Obama’s Making Homes Affordable Program

The Department of the Treasury has released further details on what the Making Homes Affordable Program will cover.

First, the Treasury department estimates that it will offer assistance to nearly 9 million homeowners.  So who gets assistance?  Well here is the summary:

Affordable Refinance Program: If you have a solid payment history and your mortgage is owned by Fannie Mae or Freddie Mac, you may qualify.

-This will let borrowers refinance at today’s low rates with loan to value ratios of less than 80%.  This should help you qualify for new loans even though your house has lost value.  If you have paper work on file, the refinance should be easy and may not require an appraisal.

Home Affordable Modification Program: This is designed to help homeowners avoid foreclosure by reducing monthly mortgage payments through loan modifications.  The rules are complex, but here are the minimum guidelines:

• Loans must have originated prior to January 1, 2009.
• Single family homes over $729,750 unpaid principal balance do not qualify.  Owner occupied properties with 2-4 units do not have mentioned limit.
• You must fully document income with pay stubs and tax returns.  A signed affidavit of financial hardship is also required.
• Property must be owner occupied and supported by proof.
• Incentives to lenders and servicers to modify at risk borrowers who have not yet missed payments.
• Loans can only be modified once under program and ends December 31, 2012.

What are the terms of the loan modification:

(I have left out some of the NPV calculation and tests since they are complicated and hard to understand without an accounting understanding.  The full regulations are posted on the Department of the Treasury website)

• Servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of gross monthly income (DTI).

• The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term or amortization of the loan up to a maximum of 40 years, and then if necessary forbearing principal. Principal forgiveness or a Hope for Homeowners refinancing are acceptable alternatives.

• The program will share with the lender/investor the cost of reductions in monthly payments from 38% DTI to 31% DTI.

• Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus “pay for success” fees on still-performing loans of $1,000 per year.

• Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years.

• The program will provide one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments.

• The program will include incentives for extinguishing second liens on loans modified under this program.

Judicial Modifications to Home Loans Program: This lets courts mandate write downs or other options for homeowners in Bankruptcy.  Current laws do not allow this practice.

Special Circumstances for High Debt to Income Individuals: If you have a debt to income ratio of more than 55%, you can still qualify for the programs above, but you must enter into a hud-certified consumer counseling program.

There is much more under this program, but the above items cover the main things that really impact borrows.  If you want full details try the following links:

http://www.treas.gov/press/releases/reports/housing_fact_sheet.pdf

http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf

Subscribe to this blog's RSS feed

Unfortunately, at a time when people are losing their homes to foreclosure and excessive debit they also have to pay the most attention to who they are dealing with for help.  Anytime you have a market where panic has set in, it is easy to work people on their fears by making large promises.  All too often, however, these promises are fake and only take you for your hard earned cash.

So what is can you look for?  Start with the slogans (these are ones I have heard and seen in my local papers):

1. “We can reduce your debt to pennies on the dollar”
2. “I paid off my house in five years”
3. “We know the tricks to get your credit cards to reduce your debt by 50%”
4. “Pay no tax and have the government pay you”
5. “Refinance for 4% on a 30 year fixed”

All these statements set off red flags because they offer things that to good to be true.  Maybe someone did pay off their house in five years, but how much did they owe?  Sometimes credit card companies will negotiate your debit down, but it does come at a cost.  Pay no tax?  Good luck with that.

If you hear something that sounds appealing that you just have to call, do a few things first.  Research on the internet some of the details of people in you same situation.  100’s of sites offer discussions, reviews, and advice to ways you can deal with your problem.  Secondly, research the company you plan to call from the advertising.  Check for reviews, go to the website and read the fine print, check with BBB, and ask around.  In many instances you will find negative information that leads you to the right decision.

Ok, so now you have found nothing and choose to do business with a company.  At a minimum follow these steps:

• Are there any upfront fees?

This is usually a red flag if a company is offering you things that seem to good to be true.

• Read everything.

Before signing anything, read the fine print and if you do not understand one thing take it home and ask someone else to review the information.  Remember, people got in to trouble with home loans even with the all the rules and regulations regarding truth in lending documents.  Many of these companies are not bound to such laws and can easily hide unrealistic terms.

• What are the policies on refunds, obligation of the provider, and performance warranties?

Make sure you have protection through some kind of refund process, performance obligation, or any other documentation that the company can and will do the things they say.  Most importantly, it must be in writing.  Many companies say yes to your concerns, but a verbal contract holds no weight when you take the company to court for stealing your money.

• Ask for references of people you can contact.

They should be able to refer you to people that have had success with their company.  However, be cautious, they can set these up so don’t believe everything you hear.  It would be best if you can find people that have used the company outside of their reference.  Sometimes you can ask people sitting in the lobby or find reviews on the internet.

• A second opinion does not hurt.

Before you sign anything the commits you to obligations of payments, make sure to check with a few companies.  It is best to check with known reputable companies to see what they say and bring up any red flags to the person you are working with to see how they answer the question.

• Lastly, don’t expect a miracle

Yes, there are cases that do live up to some of the claims, but they are unique and often very few.  Remember many of these firms are feeding on your situation and have no real inside secret to dealing with your problem, they just make it look official and package it with paperwork.  Many of the techniques they use can be done on your own with some research and time.

On Wed. July 30th, the bill was signed into law by the President.

Before this, on July 23, 2008, the House Committee on financial Services released an opinion on HR 3221. In reading through the document, it goes through all the painted benefits of the proposed legislation, however, it does not address any of the risks, down sides, or other important things the bill does. In fact it makes some bold claims that I find hard to believe. Here is an excerpt of the summary:

FHA Housing Stabilization and Homeownership Retention Act
• Provides mortgage refinancing assistance to keep at least 400,000 families from losing their homes, to protect neighboring home values, and to help stabilize the housing market at no cost to American taxpayers.

• Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government-insured mortgages they can afford to repay.

• Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.

• Contains critical protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.

• Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.

• According to CBO, this three-year program, starting October 1, 2008, will not cost taxpayers a dime, as it is more than paid for by using funds in the first few years from the Affordable Housing Trust Fund.

• Provides $180 million for financial counseling and legal assistance to help families stay in their homes.

Read more here:
http://www.house.gov/apps/list/press/financialsvcs_dem/press072308.shtml

I take issue with the third point above. They claim this requires lenders to take responsibility by participating in reducing loan principals. While this is true, they fail to mention the real benefit to the bank is being able to take a worthless loan and transition it to a secured loan.

If just having banks reduce principle was the solution, why not have the courts mandate loan reductions on a case by case basis? Or the real problem is when home owner’s adjustable rates expire and they can’t afford the new rate, why wouldn’t the banks just hold the lower payments indefinitely and thereby preventing foreclosure. The answer is, they would still have to carry a risk that affects future lending, earnings, and the overall health of the bank. This risk is much more costly then a loan balance reduction, otherwise you would see massive loan restructuring. At the end of the day, the bank needs the loans secured or off the books. Currently the only way to get them off is through foreclosure.

With the passing of this bill signed by the president on Wednesday, from what I have seen and read on the major news networks, it also appears they have only taken the perceived benefits written by this document as well.

Here are some of the lesser reported things this bill does that seem to be overlooked:

-(sec. 3091) did they mention Christopher Dodd and Richard Shelby attached an amendment that requires electronic commerce to collect, aggregate, and transmit details of every electronic sale to the federal government?

That’s right, your latest iTunes, eBay, and Amazon purchase will become government knowledge. What does that have to do with housing?

Well, I can only speculate that this had origins from the major bank lobbyist and has something to do with the major competition they are seeing from companies like PayPal (currently process 30% of online transactions), but I will try to stick to only the facts unless I can prove otherwise.

The main purpose of this appears to be revenue generation to help offset costs of this bill. Companies will be required to file this information to the government on return schedules, if not they are subjected to fines. Given the burden of this task for many of these companies, they anticipate a large amount of fines and therefore place this as a revenue generating measure.

Seems like a silly way to generate revenue by divulging sensitive information regarding your online transactions so there must be more behind it. A word of gratitude should be sent to Dianne Feinstein and Barbara Boxer for issuing a letter objecting this measure.

-did they mention the tax increase: it changes the home residence and sale tax exclusions that state you must own/live in a house for two of five years to a pro-rated system that only gives you exclusions based on the time you lived in the house divided by the time you have owned the house? (sec. 3092)

-how about the provision that extends a tax credit that allows manufactures to use accumulated AMT credits as well as research and development tax credits to make investments that would qualify for bonus depreciation. The amount of investment is capped at the lesser of 6 percent of built up AMT and R&D credits or $30million. (HR 3221 amended by Debbie Stabenow (D-MI) and Sander Levin (D-MI). The idea behind this is to stimulate investment in new technology by reducing the tax burden.)

-Down payments for FHA loans will increase from 3% to 3.5%.

-(sec. 1101) A whole new government agency is created “The Federal Housing Finance Agency”.

-Penalties for business late filings will be increased. (sec. 3094)

-Extension of net operation loss carry back will be extended from two years to four years.

It does not matter if you agree or disagree with the legislation, the fact of the matter is that very few people understand what the bill does in its entirety. If the news and media only highlight positive things with all encompassing messages like “this will bail out homeowners” or “home owners will be saved”, which is certainly not true on that scale, most people will not know the facts and take this as something their representatives did good work on.

The truth of this bill, is that it does a few good things, a few bad things, but most certainly it adds a lot of complication and should have been rejected for something that is more specific and easy to understand. This bill has many hidden agendas that may not impact you and I, but others will benefit because they know how to work the system.

If we want change, which seems to be the message, it needs to start with legislation and calling out bills like this. The news and media agencies need to stop publishing what people want to here and simply lay out the facts, who is responsible, and how each party (individual, corporations, and federal) benefits. Let people make their own decision, hold the bill sponsors liable from good or crappy bills, and let people push for change when they see that every bill by their representative has some concession to some lobby group.

If you have read through this site, you know that I offer many ways to help you figure out if you are getting a good deal on your lease. I also stress the importance of not leasing a car if you are at all unsure of any factors that determine how a lease is done. It is to easy to not know what you are getting and when you are purchasing something such as a Yukon Denali, you are spending $50K. You should know what you are doing, but many people do not.

I decided to sample Yukon Denali leases since most of them come fully loaded and it lessons the chance for expensive upgrades. Using Edmunds.com, I determined that the cost for a fully loaded Yukon Denali with an extra 5K in add-ons (sunroof, larger wheels, DVD, Navigation, etc) should cost about $50,000 not including any rebates. Through some research I was able to collect details from offers and prior purchases of leases.

I sampled 10 Yukon leases and here is what I found:

You can see the payments, terms, and residual payoffs vary greatly. Next I totaled the payments over the term and added the residual to determine the final cost (It does not show any down payment the buyer put towards the car so assume the total price below is lower than the actual total price). I then put in the cost over the same term for a 5% loan based on a fully loaded Yukon with $5K in upgrades costing $50K and compared the two.

You can see the difference. Car 10 ended up over $8,000 higher than the $50K car I put together. In fact, out of the 10 cars I sampled, only 3 came in better, and two of them we would have to assume they had full upgrades and did not put more than $356.00 dollars down. Also notice how bad most of the 39-month leases worked out.

If any of the 7 other cars had put money down, the terms become worse. To make matters worse, the blue book on a 2007 Yukon Denali is $37,000. Wow, look at car 1 and car 10, at the end of the lease term you have to pay nearly what the car is worth today after making 27 payments of over $700 per month. Sound like a good deal? I guess if your spending $50,000 on a car what is an extra 6-10K right? At least you had a nice sales person and your car payment met your budget.

I hope this puts a little more light into how much a lease can cost you if you don’t know all the terms. I would like to say that someone spending $50K knows the terms, but as demonstrated here, that is not the case.

Leasing any car, expensive or not, you can get ripped off. There is a reason all the ads push leases, either do your homework or don’t lease. Remember never buy a car based on a car payment.

If anything know this.
-A lease is simply financing the depreciation of the car. American cars lease bad as they do not hold their value. Cars like Toyota, Honda, and Nissan lease better.
-The more a car holds it value, the better your lease payment.
-Down payments for leases should be very small since any amount is usually applied to the residual (a dirty trick), which if you turn your car in the money is pocketed by the lease company.
-Always know the total cost if you were to buy the car at the end of the lease. Dealers will say this does not compare to a purchase, that is a lie. It does and it should be close to what you would buy the car on a conventional loan under market interest rates.
-You will be upside down on 90% of leases.

More on Regulation Z and your heloc loans

I was surprised at the large response to the last post about regulation z of the fair lending practices set forth by the FDIC and as such decided to add a few more details to how it directly protects you regarding Helocs.

Under section 226.5b of the fair lending guidelines, you will find provisions for heloc loans. Section F is probably the most interesting to consumers given the current the housing market:

(f) Limitations on home equity plans. No creditor may, by contract or otherwise:
(1) Change the annual percentage rate unless:
(i) Such change is based on an index that is not under the creditor’s control; and
(ii) Such index is available to the general public.
(2) Terminate a plan and demand repayment of the entire outstanding balance in advance of the original term (except for reverse mortgage transactions that are subject to paragraph (f)(4) of this section) unless:
(i) There is fraud or material misrepresentation by the consumer in connection with the plan;
(ii) The consumer fails to meet the repayment terms of the agreement for any outstanding balance;
(iii) Any action or inaction by the consumer adversely affects the creditor’s security for the plan, or any right of the creditor in such security; or
(iv) Federal law dealing with credit extended by a depository institution to its executive officers specifically requires that as a condition of the plan the credit shall become due and payable on demand, provided that the creditor includes such a provision in the initial agreement.
(3) Change any term, except that a creditor may:
(i) Provide in the initial agreement that it may prohibit additional extension of credit or reduce the credit limit during any period in which the maximum annual percentage rate is reached. A creditor also may provide in the initial agreement that specified changes will occur if a specified event takes place (for example, that the annual percentage rate will increase a specified amount if the consumer leaves the creditor’s employment).
(ii) Change the index and margin used under the plan if the original index is no longer available, the new index has an historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an annual percentage rate substantially similar to the rate in effect at the time the original index became unavailable.
(iii) Make a specified change if the consumer specifically agrees to it in writing at that time.
(iv) Make a change that will unequivocally benefit the consumer throughout the remainder of the plan.
{{12-31-07 p.6652.03}}
(v) Make an insignificant change to terms.
(vi) Prohibit additional extensions of credit or reduce the credit limit applicable to an agreement during any period in which:
(A) The value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan;
(B) The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer’s financial circumstances;
(C) The consumer is in default of any material obligation under the agreement;
(D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;
(E) The priority of the creditor’s security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or
(F) The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.

Section 3vi A-F, provide the details as to when a bank can make changes to your heloc credit line. In summary, short of any government intervention, your property has to have a material change in value or you have give reason that your ability to repay the loan is no longer secure.

While these guidelines are in place, they fail to define what “material” is. Given today’s market, banks will be stretching “material” as far as possible and that is what the FDIC is concerned about.

If you find yourself arguing with your bank, it is up to them to tell you how they define “material”. They must prove to you they are within the guidelines, so use that to your advantage. Be persistent and a pain in the ass. Make them pay for appraisal, credit reports, and any other information they claim. Ask them to prove their guidelines are within reason. These guidelines are the only thing you have to protect you, so use them the best you can.

While many abuse home equity lines, they still do play an important roll. A blanket tightening of un-used equity lines could further damage the fragile housing market.

Please comment with any strategies you know to help home owners facing a reduction in home equity lines by their banks.