Christina Dunham's Random Real Estate Musings

Has this happened to you: you apply for a home loan through your loan officer, and days or weeks later, you are bombarded with calls and mailers from other lenders soliciting your business. And you ask yourself – how did they know?

Credit bureaus, those pesky organizations that collect and maintain credit information from various lenders and creditors on approximately 200 million consumers, may place your personal information on a prescreened list (also called a trigger list). The minute your loan officer pulls your credit report from these credit bureaus to obtain your credit score and process your loan application, a trigger is activated and you are tagged as a “hot prospect” for a home loan.

Within hours, the credit bureaus may sell the trigger list, containing your name, address, phone number and general credit history information, to hundreds, or even thousands, of companies. Your loan officer does not authorize this sale without your permission (and some may not even be aware of it). Unfortunately, he or she also does not have the authority to stop it.

As part of this “hot prospect” list, you are a prime target for the sales pitches of mortgage bankers and brokers. Matt Carter, a columnist for Inman News says, “In theory, it’s a win-win for everyone. Lenders can concentrate their sales pitches on people who are truly in the market for a loan, and borrowers who may not have shopped around for the best deal may get better offers from other lenders.”

While the various credit bureaus who sell these lists claim that the names are checked against the Do Not Call Registry, lenders who buy these lists are cautioned to double-check. Carter writes, “Last fall, the Federal Trade Commission filed suite against USA Home Loans, inc. and a telemarketing firm the company employed to qualify borrowers, alleging that they’d called consumers who were on the Do Not Call Registry. The companies settled the charges for a combined penalty of more than $500,000.”

The National Association of Mortgage Brokers offers some tips to avoid falling victim to lenders who misuse these trigger lists. In their brochure “What happens when your Credit Report is requested?” they caution to watch out for:

1. The “bait-and-switch” scheme. This scheme is run by companies who get business by luring consumers in with low rates and then switching the loan product.
2. Solicitations (phone and mail) that appear to be from your current mortgage company. Always confirm who you are speaking with.
3. Solicitations asking for pin numbers, passwords, your mother’s maiden name and/or your social security number.
4. If you believe you have been the target of one of these deceitful practices or some other abuse of the system, please report the incident to the Federal Trade Commission at 1-877-FTC-HELP (1-877-382-4357).

Your best defense is offense, so avoid becoming part of these trigger lists by: 

HOMEOWNER OPTIONS

Worried about where you stand? Here are some things to keep in mind:

Lenders will always send out a letter to borrowers 3 to 6 months before their rate is about to adjust. The letter will state what your new monthly payment may be. If you feel that you will have difficulty making payments at the higher rate, contact the lender ASAP.

As long as you are making on-time payments to the lender, you are not in danger of foreclosure. Lenders will start calling you once you are 10-16 days late on your mortgage. You can qualify for many of the bailout programs up to the point where you are 60 days (2 months) late on your mortgage.

Before you are 60 days late on your mortgage, you can:

• Contact your lender to see if you qualify for the interest-rate freeze OR
• Call a credit counselor at HOPE NOW, a cooperative effort between counselors, investors, and lenders at HOPENOW.COM or 1-888-995-HOPE to find out your options.
• Refinance on your own to a conventional or FHA loan OR
• Work with an experienced realtor to prepare your home for a short-sale

The moment you hit 90 days (3 months), your options will become more limited. At this point, the lender will file a “Notice of Default” with the county and you are now in pre-foreclosure. In CA, there are currently 106,297 homes in Pre-foreclosures and 33,355 in Foreclosures.

Some homeowners simply turn over their deed to the lender (referred to as “Deed-in-Lieu of Foreclosure”) instead of fighting the foreclosure process. A knowledgeable attorney can help determine whether there are some legal defenses to your foreclosure.

Foreclosures are expensive for lenders, costing them up to $50k in some cases. They are not in the business of selling real estate. They would prefer a win-win solution if you are willing to work with them.

There is life after foreclosure. Typically, if you are able to maintain at least 4 years of on-time payments for all your other credit accounts, you can qualify for a good loan program and purchase another home.

Your Mortgage Advisor should be providing you assistance throughout the course of your loan, with interest-rate reset or prepay expiration reminders, quarterly credit reviews, as well as annual mortgage loan and home equity reviews.

If they are not involved in actively managing your mortgage debt and home equity, give us a call at 866.7.DUNHAM or email contact@dunhamgroupmortgage.com for assistance. We can help you manage your mortgage, regardless of who your current lender is.

BIG BROTHER STEPS IN TO HELP
Confused about the new legislations out there? Here are a few in the news over the last 2 weeks.

12/13/07 - Senator Christopher Dodd introduced The Homeownership Preservation and Protection Act of 2007, the Senate’s “tougher” version of H.R. 3915. According to the National Community Reinvestment Coalition, the strong anti-predatory lending bill, among other provisions, will seek to:

• Eliminate prepayment penalties and yield-spread premiums in subprime and high-cost loans
• Create a "good faith and fair dealing" duty for all lenders, including a fiduciary responsibility for brokers.
• Address abuses in the servicing sector, and would hold lenders accountable for problematic appraisals.
• Include protections for non-traditional products, such as option-ARMs (and 2/28 & 3/27 mortgages).
• NOT include national registry, licensing, or continuing education for Loan Officers

12/17/07 – Senate passes first major FHA Reform Bill. If enacted, the FHA “modernization” legislation would increase loan amounts FHA could insure, cut in half down payments for borrowers getting an FHA loan, and provide more counseling to homeowners. The Senate must now forward the bill for final approval (or veto) to the President, who has expressed support for significant FHA enhancements.

FHA also has a refinance program called FHASecure. Here are the qualification guidelines:

• A history of on-time mortgage payments before the borrower's teaser rates expired and loans reset;
• Interest rates must have or will reset between June 2005 and December 2009;
• 3% cash or equity in the home;
• A sustained history of employment; and
• Sufficient income to make the mortgage payment.

12/18/07 – The Federal Reserve Board, under the authority of the Truth in Lending Act, unanimously voted to propose important changes that would affect subprime loans or those loans the Fed defines as "higher-priced mortgage loans" (loans with rates at least 3 percentage points above a comparable Treasury security for first mortgages and 5 percentage points for second loans, or home-equity loans). Creditors would be:

• Prohibited from extending credit without considering borrowers' ability to repay the loan.
• Required to verify the income and assets they rely upon in making a loan.
• Permitted to impose prepayment penalties if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.
• Required to establish escrow accounts for taxes and insurance.

The Fed also proposed another set of rules for all mortgages, including what the Los Angeles Times called "stricter disclosures on 'yield spread premiums.'" These rules include:

• Curb or better disclose broker incentives.
• Prohibit coercion of appraisers.
• Prohibit loan servicers from engaging in unfair practices.
• Require better disclosure overall.

12/20/07 - President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which will help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages. This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive.

Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the lender will issue you a year-end statement (called a 1099-C) which states the amount of debt forgiven. This amount is treated as taxable income. This happens in both short-sale and foreclosure situations.

One thing to note: if you have lived at least 2 out of the last 5 years in your home, you may exclude up to a $250k gain (or $500k for married couples) from income. This means that the Mortgage Tax Relief only affects you if your lender is forgiving more than $250k in mortgage debt.

Bush Administration Rate-Freeze Plan: Do You Qualify?

The Bush Administration unveiled a plan earlier this month to assist homeowners in subprime loans, borrowers at risk for default or foreclosure with the impending increase in their interest rates and mortgage payments.

The plan would offer some of these homeowners a five-year freeze on their mortgage rates, allowing them to continue paying at the lower start rate.

Of the estimated 1.8 million borrowers who took out subprime loans, only 145,000 to 240,000 would qualify under the following parameters: subprime adjustable-rate mortgages (ARMs) with an initial fixed-rate period of 36 months or less, originated between Jan.1, 2005 and July 31, 2007, with interest rates that reset for the first time between Jan. 1, 2008 and July 31, 2010.

How do you know if you have a subprime loan? Here are some rough indicators:

• When you applied for a mortgage, your credit score was below 620.

• You did not submit copies of your W-2s, 1099s, tax returns or paystubs.

• You secured a mortgage from New Century, Ameriquest, Long Beach, Fremont Investment, WMC, First Franklin, among others.

• You obtained a 100% financing loan

• Your loan has a prepayment penalty period of 2 to 3 years.

If you meet the criteria above and are having trouble paying your mortgage, contact your lender immediately or call a credit counselor at 1-888-995-HOPE to discuss your options.

Christina Dunham is a Mortgage Advisor with the Dunham Group at Sierra Pacific Mortgage, a nationwide mortgage banker funding $9 billion in loans in 2006. She may be reached at contact@christinadunham.com.

Homeownership Still Possible for Zero Down
Down Payment Assistance makes it possible for buyers to own a home

Not enough money for a down payment? Fear not. There are several government and non-profit organizations that are dedicated to assisting individuals and families in buying their first home through gifts and grants.

Gift amounts vary with each program but generally range from 3% to 6% of the purchase price, up to $22,500. The best part – homebuyers never have to repay these gifts.

Qualification guidelines also vary by program and the home seller must agree to participate. For some government subsidized grants, homebuyers are required to complete a Home Ownership Counseling Course or provide 1% of their own funds toward the transaction.

Most commonly, income and asset restrictions apply since these programs are intended to assist low- to moderate-income families, and eligibility is limited to certain targeted zip codes. However, there are programs available that are not based on income or zip codes.

In the case of forgivable loans, homebuyers are also required to live in the home for a specified period time before the loan is forgiven.

The good news is that these down payment assistance programs can be used to purchase single-family homes (up to 4 units), manufacture/modular homes, condominiums, townhouses or toward new construction or property rehab.

Below are just a few of the Down Payment Assistance Programs available in the Bay Area:

• Nehemiah Down-Payment Assistance Program - provides gift funds for down-payment and closing costs to qualified homebuyers using an eligible loan program, such as FHA or a conventional loan that allows gifts from charitable organizations. Gift funds of up to 6% of the purchase price can be received, depending on the needs of the homebuyer.
• FirstHouse Program - designed to provide low and moderate income first-time homebuyers in California the opportunity to purchase a home even if they don't have funds for a traditional down payment or closing costs. The program is available in over 40 counties in California. Down payment and closing cost assistance is in the form of a grant, which does not need to be repaid by the borrower, or a low interest Second Loan, or a combination of both.
• California Homebuyer's Down-Payment Assistance Program (CHDAP) - provides a deferred-payment loan for up to 5% of the purchase price or appraised value, whichever is less, for use towards down-payment or closing costs. Specified “moderate income limits” apply. For example, $80,500 for a 2-person household in Alameda County, or $91,200 for a 2-person household in San Mateo County.
• American Dream Down Payment Initiative - provides financial assistance to low-income first-time homebuyers by providing a deferred-payment loan for down payment, closing cost and rehabilitation assistance on home purchases within the City and County of Sacramento. Assistance is up to 6% of the sales price, up to a maximum of $10,000.
• CalHome First-Time Homebuyer Mortgage Assistance – provides a low-interest deferred payment loan at 20% of the purchase price up to a maximum of $40,000 for first-time homebuyers in the City and County of Sacramento. The loan is due once the home is sold or transferred to a new owner, or when the home ceases to be owner-occupied. Maximum income limits apply.

A first-time homebuyer is defined as someone who has not owned and occupied their own home during the last 3 years. Annual household income limits apply and availability varies by county, so it’s best to discuss your needs with a trusted Mortgage Advisors in order to find the right fit.

Until next week, Happy Home Loan Shopping!

Holiday Treat – Fed Cuts Short-Term Rates Again

The Federal Reserve Bank -- The Fed -- has cut the federal funds rate by another quarter point to 4.25%. This is the third time this year that the Fed has slashed rates, good news for consumers and businesses alike.

This spells relief for consumers who hold adjustable home equity lines of credit (HELOCs) based on the Prime Rate, a rate pegged at 3% above the Federal Funds Rate. The Prime Rate is expected to go down to 7.25% in the coming weeks.

Variable-rate credit cards, also tied to Prime, will be following suit – just in time for the holiday shopping frenzy. Although analysts were expecting a more aggressive 0.5% decrease, the rate cut is intended to stimulate business activity by lowering the cost of borrowing, as well as encourage consumer spending.

The Fed also lowered its discount rate, the rate at which it loans out money to banks, by a quarter point to 4.75%. According to the Fed Committee, "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time."

Between January 3, 2001 to June 25, 2003, the Fed cut the federal funds rate 13 times, and it hit a 45 year low of 1% between June 2003 to June 2004. From June 2004 and onward, it increased the federal funds rate 17 times in a row a quarter point at a time. After holding steady for several months, the Fed has slashed the federal funds rate three times this year.

Another One Bites the Dust – WaMu cuts 3300 jobs

Washington Mutual just announced that it is laying off 3,300 workers in its efforts to cut costs and stabilize operations. It is shutting down its subprime mortgage business, operated under Long Beach Mortgage, closing down 190 of its 336 home loan centers, and eliminating its mortgage broker finance warehouse lending operation.

With the forecast for increased foreclosures, WaMu is also setting aside $1.5 to $1.6 billion this quarter to cover bad loans, and an additional $2 billion for the first quarter of 2008.

What does this mean to current WaMu clients? According to an account representative for WaMu’s wholesale lending division, none of the company’s existing borrowers will be affected by this change. Existing WaMu loans will continue to be serviced by the company, and will not be transferred to another lender.

Bush Administration Puts the Freeze on Subprime ARMs

Last week, the Bush Administration announced that it had reached an agreement with mortgage lenders and Wall Street firms to “freeze” interest rates for up to five years on certain subprime adjustable rate mortgages. This freeze applies to borrowers who:

• Took out their loan between January 2005 and July 2007 and whose rates are set to increase between January of 2008 and July of 2010; and
• Have less than 3% equity in their homes; and
• Are current on their payments (or no more than 60 days behind); and
• Are able to handle their current lower rate, but will not be to handle a higher payment.

To good to be true? The freeze is a voluntary agreement on the part of the lenders, and only 145,000 to 240,000 of the estimated 2 million subprime borrowers would qualify under the parameters outlined.

If you are at risk for a foreclosure, contact Hope Now Alliance – a coalition of nonprofits, lenders and investors – to receive foreclosure-prevention counseling. Their hotline is 1-888-995-HOPE.

There are countless ways to finance a real estate purchase, and future homebuyers don’t always have to wipe out their savings account in order to buy their very own home.

Often, the biggest obstacle for homebuyers is coming up with enough cash for the down payment and closing costs. Saving up the funds for the down payment can be a seemingly insurmountable hurdle to homeownership. This doesn’t have to be the case. Here are 10 ways to finance your down payment.

1. Use a second mortgage – for purchases under $500,000, it is still possible to secure 100% financing by getting an 80% first mortgage and a second loan at 20%. The second mortgage can be in the form of a fixed rate loan or a home equity line of credit.
2. Government Down-Payment Assistance Programs – last week, we outlined several government programs that provide gift funds or deferred-payment loans of up to 20% of the purchase price for down-payment and closing costs to qualified homebuyers using an eligible loan program.
3. Seller Financing – sellers who have considerable equity in their homes may be willing to carry-back a second mortgage of up to 20% of the purchase price. This strategy may be available for purchase prices above $1million, provided the lender allows for 100% combined loan-to-value.
4. Lease with Option to Buy – for a small up front fee (anywhere from $1,000 to 5% of the agreed upon purchase price), a prospective buyer can “save up” for their down payment by having a portion of their monthly rent allocated towards the purchase price.
5. Gift Funds – most lenders will allow immediate family members, employers, or non-profit agencies to “gift” a portion of the down payment as long as a Gift Letter indicating that there is no expectation for repayment on the money being provided.
6. Gift Equity – for transactions involving next of kin, sellers can “gift” part of the home’s equity to count towards the homebuyer’s down payment. For example, on a $500,000 purchase, the seller can “gift” $50,000 in equity, the buyer can put a down payment of $50,000 and finance the remaining $400,000 through a conventional loan.
7. Zero Down loans – FHA and VA loans assist qualified borrowers in securing zero down loans by providing lenders protection through mortgage insurance. Underwriting guidelines are more flexible than conventional loans, which means borrowers who won’t normally qualify for conventional loans can secure financing through FHA or VA.
8. Tap your 401k – many company plans permit certain withdrawals for “immediate and heavy financial needs,” including towards the purchase of a principal residence. You can also borrow against your 401k, often as much as 50% of your account balance. While you pay interest on the loan, the interest goes back into your account. The money you receive is not taxable as long as it is paid back. Depending on your plan, you may have up to 30 years to pay back your loan.
9. Personal Loans – got a friend or relative with considerable cash and looking to earn more than the measly 1% paid out by their savings account? Then consider a personal, short-term loan. While personal loans are counted towards your overall debt profile, they can serve as viable alternatives to lender or seller financing.
10. Use equity from another property – some people are afraid of tapping their equity. If you are one of them, ask yourself these questions: How much equity do you have in your property? Is your equity making you money?

As you can see, there are many ways to finance your down payment. If you would like to learn about these down payment options in-depth, please contact me at 866.7.DUNHAM or via email at contact@christinadunham.com.

Until next week, happy home loan shopping!

Christina Dunham is a Mortgage Advisor with the Dunham Group at Sierra Pacific Mortgage, a nationwide mortgage banker funding $9 billion in loans in 2006. She may be reached at contact@christinadunham.com.

An accepted offer on a home purchase does not signify a done deal, and many homebuyers often make the mistake of rushing out to buy things to fill their home when the lender pre-approves their loan. But there are still a few major hurdles to overcome before the keys are handed out. Here are some things to avoid during the home buying process to assure your transaction goes as smoothly as possible:

1. Don’t inflate your income or bank account balances. Even if you are doing a “Stated Income” or “No Doc” loan, lenders still have a way of verifying your ability to pay. If they deem your loan application as “high risk,” they may end up requiring two year’s proof of income as well as two month’s bank statements prior to closing. Nothing will kill a loan faster than discrepancies in documentation.
2. Don’t apply for a new credit card. Every time you apply for new credit (whether it is a store card, gas card, major credit card, student loan, auto loan, or new home loan), an “inquiry” is made regarding your credit profile. Each new inquiry can lower your score, sometimes by as much as 50 points. It may take as much as 6 months of on-time payments for your credit score to rebound from opening a new credit account.
3. Don't make an expensive purchase. Avoid making major purchases like furniture, cars, appliances, or vacations until after close of escrow. Financing that purchase with a store credit card or even one of your own credit cards could jeopardize your credit worthiness during the time it means the most. Tapping into your savings to pay for these big ticket items can also create a problem because it may significantly reduce your cash reserves, which many banks take into consideration.
4. Don't get a new job. Lenders like to see a consistent job history, typically two years stable employment in the same profession or industry. Generally, changing jobs will not affect your ability to qualify for a mortgage loan - especially if you are going to be making more money. But if the new job is in a different industry altogether or you don’t have two years verifiable employment in the same profession, questions might be raised about your ability to meet your obligations.
5. Don't switch banks or move money around. As your lender reviews your loan package, you will likely be asked to provide bank statements for the last two or three months on your checking accounts, savings accounts, money market funds and other investment accounts. To eliminate potential fraud, most loans require a thorough paper trail to document the source of all funds. Changing banks or transferring money to another account - even if it’s just to consolidate funds - could make it difficult for the lender to document your funds.
6. Don't go on vacation in the middle of the transaction. It is important to stay in touch with your loan officer, real estate agent, and escrow officer during the home buying process. If a loan condition is required while you are away, it could prolong your closing date or worse, jeopardize the transaction.
7. Don't disregard your lenders requirements. You may have been pre-approved for the loan but your work with the lender is far from over. In order to process your loan, you need to meet certain requirements. Your lender will need copies of your bank statements, W2s and other paperwork. It is up to you to get it to him or her as soon as possible. Failure to submit certain qualifying documents could cause you to lose your loan and the financing you need to buy your home.

Buying a home is a major accomplishment. To ensure a successful closing, be sure to avoid the pitfalls above!

Until next week, happy home loan shopping!

Subprime in the news:

- On October 1, Citigroup Inc. the largest U.S. investment bank, revealed a 60% drop in earnings from a year ago after taking a $3.3 Billion (and counting) loss on subprime mortgages gone bad.” (CNN Money)

- NetBank, Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday [September 28] because of an excessive level of mortgage defaults. It was the largest savings and loan failure since more than 14 years ago. (DesertNews.com)

- Morgan Stanley, the second-biggest US securities firm, plans to cut 600 jobs after a decline in mortgage-related revenue led to lower third-quarter earnings than analysts estimated. [In December 2006] just as the subprime crisis was unfolding… it bought Saxon Capital for $705 million. In addition to being a mortgage provider, Saxon services home loans to people with patchy credit histories by collecting payments, maintaining records, and foreclosing on delinquent borrowers. (Bloomberg.com)

This morning, I checked out rates from one of the largest players in the subprime market, Long Beach Mortgage. Acquired by WaMu in 1999, LongBeach originated nearly $30 billion in mortgage loans in 2005, the height of the subprime extravaganza. Back then, 2-Year Fixed Rates for Full Documentation Loans at 80% loan-to-value with a 620 FICO score was at 5.10%. Many first-time homebuyers took advantage of this low starter rate, most borrowing up to 100% of the home’s value.

Two years later, these rates started to adjust upwards, some by as much as 6%, causing many subprime borrowers to fall behind on their mortgage payments. In mid-July, many subprime lenders pulled their short-term 2-Year and 3-Year Fixed loans off the shelf, keeping only longer term programs like the 5-Year Fixed and 30-Year Fixed.

Today, the lowest rate a subprime borrower can get with the same profile – Full Documentation, 620 FICO score, 80% loan-to-value – is at 8.85%. That’s a 3.75% jump in the rate, an almost 75% increase. And Long Beach no longer offers 100% financing. The maximum they will lend is at 90% of the home’s value. This leaves many subprime borrowers stuck, unable to refinance due to lack of equity exacerbated by late payments in their credit history. Thus, foreclosures spike.

Loan Performance, a San Francisco firm that tracks the delinquencies in the mortgage industry, indicates in its March 2007 report that nationwide, 8.28% of subprime mortgages were seriously delinquent (90+ days late) while Bankrate.com indicates that 16% were at least 30 days delinquent. These figures are expected to get worse as more subprime mortgage rates reset.

The only thing a subprime borrower can do is to take a serious look at their credit history and make the appropriate changes or seek professional assistance and intervention. Financial mismanagement and procrastination can indeed by very hard habits to break.

Until next week, happy home loan shopping!