The following is a question and answer with Don Taylor of Bankrate.com. The situation referred to - and advice given - could apply to anyone with debt and/or a Florida mortgage loan …
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 Florida 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, Florida home loans where initial monthly payments equaled no more than the cost of interest and sometimes less.
But now the game has changed. Freddie Mac 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 more difficult to receive.
“Right now,” says Jim Saccacio, chairman and CEO at RealtyTrac.com, 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 Florida 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 Florida home loan 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 Florida mortgage 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.
For some borrowers the new rules mean existing loans - especially recent loans - cannot be refinanced. Unfortunately the alternatives to Florida mortgage 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.
Rising mortgage payments are putting many families in the Sunshine State at risk of losing their home or falling badly behind in payments.
However, careful Florida mortgage refinancing may be able to mitigate or eliminate that risk, and keep families fiscally afloat.
Three years after the Central Florida housing market turned red hot and prompted so many people to buy, thousands are in danger of losing their homes because they can’t make their monthly payments.
The number of mortgage foreclosures is soaring this year. Foreclosures had been increasing for months during the past year, but in January, lenders filed 1,787 foreclosure suits in Central Florida, more than twice the number compared with a year earlier, according to the Orlando Sentinel.
“These were foreclosures that didn’t necessarily have to happen” Robert Markin, President of Credit Mortgage Group in St. Petersburg, said.
“Many times the cost of rising [Florida mortgage] bills can put you in a position to lose your home, but with proper advice and smart refinancing of their home, many of these tragedies can be avoided.”
Why are so many mortgage payments rising to heights beyond the reach of the borrowers? Because there are so many adjustable-rate mortgages on the verge of pushing up monthly payments. Many homeowners simply took on more debt than they could manage. Some, to get the house of their dreams, signed home loans with adjustable mortgage rates that are moving upward.
Or they took on balloon mortgage payments they could not make. Many high-risk borrowers had no other choice but to accept higher Florida home loan rates. Rising insurance and tax bills have only added to the pressures.
The bottom line: Many homeowners can no longer afford their houses. They have missed a few months, and now the Florida home loan company is suing, asking a judge to order the property auctioned off to the highest bidder.
Homeowners who can afford to pay their new higher payments are suffering too. Attractive adjustable rate loan payments from a few years ago, are now about to jump up as much as $500 a month.
What is a borrower with a pending payment increase to do? Prepare before your payment goes up. If you know your rate is going to adjust any time soon, apply above and request a Florida mortgage refinance quote.
You can lower your bills now, before your rates go up, and you fall behind on your home payment or any of your other payments. There’s really no need to wait until your situation gets out of control.
Remember: These are tough times, but by exploring options for Florida home loan refinancing, you might be able to get through unscathed.
Homeowners who counted on Florida home loan refinancing at affordable rates might find the door closing fast on that option as lenders clamp down on making high-risk loans, Northeast Florida officials in the home financing field say.
According to the Florida Times-Union, the shake-up will hit homeowners who have subprime loans, which carry higher Florida mortgage rates than regular loans.
Florida mortgage broker Patrice Yamato, president of the Florida Association of Mortgage Brokers, says that homeowners who signed up for subprime (bad credit) loans with adjustable rates may be hard-pressed to lock in a fixed rate by refinancing.
She said her “biggest fear” is that homeowners unable to refinance will face foreclosure because they no longer can afford their mortgages.
Bad credit home loans paved the way to home ownership for buyers unable to get financing at regular Florida mortgage rates, particularly when prices were escalating in a booming real estate market.
But as homeowners have defaulted on those loans, many Florida mortgage lenders have taken a financial blow.
“There’s a pullback,” Yamato said. “[Mortgage lenders] are tightening up all the underwriting guidelines and really going to a very conservative approach.”
A report released last week by the Mortgage Bankers Association said the rate of missed payments for mortgage loans was about 5 percent at the end of 2006. But for subprime loans, the delinquency rate was 13.3 percent.
When the association looked only at the prime rate loans - which make up the biggest share of the market - the rate of overdue home loan payments was 2.4 percent. The report analyzed 43.5 million home loans for homes, along with other residential properties up to four units in size.
Bill Thompson of Family Foundation, a Jacksonville nonprofit organization that offers financial counseling, said in recent years, he has worked with a growing number of clients who signed on the dotted line for subprime Florida home loans they could not realistically repay.
The subprime market historically has a higher default rate because of the fact that borrowers have spotty credit histories, and Thompson said the review by mortgage lenders kept getting more lax.
Helping people to become homeowners “is great, but are we really doing a service for them or an injustice to them because we’re setting them up for failure sometimes,” Thompson said.
He said he counseled a client last week who had received pre-approval for a loan that would have cost her around $1,100 a month for the combined cost of repaying the loan, mortgage insurance, property taxes and insurance.
He said the client’s take-home pay was $1,400 a month. After going over the numbers with her, she agreed to postpone house-hunting and focus instead on improving her credit rating.
Homeowners who have a home loan with a company that’s experiencing myriad financial difficulties should not worry their loan is at risk or that its terms will change, said Tom Morcom, president of Coastline Home Mortgage, which is a Coastline Federal Credit Union company in Jacksonville.
He said the homeowner has a legally binding contract.
Like Yamato, he said he doesn’t expect that the recent problems in the subprime lending industry will spill over to the rest of the market and make it harder to qualify for regular loans.
However, he said in the subprime market, loans will be scarcer. He said he doesn’t expect approval of loans for the full value of the house, or home loans in which the borrower simply states his income without providing proof he can pay off debt.
SOURCE: Florida Times-Union
Below, Don Taylor of Bankrate.com answers a question that can easily be transferred to Florida mortgage refinancing …
Question: I applied and was approved for a cash-out refinancing. The loan amount was for $260,000, which I expected to be enough to pay off the balance on my existing first mortgage, a home equity line of credit, a credit card balance and the loan’s closing costs.
The lender provided me with a good faith estimate for estimated settlement charges of $3,617. On the day of closing, the closing attorney’s office called to tell me that I would need to bring a check to the closing for $5,029. After making some calls, I learned from an administrator in the closing attorney’s office that my existing first mortgage had a prepayment penalty.
I didn’t close on the new loan. The refinancing didn’t make sense with the prepayment penalty. I feel that the refinancing lender had an obligation to tell me about the penalty. When I spoke to a vice president at the bank about this, he told me that the bank I currently have my first mortgage from is known for charging very high prepayment penalty fees. I told him that he should have informed me about this point before proceeding with any appraisal or closing.
To add insult to injury, I get a bill from the attorney’s office for a total of $916.50, which states I need to pay for 2.5 hours of service at $225/hour and two other fees, which they stated as $354. Can I fight this bill from the attorney’s office?
I really feel the bank was negligent in this entire process and since they knew that the bank I am using charged large prepayment penalties, then they should have known what the actual payoff was before telling me the day of the closing that I would need to provide a check for over $5,000. I feel the bank should pay the legal bill since they were negligent in the way they handled this entire process from the very beginning. Thank you.
Answer: I’m not with you on this one. A good faith estimate, or GFE, isn’t designed to show you the prepayment penalties on the existing loan; rather, it discloses any prepayment penalties on the new loan. It was your responsibility to know whether the existing Florida mortgage had a prepayment penalty. The closing costs on a GFE are just estimates and are represented as such. Allocating loan proceeds with GFEs is never a good idea.
It’s the HUD-1 Settlement Statement, not the GFE, that shows the actual settlement costs of the loan transaction.
Under the Real Estate Settlement Procedures Act, or RESPA, you had the right to request the HUD-1 or the HUD-1A one day before settlement. Here’s what the HUD Web site says about that statement:
“The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.”
There’s been a lot of discussion surrounding reforming RESPA, in part to get this information in the hands of the borrower early enough for them to use it in decision making, but future reform doesn’t do anything for your current situation.
Not paying the attorney isn’t really an option. Do you want a lien place on your home for $1,000 in unpaid attorney’s fees? You could try to talk the lender into paying the fee or the lawyer into reducing the fee, but I don’t know a reason they would be obligated to do so.
Determining whether there is a prepayment penalty should be one of the first things a homeowner considers in the decision to refinance a Florida mortgage loan. There are people who knowingly pay a prepayment penalty to refinance a mortgage - usually because their credit score has improved or they like the rate on the new mortgage enough to pay a penalty to refinance. It wasn’t the refinancing lender’s responsibility to know your mind in the decision to refinance.
With rates on many homeowners’ adjustable-rate home loans rising, some who would like to Florida mortgage refinance into a new loan are finding they can’t.
In some cases, that is because their loan carries a prepayment penalty, which would force them to come up with thousands of dollars if they refinance in the first few years. Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a low 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 Florida 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 refinance but are finding it more costly than they expected.
These new challenges come at a time when many 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.
“The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans,” says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp.
In recent years, many homeowners refinanced repeatedly - to get a better rate, lower their payment, consolidate debt or pull out cash. Even now, Florida home loan rates remain relatively attractive, though they have moved up from their recent lows in early December, and most borrowers still should be able to take advantage of them. The challenges for homeowners could increase if lenders continue to tighten standards and the housing market remains soft.
Antonio Papa, a construction worker, took out an option ARM with a 1% introductory rate in 2005 on a second home he owns in Jupiter, Fla. The rate jumped to 5.6% in September 2005 and has since climbed to 7.5%.
“I was looking to refinance to have more stability,” he says.
He has decided to hold off because his option ARM carries a prepayment penalty that would force him to pay six months’ of interest if he refinances within the first three years. Mortgage brokers often receive higher payouts for putting borrowers into a loan with a prepayment penalty, says Sandra Barrett, a loan officer in Palm Beach Gardens, Fla., who was working with Mr. Papa.
Prepayment penalties are most common with option ARMs and Florida home loans made to borrowers with scuffed credit. Some 84% of option ARM loans made last year carried a prepayment penalty, according to an analysis by UBS AG that looked at mortgages that were packaged into securities and sold to investors.
The challenges facing borrowers are becoming more apparent at a time when opportunities for refinancing are narrowing. Rates on 30-year fixed-rate mortgages dropped to their lowest levels in 14 months in December, but have recently drifted higher. Rates on 30-year fixed-rate loans currently average 6.45%, according to HSH Associates in Pompton Plains, N.J., up from 6.16% in early December.
“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.”
Low long-term interest rates continue to attract homeowners who are looking for a Florida mortgage refinance, according to the latest Weekly Mortgage Applications Survey, released today 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 Florida mortgage 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.
“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 [Florida 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.”
The percentage of borrowers who took cash out when refinancing loans with Freddie Mac dropped slightly in the fourth quarter, as did the dollar volume of cash-out refinances.
Cash-out, Florida mortgage refinance volume is expected to continue on a downward trend in 2007, due to an expected drop in the share of refinance loans and overall origination activity, said Amy Crews Cutts, Freddie Mac deputy chief economist.
Approximately 84 percent of borrowers who refinanced ended up with mortgages that were at least 5 percent higher than their original balances, Freddie Mac said, down from 87 percent in the third quarter. Cash-out refinances totaled $70.7 billion, down from $80.2 billion in the previous quarter.
In the fourth quarter of 2006, the median ratio of new-to-old interest rate was 1.06, meaning that half of borrowers who refinanced increased their Florida mortgage coupon rate by 6 percent.
“With interest rates averaging 6.2 percent in the fourth quarter for 30-year fixed-rate mortgages, many families found it cost effective to cash out equity through a new first mortgage even though it raised their rate,” Crews Cutts said in a statement. “With the prime rate at 8.25 percent, a home equity loan or line of credit based on that rate may not make sense if the financing need is large, like a major home improvement or college tuition payments, and will be paid back over several years.”
In the fourth quarter of 2006, 30-year fixed mortgage rates averaged 6.2 percent, 40 basis points lower than in the third quarter. Freddie Mac expects 30-fixed mortgage rates to average between 6.3 percent and 6.5 percent in 2007.
“While interest rates are expected to be flat or up slightly in 2007, there are roughly $500 billion in outstanding first-lien adjustable-rate mortgages that will see a monthly payment increase due to an interest-rate reset, the start of amortization, or both,” Crews Cutts said.
Other homeowners have second liens that adjust each month depending on changes in the prime rate, she said, and Freddie Mac expects that many borrowers facing payment increases this year will refinance those Florida home loans.
As Florida mortgage rates rise slightly, borrowers are faced with three options:
First, would your condo appraise at a price that would allow you to stop paying PMI? If your condo is appraised at a price where the outstanding loan balance is 80 percent or less of the appraisal, you should be able to stop paying PMI if you refinance, or perhaps even without refinancing.
What’s the new rate on the adjustable-rate Florida mortgage if you take advantage of the option?
A typical option extends the fixed-rate feature for three more years, to January 2011. If the new rate is - for example - 4.875, then you need to compare the expected interest rate savings from having this low rate against continuing to make PMI payments on the existing loan.
PMI doesn’t last forever. It just lasts until your Florida mortgage loan balance falls to a point where the lender has 78 percent loan-to-value, based on the original selling price or original appraised value of the house (whichever is lower). The lender doesn’t have to consider the home’s appreciated value in deciding to drop the PMI policy.
If, however, your Florida mortgage loan is subject to the more liberal Fannie Mae and Freddie Mac guidelines; then your home’s appreciation can factor in to when you can drop the PMI policy and premiums.
If your loan officer is offering you an extension at 4.875 percent, and things look pretty good to get out from under PMI in the next year or two without refinancing, then it’s a fairly easy choice to pay the $1,000 and lock in that low rate until 2011.
If the interest rate on the extension is closer to market rates on a new fixed-rate mortgage, say 6.5 percent, then you need to weigh the possibility that you can get out from under PMI against the higher interest rates over the next two years and the closing costs of the loan.
If you’re currently paying $221 per month in PMI and it will cost you $6,000 in closing costs to Florida mortgage refinance into a new fixed-rate mortgage, then it takes 2ΒΌ years in the new mortgage to offset the closing costs by eliminating PMI, but that ignores any difference in interest rates between the existing mortgage and the new mortgage.
If you have an adjustable rate Florida mortgage loan - where your monthly payments are about to ratchet up steeply or you are dangerously close to having a negatively amortized loan - the low rates on the 30-year fixed-rate loans this month offer you a window of opportunity to lock in a low rate long term.
There may be some payment shock if you’ve been in an ARM, “but it will be less than if you wait,” said Bob Visini, Loan Performance’s vice president of marketing.
Here are five cost-effective steps that Wachovia mortgage banking executive Blair Glenn and George Hanzimanolis, president-elect of the National Association of Mortgage Brokers, recommend if you choose a Florida home loan refinance:
1. Ask your original lender if you may modify (or recharacterize) your loan into a fixed-rate mortgage. With fees that range from $250 to $500, this process is less costly and less intensive than a full refinancing - which typically runs between 0.5 percent to 2 percent of the loan amount.
But a modification may prove more expensive in the long run if the fixed rate your lender offers is more than three-quarters of a point above the going rate you’d get on a regular refi. So make sure you shop around for the best Florida mortgage rates and closing costs.
2. Consider whether it makes sense to buy points. Points are money you pay up-front to lower the fixed rate on your mortgage. If you think rates will fall and you’ll refi again soon, it may not make sense to buy points. But if you think rates are as low as they’re going to get for awhile, it might save you a lot of money long term to lower your rate today.
3. Ask to pay the “reissue” rate on your title insurance in a refi. It costs about 20 percent less than the standard title rate on new Florida mortgages.
4. Opt for a full appraisal, even if your lender only requires a “drive-by appraisal.” A drive-by means an appraiser doesn’t even inspect the home in person. A full appraisal costs more (about $300 vs. $150), but your home’s value will be more accurately assessed.
Because a sale may be contingent on your home’s assessed value and it determines how much you can borrow against your home and how much you’ll pay in property taxes, accuracy is important.
5. Don’t pay an application fee. A lot of companies are waiving that fee, so you shouldn’t be subject to it.
