New Mortgage Plans Developed

New mortgage plans will soon be introduced that will help an additional 40,000 families each year enjoy the benefits of homeownership. It’s part of the government’s plan to make homeownership attainable to a greater proportion of families.

Under the plan, adjustable-rate mortgages (ARMs) will become more flexible, meeting the home financing needs of a greater range of families. The new mortgages are currently proposed by the Department of Housing and Urban Development (HUD), and will be FHA-insured. The proposed ARM loans can have a fixed interest rate for three, five, seven or ten years, then revert to an annually adjustable rate for the remainder of a 30-year term.

In the case of the 3-year and 5-year loans, the interest rate cannot be changed more than one percent per year during its adjustable term — after the fixed-rate period. The maximum amount of increase over the entire loan term is five percent. For loans with the 7-year and 10-year fixed rate, the maximum increase during the adjustable period is two percent per year, with a limit of six percent increase over the life of the loan. At this point, the only FHA-insured ARM loan available is a one-year fixed payment period loan, with caps of one percent a year, and five percent over the entire loan term.

This type of mortgage loan can be obtained at more favorable terms than a straight 30-year fixed-rate loan. That translates to money saved every month in reduced payments, and it allows some homebuyers to acquire a needed loan who would otherwise be unable to qualify for it.

By offering these additional types of FHA-insured ARM loans tailored to the financial conditions and desires of today borrowers, we are creating more homeownership opportunities, said a HUD spokesman. It will provide a new and more viable way to finance the purchase of a home.

The proposed new loans are now in a 60-day public comment period, a requirement before it can be implemented. But no problems are expected, according to the spokesman, and the final enactment of the new rule will probably be in late summer.

Other steps are being taken by the administration to boost homeownership. For example, an American Dream Downpayment Initiative is being developed. This will provide $200 million to help low-income families each year with downpayment and closing costs.

Another step is to modify the regulatory requirements under the Real Estate Settlement Procedures Act to simplify and clarify the home buying and finance process. And a special fund is being set up to provide for housing counseling programs to help families better understand and home buying and financing process.

Also, a Self-Help Homeownership Opportunity Program is in place to fund about 5,200 new homes for low-income families by providing grants to non-profit organizations. This would require homebuyers to contribute sweat equity (labor) to the construction or rehabilitation of the property.

Help for Marginal Mortgage Applicants

Another currently proposed program would offer a federally insured subprime mortgage program for consumers who have poor or marginal credit histories and high debt ratios. These prospective buyer-borrowers are often squeezed out of the home buying market due to their less than pristine credit records. Often their only recourse is to deal with high-cost predatory lenders.

The proposed loan plan would be insured by the FHA and would offer better terms than normally available in today’s marketplace. Persons who would qualify for and benefit most from the plan are those with low credit scores and those who have little documented credit histories.

Also benefited would be persons who have higher than normal debt-to-income rations  higher than are usually accepted by standard FHA underwriting rules. When qualified for one of the new loans, the consumer would be offered a home financing mortgage with very small down payment requirements. However, they would carry slightly higher interest rates than prevail for regular FHA loans. The loan would also carry a good performance discount feature. After two years of on-time payments, the monthly FHA insurance charge would be reduced.

Move Toward More Accurate Credit Reports

Pressure is growing for credit-collecting companies to communicate accurate reports on persons applying for a mortgage loan. And it’s about time for such a reform. Inaccurate information from credit companies has caused major problems for homebuyers, mortgage lenders-brokers and real estate brokers for years. Purchase transactions can fall apart while waiting for inaccuracies to be corrected in error-ridden credit reports.

In some cases, false information can result in borrowers being forced to accept a less favorable mortgage loan, or losing their dream of homeownership entirely. A move is underway to correct these problems.

At the forefront of the move are real estate brokers, who sometimes lose deals and clients due to sloppy credit records and reports. In California, for example, the state Association of Realtors is teaming up with the Consumers Union to cosponsor new legislation (AB 800)  the Truth in Credit Act. This law will force creditors and credit-collection firms to quickly correct inaccurate information or face statutory damages.

It permits creditors to furnish information about a consumer to a credit-reporting agency only if the creditor has reason to believe the information is accurate and complete. This means creditors must check their records carefully before sending information to the credit bureaus.

New Plan to Help Troubled Borrowers

In the future, when mortgage borrowers encounter financial problems to the point of being unable to make their mortgage payments, there’s currently pending legislation that might be very helpful to them.

The proposed law is The Homeowners Emergency Mortgage Assistance Act (HEMA). It would establish a national program to assist homeowners experiencing unavoidable and temporary difficulty in making payments on mortgages insured under the National Housing Act.

Homeowners who are at least two months delinquent in their mortgage payments and have been notified by their lender of their intent to foreclose would be eligible to receive assistance. Repayment of such assistance with interest will be required after the homeowner regains his financial stability a period not to exceed three years.

Churning Refi Mortgage Loans

The term churning usually relates to frequent buying and selling of stocks, driven by over-zealous stock brokers. But it can also apply to refinancing home mortgage loans. With mortgage interest rates remaining at near record lows while they rise and fall a bit each day, homeowners are often motivated to apply for multiple refinance transactions in very short time periods. Some owners are refinancing the mortgages as frequently as three or four times in a single year, even though the new loan is as little as a quarter of one percent lower than their previous loan, according to several mortgage bankers and brokers.

In the vast majority of cases, an application for a refi mortgage loan results in an improved financial situation for the homeowner family. But there is a downside to refinancing too often, even when it’s a no upfront cost refi.

Forgetting about the closing costs being added to the balance (in some cases) and the time required to apply and provide needed documentation for the new loan, there’s more to be considered in this scenario. When there is an early pay-off (EPO) of an existing refinance loan, particularly during the period from 90 days to eight months following its closing, the mortgage banker who funded the loan is often required to return all monies he has earned from the loan transaction to the investor who supplied those funds. Typically, this provision is incorporated into the contract between the mortgage banker and investor.

In most cases, a good portion of the earned money was already paid out as a commission and cannot be recovered. The mortgage banker loses this and other costs he incurred. This is an unfair result of frequent refinances by individual homeowners, when they benefit so little from the new loan. And it tends to push up interest rates and fees. It can be counterproductive for consumers, generally. It’s more of an ethical, rather than legal, consideration.

I’d like to see an across-the-board pre-payment fee, or penalty, charged for any mortgage loan paid-off within a year, said Michael Levy, president and CEO of Home Savings Mortgage, a major mortgage banking firm based in Oxnard, California. This would minimize losses incurred by mortgage bankers, and would lower the pressure to increase processing fees paid by consumers.

Additionally, with the onset of so many EPO’s, the industry has answered by increasing interest rates to offset these losses. In the long run, everyone is paying higher fees resulting from the churning trend, Levy noted.

In most cases, the best and most ethical first step taken by homeowners wanting to further reduce their mortgage interest rate after obtaining one refinance loan is to work out an arrangement with the firm from which they obtained their existing loan. In some cases, the loan officer or broker who handled the existing refinance loan can arrange a ‘streamlining’ of that loan — a simple process resulting in the lowering of the interest rate. Discuss such possibilities with your loan officer or broker as a first step in seeking a mortgage with more favorable terms.

The Impact of War

Real estate and mortgage professionals are worried about the possible negative impact of the war on the real estate and lending market. Home sales and prices could fall off substantially, particularly at a time when unemployment is high and consumer confidence is low the situation that prevails today.

War jitters could spark an increase in mortgage interest rates, and depress housing prices due primarily to a decline in consumer confidence, according to analysts. During the last Gulf War in 1991, sales of new homes dropped by 4.7 percent, and prices fell by about 5.8 percent. The danger of a negative impact is increased during a time when our economy is having problems and unemployment is high, economists say. And unfortunately, that’s where we stand today.

Just how vulnerable our housing market will become during the war and its aftermath will be determined by the severity and length of evolving developments. If the war is concluded reasonably soon and we don’t encounter major unexpected problems after the fighting ends, it could actually help the economy and strengthen the real estate market. Consumer confidence could quickly be revived.

However, if the fighting and resulting problems drag on, it could produce higher oil prices, higher interest rates, lower home sales and falling prices. At this point, the availability of homes is considerably tighter than during the first Gulf War 12 years ago. That could contribute to a precarious situation in the future.

On the other hand, most people today consider real estate to be the safest of all havens for their money clearly the best form of investment for the average family. Home sales have been notably strong over the past 18 months. That prevailing positive opinion might just carry the real estate and mortgage market through these volatile times in very good condition indeed.

It should be noted that home builders are already pulling back on plans to build new units this year. Builder confidence is taking a substantial hit, but there is certainly no sense of panic among single-family home builders, particularly in view of the support being provided by falling mortgage rates and still-healthy appreciation of home values, said David Seiders, chief economist for the National Association of Home Builders. It’s more a sense of needing to be cautious heading forward,

Kids stuff

Finally, I’d like to pass along a bit of information that doesn’t directly relate to mortgage financing, but definitely does so indirectly. Recent research has determined that kids benefit in special ways from their family owning their home. The study was conducted by the Joint Center for Housing Studies at Harvard University. This is yet another strong motivation for families to leave the world of renting and purchase a home of their own.

Children of homeowners have higher cognitive test scores and fewer behavioral problems than do kids of renters, the study concluded. The study was based on national data regarding economic, social and demographic variables.

The report focused on the general subject, The independent impact of homeownership and its positive impact on the home environment. Highlights of the report are carried in the current issue of The Residential Specialist magazine.
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Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers. He also writes freelance features on real estate related subjects.

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