wonder that during the annual period he examined, the number of foreclosures swamped the number of modifications.

Borrowers having payment trouble have choices. The rational choices are either to seek help immediately, or to take immediate action themselves. Those who put their heads in the sand will lose their home in a foreclosure.

I suggest that those who elect to seek help go to HOPE NOW first, and if that does not work out, to try a HUD-approved counselor. Before seeing a counselor, prepare yourself by pulling together all the data that the counselor will need; the form at Genworth Financial can be used for this purpose.

Responding to a solicitation from one of the many modification consultants who have emerged over the last year is extremely risky. They charge $1,000 and up, usually payable in advance. Some may do a good job, but many are hustlers looking to garner upfront fees.

If you elect to handle the matter yourself, you must get to the servicer’s loss mitigation department, which may take some persistence. The burden of proof is on you to demonstrate and document that, for the reasons you lay out, you can no longer make the required payment. You must also demonstrate and document that you can make a smaller payment that you specify.

Under the new FHA program called H4H (“Hope for Homeowners”), FHA will refinance loans of borrowers having payment problems if the existing investor will write down the loan balance to 90 percent of current market value. HUD publishes a list of lenders participating in this program. I am not sure whether there is any benefit to a borrower contacting one of them before the firm servicing their existing loan has agreed to pay down the balance. But it can’t hurt to get that lender on your side.

Aside from the possible increased risk exposure under FHA, the federal government has not channeled any crisis money directly to borrowers. The new programs referred to earlier will direct $700 billion or more to financial institutions, but none to households. A strong case can be made that this is unbalanced.

The root cause of the crisis is the decline in home prices, which will continue so long as the foreclosure problem isn’t solved. Arguably, dealing directly with this problem is more effective than dealing with it indirectly. The Treasury recently put out a request for proposals on a mortgage payment insurance plan, which could be the perfect vehicle for providing direct assistance to borrowers. Stay tuned.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

Presented by
CAROL PERDEW
Prudential California Realty
(209) 239-7979
wwwCentralValleyHomes.com

Thoughts to Help Homeowners Overcome Mortgage Fright

Mortgage Fright and Moral Quandaries

by Jack M. Guttentag
Featured on Yahoo Finance

The mortgage world has suddenly become very frightening to many people who have no real reason to be frightened. Their mortgages are in good standing, they are not having any trouble meeting their payments, yet they are in distress — in large part because so many around them are in distress. Fear is contagious. The only antidote I know to fear is good information.

One important thing that people suffering from mortgage fright often forget is that a mortgage loan is a contract between two parties, and it cannot be violated by either without the permission of the other. If the loan is sold, the purchaser replaces the originating lender as the contracting party and is subject to the contract in the same way. If the servicing of the loan is sold, the servicer as the agent of the owner is required to abide by the terms of the contract, and the same holds if the loan is placed in a pool as collateral for a mortgage-backed security.

The two letters below are from borrowers who do not have a problem with their current mortgages but are distressed about what might happen in the future.

“Crazy “Can whoever owns my mortgage demand immediate repayment of the balance? I know it doesn’t make sense, but crazy things seem to be happening…”

Mortgage contracts do not give the lender the right to demand immediate repayment. Balloon loans require repayment at the end of the balloon period, but that is stated in the contract. Fortunately, there are not too many balloon loans around.

Even if lenders had the legal right to demand immediate repayment, they wouldn’t do it because it would only generate more foreclosures. For the same reason, borrowers with balloon loans in good standing who are unable to refinance anywhere else will find that their existing lender will prefer to refinance them than to foreclose.

Things Are Happening”

A Rate Is Adjustable — Not the Index

“When the rate on my ARM (adjustable-rate mortgage) adjusts next year, the new rate should be the one-year Treasury rate at the time, plus a margin of 2.5 percent. Last year, however, my lender replaced the Treasury rate on new loans with Libor. Because of the crisis, Libor is now 2.5 percent higher than Treasury. Can my lender switch my ARM to Libor when my rate is adjusted?”

No way. The rate is adjustable but not the index used to calculate it. Your ARM contract stipulates the index and its source, and the only circumstance in which a different index can be substituted is in the event the specified index is no longer available. The different Treasury indexes used by ARMs are compiled by the Federal Reserve and there is zero likelihood that they will disappear.

When a Borrower Is Upside Down

I wish I could answer the next letter with the same degree of certainty.

“We bought our house just last year with 100 percent financing; now it is worth $40,000 less than we owe. I don’t know what to do. Do we keep making mortgage payments or do we stop? A friend has advised us to lock the door and send the key to the lender, but that doesn’t sit very well with me. We’ve always met our obligations and have good credit. What do you advise?”

This letter is typical of many I have received from borrowers who are “upside down” in owing more than their houses are worth. I have a lot of trouble dealing with it because in good part it is a moral issue.

My right-handed side says that when you borrow money, you should pay it back if you can. During the many years when house prices were rising, he never once heard of a mortgage borrower offering to share the capital gain with the lender. There is no justification in forcing the lender to share the capital loss.

My left-handed side rejoins that very few of the people who are upside down today enjoyed a capital gain on previous homes that they owned. Further, the borrower’s major obligation is to his family, not to his lender. If the financial gain from letting the house go to foreclosure more than offsets the pain of having their credit trashed and having to find a new place to live, then that is what the borrower should do.

There is an economic dimension to this quandary. If those who are upside down could be assured that house prices had hit bottom and within a year or two they will be right side up, there is little doubt that most would elect to stay the course. Unfortunately, no economist in good conscience can provide such assurance today.

Finally, there is a policy dimension. Upside down borrowers would be encouraged to stay the course if they had some reason to believe that the government will help them get right side up. Right now, the prospects for this are extremely murky. But don’t write the possibility off just yet.

CAROL PERDEW
(209) 239-7979
wwwCentralValleyHomes.com

Fannie Mae is Requiring Homeownership Counseling

Fannie: First-time buyers need counseling
REAL ESTATE BRIEF by Inman News

Fannie Mae is reinstating required homeownership counseling for first-time buyers who don’t have a solid credit history or are seeking loans tailored for low- and moderate-income buyers.

Beginning Jan. 1, Fannie Mae will require counseling for home buyers relying on nontraditional credit or obtaining a MyCommunityMortgage loan to purchase a single-family home. Fannie Mae already requires pre-purchase counseling, including landlord education for borrowers purchasing a two- to four-unit property using a MyCommunityMortgage loan.

Counseling must be provided prior to closing by an independent and certified third-party agency or counselor, Fannie Mae said, and cover topics including budgeting and credit, selecting a home, and obtaining a mortgage. Homebuyers will receive a personalized assessment of their financial position and readiness for homeownership, and an analysis of their credit history and current financial situation.

Although Fannie Mae will encourage face-to-face counseling, borrowers who can’t attend sessions in person or don’t have an eligible provider in their area will be allowed to conduct sessions over the phone. Online counseling programs developed for and provided by mortgage insurance companies will also be permitted.

Counseling must meet standards established by the National Industry Standards for Homeownership Education and Counseling or standards of comparable quality established by other organizations, Fannie Mae said in a bulletin to lenders.

Evidence of completion of the home-buyer education session must be documented in the individual loan file by a certificate or letter from the counseling provider.

Fannie Mae offers counseling resources, including a “Find a Counselor“
search tool, on its Web site.

CAROL PERDEW
Prudential California Realty
(209) 239-7979
wwwCentralValleyHomes.com