How Housing Rescue Bill can help you
How Housing Rescue Bill can help you
New legislation devotes $300 billion to helping troubled homeowners avoid foreclosure. See if you qualify.
NEW YORK (CNNMoney.com) -- The House on Wednesday passed a $300 billion housing rescue bill aimed at helping troubled homeowners avoid foreclosure and supporting mortgage giants Fannie Mae and Freddie Mac.
If the bill is now passed by the Senate and signed by President Bush, who today withdrew his threat to veto it, thousands of at-risk borrowers will be able to refinance their unaffordable old mortgages into new low-cost fixed-rate loans insured by the Federal Housing Administration (FHA).
The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program - but the bill allows for as many as 1 million or 2 million borrowers to participate in the program.
Here's what homeowners need to know.
Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31% of their gross monthly income on mortgage debt to be eligible for the program.
They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments.
Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home.
To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home's appraised value at the time.
Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development.
This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home's current value. In areas where prices have plummented by as much as 20%, that will mean a substantial loss for the lender.
But lenders won't sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process.
Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home's current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.
Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home's market value.
If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.
As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal.
There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate.
However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.
Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they'll pay a "3% exit fee" of the mortgage principal to the FHA when they resell or refinance.
Plus, they'll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.
After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.
Savings depend on what borrowers are paying for their present loan and where they live, but for most people it will be substantial, even after factoring in the FHA fees.
In areas that have sustained such as Sacramento, Calif., where prices have fallen by about 30% over the past year, some loans might be reduced by more than 40%.
Additionally, the FHA loans carry reasonable interest rates, which are fixed for the life of the loan, as opposed to a subprime adjustable-rate mortgage that can jump higher every six months.
Top 10 Short Sale Questions
#10 - I can't make my house payments, but I do have an ability to pay back all or part of the negative equity. Also, I want to preserve my credit score...is a short sale right for me?
Probably, not. In cases where the seller can pay back all or part of the negative equity (usually to the 2nd lien holder), it makes sense for them to work out a repayment plan. The lender will then release the lien and allow the home to close.
#9 - If I pay mortgage insurance and default on my loan, why wouldn't that cover the deficiency amount?
The mortgage insurance is not there for your protection, just the mortgage lender's.
#8 - Do I have to have my home "Approved" by the lender prior to offering it for sale as a short sale?
No. Technically speaking there is no such thing as being "Short Sale Approved." The actual approval only happens with an accepted offer.
#7 - I just missed a payment and I know I will miss more...how long does the foreclosure process take and is there time to do a short sale?
The foreclosure process takes differing times depending on your state. In the Midwest a foreclosure can take over a year. In California its taking 6+ months. Generally speaking a well priced short sale being processed by an educated short sale listing agent will sell and close in less than 120 days.
#6 - Will I still have to pay property taxes if I do a short sale?
Property taxes will always have to be paid as part of any accepted short sale. Whether it's you or the lender, it depends on their policies and the specific agreement you reach while negotiating the short sale.
#5 - I owe more than my home is worth and I can't make the payment. Do I have to somehow qualify for a short sale?
The simple answer is NO. If someone can't make their payment and they are otherwise insolvent, they qualify for a short sale. Note: insolvent simply means their total debts are great than their assets.
#4 - Do I have to pay income taxes...I have heard that I will get a 1099. Will the loss the bank takes be treated as a taxable gain to me...the seller...is this true?
It WAS true, now it's not. Consult your Tax Attorney or Qualified CPA. Very recently the tax law was modified and now most people who do a short sale will have no taxes due.
#3 - How do you, my listing agent get paid...who pays your commission?
The bank will pay the commission along with all the other usual closing costs.
#2 - Do I have to miss a payment to do a Short Sale?
No. Late last year most major lenders started accepting short sale offers from sellers who have never missed a payment.
#1 - I want to do a short sale and have a 2nd mortgage, does this make me ineligible?
No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then you just negotiate the terms with the second lender. Most short sales do involve 1st and 2nd lien holders.
Rate Cut by the Fed - What's in it for You?
The latest reduction in a key interest rate by the Federal Reserve was partially meant to encourage banks to ease up tight restrictions on financing for all sorts of personal and business loans.
Moreover, it could help reduce interest rates tied to the London interbank offered rate, the benchmark known as Libor used for many adjustable-rate mortgages and commercial real estate loans.
The downturn in the housing industry and the growing numbers of foreclosures and credit delinquencies have some financial powerhouses cutting back on lending. The Fed move also was directed at relaying a message that the Fed is ready to jump when needed. Lastly, the move also helps to bolster consumer confidence with the Fed portraying the economy as stable and not heading into recession.
The idea is that if there's more access to more money at cheaper rates, that will pass through the broader economy and the banks' extension of credit to the public.
What about my mortgage? There is much misperception among borrowers that if the Fed reduces the rate 1/4 a point, "my mortgages will go down," however, borrowers who may benefit from the cut are those with loans tied to the prime rate. It's hard to say if rates will fall further because most fixed mortgage rates typically follow the 10-year Treasury note's yield which has not budged much.
Home Equity Lines of Credit: Consumers currently utilizing their line of credit may have already seen savings. Those inquiring about a new loan may see lower rates depending on the area in which they live.
Credit Cards: Many consumers using a credit card with variable rates (approximately 85%) may see a change as well. But this will only affect those whose current rate exceeds the bottom-rate established by the issuer. This is usually around 14%-15%. But you might not get a lower rate for one to three billing cycles, depending on when and how often your bank resets rates. "U.S. consumers owe about $800 billion in credit card debt, and a drop of half a percentage point in interest represents about $4 billion in savings for a years interest", says Robert McKinley, CEO of website CardTrak, which tracks credit card statistics and trends.
Car Loans: Because many consumers use banks or credit unions when purchasing a used car, the Fed's cut may make it easier for them to meet their financing needs.
Savings Rates: Yields on money market funds always follow the Fed funds rate and fall when rates drop. Rates on bank CDs may fall less, because banks are now eager to attract your deposits and may offer you a premium rate.
SUMMARY: There seems to be more good points than bad in the recent action. We all benefit as consumers if inflation is held in check and the Federal Reserve remains a potent force in the economy. The rate drop was not meant to counter the credit crunch, but to advertise a stable economic situation that will ultimately reduce the fears in the mortgage mess.
View today's rates.
Why are mortgage rates up if the Fed is cutting?
Fed Chairman Ben Bernanke explains credit spreads to Congress
People have been wondering why mortgage rates are jumping — even as the Federal Reserve is busy cutting interest rates. This week, Fed Chairman Ben Bernanke makes a special guest appearance at the Answer Desk to help explain what’s going on.
"Why is it, that even though Bernanke and the Fed have been lowering interest rates, ostensibly to "help the economy and the housing market", the rates on 30-year mortgages have actually risen?"
One of the more touching moments of Mr. Bernanke’s two-day testimony on Capitol Hill last week came when Democratic Congressman Luis Gutierrez of Illinois quizzed the Fed Chairman on this very subject.
The Congressman told the Chairman of making a call last month to his daughter, a first-time home buyer, to offer her some fatherly guidance on locking in her mortgage rate.
“I think I gave her good advice: I said, ‘Go and lock it in for as long as you can,’" Guiterrez said. “Because it was like 5-1/2 percent. I said, ‘It's time, honey.’ And then I checked The Wall Street Journal, and it's like 6.38 percent. What happened?”
What happened is that mortgage rates jumped by three-quarters of a percentage point in a matter of weeks — reversing a sharp drop that began in the middle of last year.
Here’s Mr. Bernanke’s answer to Congressman Guiterrez from the hearing transcript:
“Even as the Fed has lowered interest rates, and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spread, particularly for risky borrowers, like risky firms, for example,” he said. “Our easing is intended to, in some sense, you know, respond to this tightening of credit conditions. And I believe we've, you know, succeeded in doing that, but there certainly is some offset that comes from widening spreads. This is what's happening in the mortgage market.”
The Congressman moved on to another question, leaving the discussion of tightening credit and widening spreads for another time.
But, judging from our mail, the question is still on many readers’ minds these days. How can mortgage rates go up if the Fed is cutting rates? Doesn’t that mean that banks are, in effect, price gouging?
It turns out that lenders don’t control the price of long-term loans any more than consumers do. What’s happened in the past month or so is that, even as the Fed has been aggressively slashing short-term rates — and flooding the banking system with as much money it will take — the global capital markets are still very nervous about the latest headlines on rising foreclosures, a weakening economy and losses from banks and other lenders that have topped $100 billion — so far.
It turns out there are two mechanisms for setting interest rates. All the Fed can do is target the interest rate paid by U.S. banks for overnight loans among themselves. But using short-term loans to back long-term mortgages can be risky.
If National Bank takes out a short-term loan of $200,000 from the Fed and lends it to Jane HomeBuyer for 30 years, it still has to come up with $200,000 right away to pay it back. It could do so with another short-term loan, but then it has to keep doing this over and over, indefinitely “rolling it over.” If, during this process, short term rates go up, the bank loses money.
That’s why mortgage lenders making long-term loans turn to the capital markets — a global network of banks, corporations, institutions, pension funds, governments and individual investors who buy and sell money. When these players lend money for the long term, they agree to get paid back in installments, plus an interest rate that’s usually fixed for the life of the loan. As long as the rate the mortgage lender agrees to pay the investor is lower that the rate it charges its customer, the lender makes money.
Interest rates on long-term lending are based largely on the rates paid by the U.S. Treasury when it auctions off new paper to fund budget shortfalls. Because Treasuries are considered the gold standard of safety, turning over your money to other lenders is considered riskier — so the interest rates you get are a little bit higher. When an investor with money to lend in the capital markets get nervous, they demand an even higher interest rate to make up for the risk that they won’t get paid back.
During the easy-money days of the housing boom, investors showered cash at mortgage loans and asked relatively little extra “risk premium” in return. The feeling was that housing prices would continue to rise forever, and investing in mortgages – which paid higher returns than “super safe” Treasuries — was a no-brainer. Or so it seemed at the time. Now that home prices are falling, that risk premium — the “spread” between the higher rate on mortgage loans and the benchmark rate on Treasuries — has widened.
As long as that’s the case, the Fed could cut short-term rates to zero, and it wouldn’t cut the cost of long-term mortgage rates.
What is a recession?
Mr. Bernanke was asked this one in his testimony to the Senate Banking Committee, and the answer he gave was a little clearer.
“Recessions are generally ‘called,’ so to speak, by a committee called the Business Cycle Dating Committee, which is part of the National Bureau of Economic Research, a committee of which I was once a member, by the way, which looks at a wide variety of indicators to see essentially if the economy contracted over a period of time,” Bernanke said. “And it's a somewhat subjective decision and is often made well after the fact, because of the revisions of data and so on.
“A more informal but widely used definition of recession is two consecutive quarters of negative growth. That would be an alternative that people use," he said.
Using the second definition, the economic data has yet to confirm that the U.S. economy is in recession. The widest measure of growth, the Gross Domestic Product, rose by 0.6 percent in the last three months of the year — the latest data available. That’s down sharply from the 4.9 percent growth rate in the third quarter of 2007 — but it’s still growth, not recession.
The GDP, according to the keepers of the data, measures “the output of goods and services produced by labor and property located in the United States.” But it’s an average of all regions and all industries; the housing industry is clearly in a deep recession, as are some parts of the country, especially in the industrial Midwest.
Some readers — along with some economists, Senators, investment managers and CEOs — believe we’re already entering a national recession. So the entire U.S. economy could well be in the middle of the first of those “two consecutive quarters of negative growth.” But because it can take months for the economic data to be collected and revised, we won’t know for sure that a recession has hit until at least the second half of this year at the earliest.