Delete Collection Accounts

Getting a home mortgage loan or refinancing an existing loan calls for a clean credit report. Banks simply will not give a mortgage to someone with collection accounts on their credit report. And, sometimes these collection accounts can be a big shock to the prospective home buyer. Who knew the account was even there?

In California, the statute of limitations for an unpaid collection account is four [4] years. It seems, though, that  creditors have come up with some creative ways to keep collection accounts going. Sometimes, the debt is sold to another credit company, thus re-activating it or sometimes it is simply transferred to another division of the same company with a different name. Both gambits are done with the hope of resurrecting these debts.

This can have a major impact on the consumer’s credit score, sometimes as much as 30 points. This is, of course, of major concern when applying for a home loan. All collections must be paid or the bank will not grant the mortgage. If collection agencies realize that a debtor is trying for a home loan, then they will definitely play hardball and expect to get the entire amount of the debt paid with additional fees added.

So, what to do?

Thanks to a recent court case, the 9th Circuit held that the Federal Debt Collection Practices Act requires substantial activity by the debt collector before a debt can be considered valid. Specifically, for a debt to be valid the collection agency must send a notice to the debtor within 5 days.This is true if it’s the first collection agency, one of many or a subsequent one.

Of course, people often don’t even realize they have collections because collection agencies rarely send out these “validation notices.” Now, the collection agency must inform the debtor of the total amount of the debt and to whom it is owed and this must be in writing within 5 days. Furthermore, the agency must inform the consumers they have 30 days in which to dispute the debt.

When the consumer disputes the debt or any part of it, the agency must supply a copy of the judgment or verification of the debt. Previously, knowing the consumer wanted to buy a house, the agencies would simply insist on payment until either the home buyer gave up the quest for a house or paid the loan.

Now, there is some protection for the home buyer with a collection account. If you discover a collection account on your credit report, it is only valid if you have received notice of it from the collection agency in writing and you may still dispute the account. If the collection agency refuses to back down, yes, you will have to hire an attorney, but a simple letter may do the trick.

The Trouble With Loan Mods

Loan Mods Are Not Working

Despite high hopes and great fanfare, loan mods, it seems, are just not working. Various figures have been bandied about. At the beginning of December, Treasury Department officials determined that about 700,000 mortgage modifications were in process under the federal HAMP [Home Affordable Modification Program], announced in March 2009, but only about 31,000 had actually been made permament.

Those figures are dismal enough, but here’s the kicker–about 25% of homeowners who received mods have already fallen behind on their payments!

Banks Just Don’t Want To Do Loan Mods

Many excuses have been offered for these pathetic figures: paperwork gets lost, homeowners lose patience with the tedious process, the process is so long homeowners’ situations have changed drastically. Some blame the Obama administration. Here’s what I see.

No matter how much the Obama administration admonishes banks to do these mods, the banks are clearly dragging their feet. Good old B of A, for instance, claims 158,000 trial mods, but only 98 have been made permanent. In a year! Then, there’s JP Morgan. It approved 16,000 loan mods in a year, but says it’s a “struggle” to make them permanent  because only half  of those who have completed the 3-month trial program had completed all the paperwork, read financial statements.

Banks Make the Process Tedious

There’s the real issue…Banks require a ton of paperwork, far more and far more complex than most homeowners have either the time or the capacity to supply. It’s a huge job. I know because I have helped many homeowners complete it. As with everything else, the banks take forever to process the paperwork, yes, often losing it and requesting replacements or updates, drawing out the time frame to 6,7, or 9 months before even a 3-month trial period begins. In the meantime, the homeowner who often waited until he was up against it to even apply for the mod is supposed to continue making the regular payment.

Homeowners Must Qualify

Oh, and did I mention, that losing a job or having hours cut back may eliminate the chance to even get a mod.  Why? Because although homeowners focus on the hardship, banks focus on the income. If you want a loan mod, you had better have sufficient income. How much is enough? Good question? The problem is the answer changes from month to month and bank to bank. But, here’s the bottom line: if you have  real financial hardship, you probably won’t get a loan mod.

So far, I haven’t seen any official statistics on what amount of relief the loan mods already processed have actually offered to the homeowners. One survey says $640 a month or 40% reduction. If that’s true, not bad. Unfortunately, I don’t think it’s accurate.  The ones that I have seen offer much less and usually require a several thousand dollar payment to get  into the trial period.

Loan Balance Reduction Is a Dream

What is most significant to the homeowner and why most start this tedious loan mod process is to obtain a loan balance reduction. In my experience, that is completely fanciful.  None that I have seen include a principal reduction, though many I meet claim to know someone else who got one.  I’ve never met one of these mythical creatures.

 Think about it: prices around here have dropped 40% or more in the last 2 years.  How do you feel about paying your $600,000 mortgage when similar homes in your area are now selling for $300,000? Yet, the banks are not offering these homeowners struggling to make their payments any reduction in their principal balance. Extending the loan to 40 years, yes–but no reduction in loan balance.

What’s the answer? Try doing the loan mod if you are willing to put in the time and effort involved. At the same time, though, I recommend attempting a loan restructuring. Next post will explain the process.

Want To Refi? Maybe You Can Now

Californian poppy
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The program rolled out amidst much fanfare in March from the Obama administration, Home Affordable Refinance Program [HARP], was a major dud as far as California was concerned…The reason? As explained in this post at the time, instead of the typical 80% loan to value [LTV] for a refi, it offered government help for up to 105% LTV. Some places, even many places in the country, that’s a big help, but not here. We are too far underwater.

So, it was good to hear the other day that Obamanites have figured this out finally–the program has been pretty much a bust–and changed the rules so that now the government will help for up to 125% LTV. This means you can refinance if say your home is worth $300,000 right now, but you owe $375,000 and you’re paying 8% on an adjustable  If you’re eligible, you could get that refi at the new, lower rates, maybe in 5.5% on a 30-year fixed.

Who is eligible? First, your loan must be owned by Fannie Mae or Freddie Mac. To find out if your is, check the Fannie Loan Look-up or the Freddie Loan Look-Up.  Good so far? Well, now it comes to you and your house. You must have a job or at least income sufficient to take on such a loan. This is becoming more difficult when L.A. County’s unemployment rate is 12.6% as of May.  And, then, your home must be worth that $375,000 you think it is. Talk to a reputable lender and s/he can figure all this out for you in minutes over the phone.Call me at 626-641-0346 for a referral.

Don’t delay. Property values are still sinking. Next month might be too late.

Some will question whether this applies to rental property as well…I believe it does, as the previous loan limit of 105% LTV did. Small investors need help right now. Rents are not covering costs and the big initial down payment that many investors made to get their loans have disappeared as the value of the homes has sunk.

And, last, of course, you still owe $375,000 and you’re paying on $75,000 that isn’t there. If you have a financial turn of mind, you will see that doesn’t make a lot of sense.  So far, we haven’t seen too much relief for that problem.  Maybe down the road…

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How To Buy A Repo

Elden P. Bryan Residence
Image by Floyd B. Bariscale via Flickr

Everybody wants to buy a repo? What’s a repo? It’s a lender-owned home, a repossession. What’s so special about a repo, you may ask?  Main difference is the price, the price, the price. Lenders have no emotional attachment to a property. They just want it off their books as quickly as possible. To that end, repos are frequently, but not always [pay attention: NOT ALWAYS] priced below market.

So, that’s good, right? What’s not to like? Buyers get a below-market home. Lender/seller gets the property off its books. What’s the problem here?

There are a few issues when buying a repo.. Here are a few for buyers to consider.

Condition

By law, lenders are not required to offer the usual transfer disclosures required in California and most other states in which the seller discloses all the material facts about the home, including any known defects.  Why do lenders not have to disclose? Because the bank has never lived in the home and, in fact, most likely knows nothing about it or its history.

Buyers of repos get none of the detailed information sellers love to impart to buyers about what was done to the house, by whom and when.  Frequently, repos are not in great condition, truth be told, though most of them will have been cleaned of debris and tidied by the listing agent’s cleaning crew.

Remember: the former owners lost the house because they couldn’t make the payments. More than likely, they couldn’t pay for furnace cleaning or roof leak repairs or any of the multitude of tiny and large repairs that homes we live in get from us every day. This deferred maintenance  can cause hidden damage.

Remedy: Get a thorough home inspection from a competent home inspector. If further inspections are suggested in the report–plumbing, HVAC, roof or whatever–get them. This property may be offered as a  may be a bargain price, but it’s still a lot of money. It may wind up as no bargain if the pool equipment is broken or the roof leaks.  Do yourself a favor and spend the money to get the suggested inspections.

The Negotiations

Another area of difference concerns the actual negotiations in purchasing the home. Normally, you make an offer, submit it to the seller, get an acceptance or a counter offer and then go into escrow. The procedure for a repo is relatively the same except the seller is a faceless bureaucracy and usually you and your agent have no communication whatsoever.

It’s often even difficult to get in touch with the “listing” agent because frequently these “agents” are faceless themselves, communication through websites, email and voice mail.  These companies often list   hundreds of repos,   each one as lovingly treated as a disposable fork on a picnic.

Each bank and each “agent” has a different technique in negotiating with buyers. And the strategy also depends on the property. If the property is among hundreds of other repos, as in, say, Moreno Valley or Fontana, it’s all about the numbers and getting a buyer quickly if at all.  If it’s a desirable property in a good area of Arcadia, for instance, it’s a different story, though, again, it’s really about the amount of money involved.

So, for some repos, you make your offer, the agent submits it to the bank quickly, it’s accpeted, and escrow begins. For others, many offers are received, so then the agent ,in consultation with the bank,  takes one of the offers and works with it, going straight to escrow. Sometimes in this scenario, the agent comes back with a multiple counteroffer from the bank asking all buyers for their “highest and best offer”. Then, from  those that come back, the bank selects the best and opens escrow.

What to beware of here? The auction effect…we all became familiar with this during the boom market and it’s far from dead. Buyers will always vie to get a good property at a good price. Prevent yourself from paying too much by keeping your emotions out of it, if possible, and setting a price beyond which you won’t go, no matter what. That will immunize you against the auction effect.

Financing

Is financing any different for a repo? Will I have to use the bank which owns the house? The short answer here is NO and No. Some banks will require that you pre-qualify with a specific lender in order to have your offer considered, but no one can require you to use that lender. As with new homes, though, sometimes the lender will offer more favorable terms just to have control of  the situation. Should you do it? By all means…more favorable terms are always good.

Repos are a bit different as far as the transaction goes. Many banks require their own forms which, of course, are there to minimize the bank’s liability.  California, in particular, has many buyer-protection laws. Banks cannot require you as part of the transactions to give up your rights.

But, the bank may require a shorter inspection term [the normal is 17 days] or provide stringent conditions if the buyer’s loan isn’t funded in the agreed-upon number of days, especially if the buyer is not using the bank’s lender.  That’s not so bad. It may keep your lender and your agent on their toes.

Another issue is termite inspection. Many buyers assume that a termite clearance is required by law. Not so–it’s often required by the terms of the buyer’s loan, but many loans don’t require it.  Many repo listings specifically say that the bank-owner will not provide a clear termite. In this case, it’s up to the buyer to get a termite inspection and pay for any damage.

Got your heart set on a repo? Get over it. Set your heart on a good deal whether it ocmes from a bank or a short sale or even a savvy seller. In fact, buying from a seller who prices his home to sell quickly is the best way to go. At least, that seller isn’t going to walk off with the kitchen faucet or leave a big hole punched in the bedroom door…

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Mortgage Rates Fall Again!

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Freddie Mac  released the results of its Primary Mortgage Market Survey (PMMS) in which the 30-year fixed-rate mortgage (FRM) averaged 4.78 percent with an average 0.7 point for the week ending April 2, 2009, down from last week when it averaged 4.85 percent. Last year at this time, the 30-year FRM averaged 5.88 percent. This is the lowest rate since1971 when Freddie first started the survey–that’s 38 years ago!!

The 15-year FRM this week averaged 4.52 percent with an average 0.7 point, down from last week when it averaged 4.58 percent. A year ago at this time, the 15-year FRM averaged 5.42 percent. This is the lowest rate since Freddie began keeping track of the 15-year rate in 1991.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 4.92 percent this week, with an average 0.7 point, down from last week when it averaged 4.96 percent. A year ago, the 5-year ARM averaged 5.59 percent. The 5-year ARM has never been lower in the life of Freddie Mac’s weekly survey, which dates back to 2005 for the 5-year ARM.

One-year Treasury-indexed ARMs averaged 4.75 percent this week with an average 0.6 point, down from last week when it averaged 4.85 percent. At this time last year, the 1-year ARM averaged 5.19 percent.

What does all this mean to you the homeowner or potential home buyer? That’s easy…Run, run to your nearest mortgage lender and grab these rates while you can…If you’ve thought of refinancing, now’s the time. If you’ve thought of home buying, now’s the time..

freddie-mac


Obama’s Plan: Help for Small Investors

Sign for Barney's Loans, corner of Second Ave ...
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Yes you read that right. Obama’s plan will also help you refinance if you have rental properties. Last week Fannie Mae and Freddie Mac announced they would refinance rental and second homes as part of the Obama administration’s housing relief effort.  That is a relief! It seems that finally these lending giants have realized that helping small investors will also help renters and if nothing else provide homes for the foreclosed upon.

Here’s the skinny. First, the loans must be owned by Fannie or Freddie. If you don’t know, call your servicer to find out or go to Fannie and Freddie websites. If your loan is with another entity or a private lender, you will not be eligible.

Just as with owner-occupied properties, the loan to value ratio cannot exceed 105% and that is up to $729,750 loan amount.  Let’s say you bought a duplex or a fourplex a few years back for $500,000 with a first mortgage of $400,000 at 7.5% and that loan has now been acquired by Fannie Mae. You may well be able to refinance into todays 5% and 6% rates, thereby greatly increasing your cash flow. Even if the value of your property has dropped in the intervening few years, as long as the current market value is at least $420,000, you can do it.

Of course, you do have to be a good prospect for a refi. Your payment history on the loan should be close to perfect–no 30 day lates in the past 12 months. Even if you’ve had other financial woes which may have tanked your credit score, it’s still possible because Fannie and Freddie have agreed to waive their usual minimum score requirement and you won’t have to pay for new mortgage insurance [pmi].

You will have to show income to qualify–often investment income from the building is enough–and there will be the usual closing costs which will increase your loan balance.

All in all, though, this is a great deal!

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Lose Your Home: Lesser Known Ways

Half million dollar house in Salinas, Californ...
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Nowadays, we face a gigantic wave of foreclosures, the likes of which we haven’t seen since the Great Depression. Most of these foreclosures, maybe 99%, occur because the borrower did not make the mortgage payments, often over a long period of time.  When faced with a choice of making mortgage payments, paying property taxes or  homeowner’s insurance, many distressed homeowners don’t know which to choose.  Really, though, you can lose you home if you fail to pay any of these.


Let’s take property taxes, for instance. Most boroweers have impound accounts which collect a portion of the taxes and insurance each month and then pay them when they are due. If the borrower fails to make the mortgage payments, eventually the mortgage holder will pay the taxes and insurance and, of course, add the cost to the borrower’s loan.

But what if you don’t have an escrow account? In that case, failing to pay property taxes makes the taxes a lien against the property. This lien has priority over even the first mortgage. The tax assessor will inform the mortgage holder of the debt. With this information, the bank now has the right to foreclose as his secured loan is in jeopardy. Non-paid property taxes could become a huge burden on the property, eventually shutting out the lender. Before that happens, banks often foreclose.

What happens if you do not pay property insurance or fire insurance?  Again, the unpaid insurer will inform the bank. Insurance does not become a lien. But now the lender’s security for the loan is in jeopardy. What if the house burns down or suffers a major catastrophic event? The lender as well as the homeowner would have no financial protection. Unpaid insurance, then, will cause the lender to supply it by placing another policy on the property. The cost will, of course, be added to the loan and in this way become a lien on the property.

Reading you loan docs–boring, boring I know–brings many other surprises. If you allow the house to deteriorate, your lender has the right to foreclose. Or, if you make major additions or renovations without the lender’s “permission”, the lender has the right to foreclose. These, of course, are rarely if ever enforced, but do exist in most loan documents. Very few homeowners, I would hazard, run to get their lender’s permission to add a bathroom or renovate the kitchen.

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Obama’s Plan: My View

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Finally, in Obama’s plan the federal government is doing something to stem the tsunami of foreclsoures and short sales. It’s trying to keep property values from decreasing further. It’s trying to keep families in their homes.

Even as President Obama was announcing his plan, he acknowledged that it would be just a drop in the bucket. Think about this: the plan offers $75 billion in federal money to help homewoners, mainly by providing incentives to lenders.

Today,   one in 10, that’s 10%  of all home loans are  right now facing foreclosure. It’s estimated that by the end of 2010 at this rate fully 25% of all homeowners will be underwater. That’s closer to $500 to $600 trillion in home loans.

The refis will not be too much help in California because we’ve lost too much value, though they may help in other areas. The loan modifications may help and the Obama team has said that any bank which has accepted TARP or any bailout money MUST do loan mods and good ones.

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Still homeowners must have income to do a loan mod.  So, if a homeowner  has lost a job or has been unemployed for more than a short time, I don’t see lenders offering anything–short sale.

Lately, I’ve been seeing an ad on TV featuring a women who says she gave up her job so she could take care of her mother when she realized she was “failing”. She says she talked to her bank and “worked it out”. This would be  laughable if it weren’t so villanous.  Calling your bank and telling them you can’t pay your mortgage or only part of it will accomplish only one thing–a faster foreclosure notice. They will definitely tell you to pay whatever you have and to pay the bank first before other items in your budget, probably even food. That’s what I’ve been seeing out in the field. Despite all the bailout money, as we’ve all noticed, banks have gotten more hard-nosed, vicious even, not less.

Wow, I’m glad I got that off my chest. I didn’t realize how much I despise banks, especially the big ones. It seems  Obama and his team have already learned the banks will have to be forced to do anything at all to help homeowners.Reblog this post [with Zemanta]

Loan Modifications: Obama’s Plan

Called the Home Ownership Stability Initiative the heart of Obama’s plan really is the loan modification. As we have all heard, some homeowners are facing payments jumping thousands of dollars a month as adjustable loans readjust. Many homeowners are paying 50% or 60% or more of their income in mortgage payments while the value of their proerties is tumbling.

This plan aims to modify loans for those who qualify at 31% of income. Notice, that just like refinances, modifications require income. That’s the first qualification: income sufficient to pay the modified mortgage.

Until now, banks have been reluctant to offer loan modifications to homeowners who, whatever struggles they were having, remained current on their mortgages. Most banks refused outright to help such borrowers. This plan changes that and makes loan mods available to those who are current in their home loans as well as those who are behind in their payments.

This is important because it allows those who have not missed a payment to maintain their credit. As we all know, often a few dings on the credit and a missed mortgage payment is a major ding, have a cascade effect. Credit card companies find out and jump up rates on credit card debt. It becomes much harder to get any credit at a decent rate, etc.

Let’s say, for instance, that the borrower is paying 43% of his income for his mortgage. He applies for a loan mod and the lender brings the payment down to 38% of his income. Then, the government [Freddie and Fannie] and the lender bring the loan down by equal contributions [3.5% and 3.5%] to 31% of the borrower’s income. That mod stays in place for 5 years. At the end of that time, the rate would be gradually increased to the rate at the time of the loan mod.

Also, and this is important, the government would reinburse the lenders who agree to bring down the principal. Bringing down the principal: all underwater borrowers’ dream and their lenders’ nightmare. Until now, it’s been the rare lender who would touch that principal.

Now, lenders have incentives. If they modify a current loan,servicers receive $500 and lenders [investors] $1500. Borrowers have incentives, too. Every year a borrower stays current in the new mod, he receives $1,000 for up to 5 years. This is clear incentive to help those “good” borrowers who have made tremendous efforts to pay their mortgages during this current crisis and by dint of great sacrifice maintain their credit. Obama’s plan clearly tries to help these people while at least partially answering the persistent critique that responsible homeowners received no help while the irresponsible were being bailed out. Obama’s plan specifically says speculators or flippers cannot particpate.

This, of course, brings up another issue: small investors who own rental properties, especially single family homes or condos, are suffering, too, but seem to be eliminated from this program. Apparently, that is the case except for rental property that was originally a principal residence. So, if you are renting out the condo or 2-bedroom house you bought as your first home before you bought your current residence, then you may be able to participate.

Final details of this plan are supposed to be released this week. The Treasury Department says it will issue clear guidelines for all lenders to follow in doing loan modifications. That would be a relief. At the moment, it’s a free-for-all out there. Some lenders are very cooperative; others refuse to do anything. There’s no doubt we need to do something even if it means helping those who have not, shall we say, been the most prudent in their financial choices. If we don’t the fallout is just too terrible to contemplate.

Buyer Stimulus

Early reports about the massive Stimulus Bill due to be passed today indicate that home buyers will get a bit of a boost.

FIRST-TIME HOME BUYER CREDIT First-time home buyers are eligible for a refundable tax credit equal to 10 percent of the purchase price of their home, up to $8,000, if they made the purchase after Jan. 1, 2009, but before Dec. 1, 2009.  A first-time home buyer is traditionally defined as someone who has not owned a home in the past 3 years, no matter how many homes owned before that date.

first-time-home-buyer

Unlike a similar credit that Congress provided last year, buyers  don’t have to pay this one back over 15 years. The new credit, however, does phase out for individuals with incomes over $75,000. Also, you forfeit the credit if you sell the house within three years.  In other words, no home flippers, please.   Of course, this credit is for owner-occupied homes only.

Coupled with the now-permanent rise in the cap rate of FHA loans to $625,000, this does propel buyers into the market.  FHA loans offer a variety of options for the home buyer, and,  prime among them is that 3.9% down payment.  Some of the savor there is reduced by the high mortgage insurance amounts necessary for these federally-backed loans, but  FHA allows  sellers  to  contribute up to 6% of the loan amount for these and other costs.

Today, mortgage rates for 30-year fixed, are hovering around 5%, among the lowest in 50 years, and home prices are still declining, albeit more slowly.

If all this doesn’t point qualified buyers in the right direction–what will? Today’s buyer, especially in Southern California, is  unlikely to get a better deal in his or her lifetime.

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