Dennis' Mortgage Blog

Question of the week:  We are very upside down on our home we bought in 2006, with loss of overtime we are starting to feel a strong financial pinch but cannot refinance because of our home’s value and the amount we owe on the mortgage.  We do not want to sell our home but are seeing fewer options.  Our credit is very strong.  What can we do?

Answer:   If your current lender is willing to reduce the principal balance for a payoff, as they would in a short-sale situation, you may be eligible for a “short-refinance” or short-refi using FHA financing.

A short-refi works in much the same way as a short sale, except instead of selling the home to another buyer, you refinance the home to a smaller mortgage amount.  The lender will take a loss on the transaction, it is up to them to decide if they will approve the reduction necessary to accommodate a short-refi.  With the poor performance they are seeing on many loan modification transactions, the costs of short sale transactions they have been through and the even higher costs to the bank of foreclosures, many lenders are favorable to approving short-refi transactions.

For a short-refinance using FHA financing to go through the following must occur:

·         There can be no late payments on the existing mortgage, and payments must be maintained current through the entire process

·         Lender must approve the short-refinance loan balance and pay-off of the existing mortgage

·         Lender must provide statement of “non-recourse” to borrower, meaning they will not come after the borrower for any deficiency balance after the transaction closes

·         Borrower must fully qualify for the FHA loan with full income, asset and credit documentation

The loan amount for the short-refinance will be 96.5% of the appraised value of the property (if your home appraises for $400,000 then you may be eligible for FHA short-refi loan of $386,000).  During the approval process with the existing lender, part of the approval process needs to be whether the lender will allow the transaction costs to be included in the loan amount; i.e. if lender will agree to a lower pay-off amount so borrower does not need to bring closing costs to escrow out of pocket.

There are some disadvantages to a short-refinance.  First, obviously there is a disadvantage to the original lender who will be losing money and taking a loss on the original mortgage they made with the borrower.  Second, the borrower will have a derogatory reporting on their credit report for settling the existing mortgage balance for less than what was owed; which would happen through a short-sale or foreclosure anyway.

There are many benefits to the short-refi transaction as opposed to a short-sale or just walking away.  First, and most important, you get to keep your home.  While there will be a fairly significant hit to credit scores, since you will be in your home and have a mortgage the impact on qualifying for a new mortgage is eliminated.  Usually there is a benefit of reducing your monthly mortgage payment, I say usually because some of the transactions occur to refinance from an adjustable rate to a fixed rate and the payment may stay close to the same as it is now.  From a community standpoint the short-refinance transactions eliminates another home going on the market, potentially through short-sale or foreclosure, helping neighborhood home values stabilize. 

Some pitfalls that will impact a short-refinance transaction center mostly around the existing lender and their process to approve and finalize the pay-off.  We have experienced some very long and onerous transactions waiting for lenders to approve a short-sale transaction.  In the short-refinance process an appraisal must be done up front to provide the short-ref loan amount to the existing lender so they can calculate their pay-off.  Until the pay off is approved and agreed to the new mortgage rate cannot be locked in as there is no time frame within which to have the rate lock.  If the approval process takes too long then a new appraisal may be required, this may or may not impact the original loan balance submitted to the lender.

The first step in a short-refinance transaction, is to contact the lender and determine who to communicate with regarding a short-refinance, what the process is, what paperwork is required and any other information that can be provided. 

If you feel you may be a candidate for a short-refinance transaction please contact me to discuss your situation.

Have a question for me?  Ask me!

Mortgage Backed Securities this week spent considerable time pushing up against levels of resistance.  Yesterday prices broke through the ceiling and we saw some strong gains after the initial unemployment claims report came out.  This morning after a strong sell off following the Department of Labor’s January jobs report (20,000 jobs lost) and reporting that unemployment has fallen to 9.7% the market sold off very hard.

Then the numbers and report were analyzed and it seems the unemployment number fell from 10% to 9.7% because the Labor Department “found” 500,000 jobs it previously had not counted.  It also revised December’s report to 150,000 jobs lost from the reported 85,000 jobs lost.  One more revision, previously it had been reported that since the recession started in December 2007, 7.2 million jobs have been lost, today’s revision puts that number at 8.4 million jobs lost.  Not good numbers. 

Because of the severe negative employment numbers investors are selling off on stocks and investing in bonds creating a possible momentum for rates to fall for the next several days.  There is a lot of chatter about taxes, government spending, government debt, and regulation.  Underlying all of this chatter is over eight million jobs lost in our economy in the past twenty-five months.  The arguments in Washington shift from health care to how to allow, support and enable the private sector create jobs and stop the shrinking of our economy so it can begin to grow.

Normally the bad economic news would be very good news for long term prospects of lower rates.  The normal market reactions are tempered however by two factors I have mentioned previously.  First, the Federal Reserve after having purchased over $10 billion in mortgage backed securities, and almost $1.2 Trillion since its MBS purchase program began which means it has about $75 billion left to purchase MBS by the end of March 2010.  Who will absorb the MBS that the Fed has been buying?  At what price/rate?  Secondly, the concerns over the growing Federal deficit and the selling of debt to finance our government center not just on the ability to pay back the debt, but the rising cost of that debt, i.e. higher interest rates.

While from week to week and day to day rates go up and down and I/we try to educate clients as best we can on when to lock in rates to take advantage of the markets; the best advice is to avoid risk and lock as soon as possible on most transactions.  The risk of higher rates striking quickly in any given escrow time period is much greater than the chance of rates dropping significantly during the same period.  Lack of risk aversion from 2001 through 2006 by many sectors of the economy and many families is a big reason for the housing and credit collapses that started in 2007.  If we learned one lesson through this period should be our tolerance for risk as a nation and for many individuals should be lower than it was before.

This week in rates looks a lot like last week with the exception of the late break through on the resistance levels.  Gains have been seen in the hi-balance/jumbo products and some accruing on the price level for conforming loan amounts.  If we can close high today then next week we may see some reduction in rates for conforming as well.   

Rates for Friday February 5, 2010:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.75%                              No Change

30 year conforming-jumbo 4.875%                   Down 0.125%

30 year FHA    4.75%                                      No Change

30 year FHA jumbo 4.875%                            Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Are you watching the Super Bowl? For the game or for the ads?  Who are you pulling for, or do you just want a good game?

Have a great weekend, let me know how I can be of service to you,

Dennis