The Homeowner Affordability & Stability Plan FAQs

February 26, 2009

The Homeowner Affordability and Stability Plan is part of the President’s broad, comprehensive strategy to get the economy back on track. The plan is suppose to help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. In doing so, the plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too, as defaults and foreclosures contribute to falling home values, failing local businesses, and lost jobs.

More information can be found on the example sheet which will show you what options might be available to you, depending on the circumstances of your mortgage.

Disclaimer: This post is adapted from Treas.gov. We do not own this information. It is made available freely to the public. It is recommended that you consult a professional for loan advice.

Borrowers Who Are Current on Their Mortgage:

What help is available  for borrowers who stay current on their mortgage payments but have seen their homes decrease in value?

Under the Homeowner Affordability & Stability Plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15-year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

Eligible loans will now include those where the first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000or less you may qualify. The current value of your property will be determined after you apply to refinance.

How do I know if I am eligible?

Complete eligibility details will be announced on March 4, 2009 when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history.  The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

I have both a first and second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

Will refinancing lower my payments?

The objective of the Homeowner Affordability and Stability Plan is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable payments that are sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market value should see an immediate reduction in their payments. Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate. These borrowers, however, could save a great deal over the life of the loan. When you submit a loan application, your lender will give you a “Good Faith Estimate” that includes your new interest rate, mortgage payment, and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing option may not be right for you.

What are the interest rate and other terms of this refinance offer?

The objective of the Homeowner Affordability and Stability Plan is to provide borrowers with a safe loan program with a fixed, affordable payment. All loans refinanced under the plan will have a 30 or 15-year term with a fixed interest rate. The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans will have no prepayment penalties or balloon notes.

Will refinancing reduce the amount I owe on my loan?

No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

How do I know if my loan is owned or has been securitized by Fannie Mae or Freddie Mac?

To determine if your loaned is owned or has been securitized by Fannie Mae or Freddie Mac and is eligible to be refinanced, you should contact your mortgage lender after March 4, 2009.

When can I apply?

Mortgage lenders will begin accepting applications after the details of the program are announced on March 4, 2009.

What should I do in the meantime?

You should gather the information that you will need to provide your lender after March 4, 2009 when the refinance program becomes available. The includes:

  • information about the gross monthly income of all borrowers including your most recent pay stubs if you receive them or documentation of income you receive from other sources
  • your most recent income tax return
  • information about any second mortgage on the house
  • payments on each of your each credit cards if you are carrying balances from month to month
  • payments on other loans (i.e. student loans, car loans, etc.)

Borrowers Who Are at Risk of Foreclosure:   

What help is available for borrowers who are at risk of foreclosure either because their they are behind on their mortgage or are struggling to make the payments?

The Homeowner Affordability and Stability Plan offers help to borrowers who are already behind on their mortgage payments or who are struggling to keep their loans current. By providing mortgage lenders with financial incentives o modify existing first mortgages, the Treasury hopes to help as many as 3 to 4 million homeowners avoid foreclosure regardless of who owns or services the mortgage.

Do I need to be behind on my mortgage payments to be eligible for modification?

No. Borrowers who are struggling to stay current on their mortgage payments may be eligible if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default. This may be due to several factors, such as loss of income, a significant increase in expenses, or an interest rate that will reset to an unaffordable level.

How do I know if I qualify for payment reduction under the Homeowner Affordability and Stability Plan?

In general, you may qualify for a mortgage modification if (a) you occupy your house as your primary residence; (b) your monthly mortgage payment is greater than 31% of your monthly gross income;  and (c) your loan is not large enough to exceed current Fannie Mae and Freddie Mac loan limits. Final eligibility will be determined by your mortgage lender based on the y0ur financial situation and detailed guidelines that will be available March 4, 2009.

I don’t live in the house that secures the mortgage I’d like to modify. Is this mortgage eligible for the Homeowner Affordability and Stability Plan?

No. For example, if you own a house that you use as a vacation home or that you rent out to tenants, the mortgage on the house is not eligible. If you used to live in the home but you moved out, the mortgage is not eligible. Only the mortgage on your primary residence is eligible. The mortgage lender will check to see if the dwelling is your primary residence.

I have a mortgage on a duplex. I live in one unit and rent the other. Will I still be eligible?

Yes. Mortgages on 2, 3, and 4 unit properties are eligible as long as you live in one unit as your primary residence.

I have two mortgages. Will the Homeowner Affordability and Stability Plan reduce the payments on both?

Only the first mortgage is eligible for modification.

I owe more than my house is worth. Will the Homeowner Affordability and Stability Plan reduce what I owe?

The primary objective of the Homeowner Affordability and Stability Plan is to help borrowers avoid foreclosure by modifying troubled loans to achieve a payment the borrower can afford. Lenders are likely to lower payments mainly by reducing loan interest rates. However, the program offers incentives for principal reductions and, at your lender’s discretion, modifications may include upfront reductions of your loan principal.  

I heard the government was providing a financial incentive to borrowers. Is that true?

Yes. To encourage borrowers who work hard to retain homeownership, the Homeowner Affordability and Stability Plan provides incentive payments as a borrower makes timely payments on the modified loan. The incentive will accrue on a monthly basis and will be applied directly to reduce your mortgage debt. Borrowers who pay on time for 5 years can have up to $5,000 applied to reduce their debt by the end of that period.

How much will a modification cost me?

There is no cost to borrowers for a modification under the Homeowner Affordability and Stability Plan. If you wish to get assistance from a HUD-approved housing counseling agency or are referred to a counselor as a condition of the modification, you will not be charged a fee.

Is my lender required to modify the loan?

No. Mortgage lenders participate in the program on a voluntary basis and loans are evaluated for modification on a case-by-case basis. But the government is offering substantial incentives and it is expected that most major lenders will participate.

I’m already working with my lender/housing counselor on a loan workout. Can I still be considered for the Homeowner Affordability and Stability Plan?

Ask your lender or counselor to be considered under the Homeowner Affordability and Stability Plan.

How do I apply for a modification under the Homeowner Affordability and Stability Plan?

You may not need to do anything at this time.  Most mortgage lenders will evaluate loans in their portfolio to identify borrowers who may meet the eligibility criteria. After March 4, 2009, they will send letters to potentially eligible homeowners, a process that may take several weeks. If you think you qualify for a modification and do not receive a letter within several weeks, contact your mortgage servicer or a HUD-approved housing counselor. Please be aware that servicers and counseling agencies are expected to receive an extraordinary number of calls about this program.

What should I do in the meantime?

You should gather the information that you will need to provide to your lender on or after March 4, 2009, when the modification program becomes available. The includes:

  • information about your gross monthly income of your household including any recent pay stubs if you receive them or documentation of income you receive from other sources
  • your most recent tax return
  • information about any second mortgage on the house
  • payments on each of your credit cards if you are carrying balances from month to month
  • payments on other loans (i.e. student loans, car loans, etc.) 

My loan is scheduled for foreclosure soon. What should I do?

Contact your mortgage servicer or credit counselor. Many mortgage lenders have expressed their intention to postpone foreclosure sales on all mortgages that may qualify for the modification in order to allow sufficient time to evaluate the borrower’s eligibility.  We support this effort.


How to Determine A Short Sale Offer

February 3, 2009

home-under-magnifying-glass

The word “short sale” has certainly been a buzz word in the distressed real estate market we are experiencing now. However, many Realtors and investors are still unclear on how to determine a real estate short sale offer that is acceptable to the lender.

The following steps are to be used as a basic guideline on determining what to offer the lender for a short sale acceptance.

Step 1: Determine Fair Market Value (FMV)

The FMV can be determined by evaluating pending and sold comparable properties in a similar or close proximity to the subject short sale property.

A realtor will have access to the MLS (Multiple Listing Service) and can create a CMA (Comparative Market Analysis) for the subject property. This analysis will identify pending and sold comparable properties with same square footage, bedrooms, baths, garage and other similar characteristics as subject property.

Request the Realtors use a sold time frame within 3-6 months when pulling properties in the immediate or surrounding areas. Usually the short sale lender will not consider any sold comparables that are older than 12 months and that are further away than 2 miles from the location of the subject property.

Step 2: Evaluating Sold Comps Systematically

Contrary to popular and often misguided belief, you can use a formulaic system to work in your favor when determining what to offer on the short sale property. This system has been around for years, but for some reason you may have not heard of it mentioned dealing with real estate. Here is the system. You will use the law of averaging. The way this works is like this.

Let’s say you have 8 sold comparables that are all similar in size, square feet, bedrooms etc. Here is how you apply the formula. You would take out the two highest comps and the two lowest ones and average the rest.

EXAMPLE:

You have a property you think is worth $145,000.

You have a Realtor pull a CMA and you find 8 sold comparable properties that match the criteria above.

The MLS shows the following:

  • $159,000
  • $154,000
  • $153,000
  • $161,000
  • $148,000
  • $143,000
  • $146,000
  • $151,500

Using the formulaic approach you would take out the two highest sold comparables ($159,000 and $161,000). Then take out the two lowest sold comparables ($143,000 and $146,000). This would leave 4 other sold comparables.

  • $154,000
  • $153,000
  • $148,000
  • $151,500

You would then take an average by simply adding up the sum of all the sold comparables and dividing them by the total number of properties left. In this case, that number would be 4.

Total: $606,500 / 4 = $151,625

You can reasonably justify the house may sell for $151,625 instead of the $145,00 you originally estimated.

Step 3: Revealing the After Repair Value (ARV)

This terminology is slang often used with real estate investors. It is similar to the FMV with a few differences made up by the amount of repairs the investor estimates the property needs in order to sell quickly on the open market using FSBO (for sale by owner) techniques and not using the MLS.

It can be argued the ARV is more of a guess or suggested value derived by using sold comparables from houses that were NOT sold by a Realtor.

One way to explain the difference is a realtor will typically use a FMV and a real estate investor may elect to use an ARV. An appraiser can use both value methods, but generally sticks to the ones that come from off the MLS. In my opinion…the ARV is a less accurate and dependable value than what come off the MLS.

Step 4: Figuring Out the Broker’s Price Opinion (BPO)

The BPO  is perhaps the single greatest value factor the lender will use to determine the acceptance of your short sale offer. The BPO is KING!

The BPO is a generalized opinion or value of a property the lender uses to determine what the short sale property is worth on paper. They are ordered by the lender and sent to a Third Party Company, such as BPO Direct, First America, LandSafe, etc. These companies have a list of realtors for each state. The BPO’s are ordered and conducted by a BPO Agent (who is usually a Realtor).

The BPO can be an Interior or Exterior type.

If an Exterior type BPO is conducted, it means the BPO Agent did not go inside the property to evaluate its condition. This could be due to the homeowner vacating the house or not being cooperative with the BPO Agent when requesting a time to come appraise the house.

Dealing with “Pretty House” type short sales (categories later defined), you will find the BPO will typically come in 10-20% lower than FMV or ARV. Based on this, you might consider offering 60% of the ARV or FMV value for your initial purchase offer. Of course, this depends on the amount of repairs needed for the property.

If you have what can be classified as a “Pretty House” short sale, which would show very little needed repairs, don’t expect to get a huge discount from the lender for it. If you cannot JUSTIFY a reason for the lender to accept either a small or large discount … don’t expect them to give one to you.

This also dispels the myth that all houses heading towards foreclosure are good short sale candidates. They are not always.

Here are some classifications and examples to make it easier to determine how much of a loss the lender may agree to accept.

Short Sale Classifications:

  1. PRETTY HOUSE
  2. UGLY HOUSE
  3. SCARY HOUSE

EXAMPLES:

Pretty House: Generally in safe, desirable areas and houses selling fairly quickly

ARV/FMV: $100,000
REPAIRS: $5-10,000 (5-10%)
BPO: $80-90,000 (+/- 5%)

Ugly House: Generally a light rehab or fixer-upper, handyman special house in fair neighborhoods

ARV/FMV: $100,000 (With Ugly Houses this number tends to be the “as is” value instead of ARV)
REPAIRS: $11-20,000 (11-20%)
BPO: $80,000 (+/- 5%)

Scary House: Generally in areas that are not desirable, massive repairs needed, lots of crime isn’t uncommon

ARV/FMV: $100,000 (With Scary Houses, this value tends to be the “as is” value instead of ARV)
REPAIRS: $35,000 (21 – 35% +)
BPO: $65,000 (+/- 5-10%)

You can have a Scary House located in a great, fast selling neighborhood and combination of the others, but generally speaking, Scary and Ugly Houses will not be located in excellent neighborhoods. Remember this is a guideline, not an exact science. The BPO Agent will generally consider the “as is” value for both Ugly and Scary Houses.

Now let’s discuss the different loan types the lenders will consider a factor per short sale submission.

Step 5: Learning the Loan Types

When you learn these, you can increase your closing rate for lender accepting your short sale by as much as 50%! Here’s why: if you know more about any property, it provides you better leveraging and ultimately negotiation strategies to target. Not all short sales are created equal.

Conventional Loans

These loans are found all over the place. They provide the most flexibility especially dealing with short sales. Using the $100,000 example, you might start out your offer submitting 60% x 100,000 (FMV) = $60,000… The $60,000 is actually 70% of the BPO Price. However it is very common to see the lender accepting around 80-85% of the BPO price, which would be around $68,000 – $72,250.

This model can fluctuate a little bit, but this is a common average. The BPO (value opinion also considered the PERCEIVED value of the property) to the lender is the MAIN FACTOR. Therefore, in this example, if you thought the BPO was going to come in around $65,000 … You would take 82% of THAT number, which would be $53,300. The lender may very well accept $53,300 based on their perception of the value of the property (their asset).

FHA Loans

I repeat: this is not a scientific grading scale. It is the model used by many short sale investors as a guideline. You can and will have other factors that make you stray from this. If you are dealing with an FHA type loan or any government backed loan, they are going to recoup a set amount if the foreclosure is completed.

For example with FHA loans, the insurer will basically guarantee the lender 82% of an FHA Certified Appraisal amount. Notice, I did not say BPO. For these loans, you will need an FHA Certified Appraisal for the lender to consider in their evaluation process on the property. The BPO will not suffice on these types of loans. You can massage the numbers 1-2%, but 82% is listed in their guidelines.

  • All FHA loans are insured by the federal government
  • As long as the lender follows FHA guidelines, they are guaranteed 82% of the “as is” appraised value
  • FHA loans do not use a BPO. Instead they will require an FHA Certified Appraisal. Use the same techinques on the FHA Certified Appraisal that you would for a typical short sale deal
  • If the debtor is in bankruptcy, no short sale will be approved
  • If the property was used as a rental for more than 12 months, no short sale will be approved
  • If the homeowner does not occupy the property, no short sale will be approved (There can be exceptions to this)
  • The cooperating lender is eligible to receive $1,000 from FHA for performing a short sale
  • Seller MUST fill out FHA specific forms for approval. This will include an Application to Participate and a Homeowners Counseling Certificate, all of which the lender will supply in their FHA Short Sale Packet
  • FHA loans must be at least 30 days past due for short sale consideration
  • The lender is required to give a copy of the appraisal to the homeowner
  • The homeowner can receive up to $1,000 directly from the HUD 1
  • FHA will not go after the homeowner for a deficiency once the short sale is accepted and closed

Veteran’s Affairs (VA) Loans

These type of loans have a guarantee of 88% of the appraised value of the property.

  • Designed for veterans
  • These loans are federally insured
  • VA guarantees the lender at least 88% of the “as is” appraised value
  • A VA appraisal is usually automatically ordered once the debtor becomes 60 days past due
  • The appraisal value can be appealed by the homeowner
  • The VA will work the homeowner and do everything possible for the homeowner to retain VA benefits

Note: Absolutely NO BPOs allowed. All VA loans require certified appraisers to determine value.

Freddie Mac (FDMC) Loans

  • FDMC will not allow the buyer of a short sale property to be anyone but an individual. This means the buyer on the Option Contract (Purchase and Sales Agreement) and HUD 1 CAN NOT be a company, LLC, trustee, or anything of the sort. The purchaser must be an individual name
  • FDMC will almost always require that the property be listed with a realtor, which means they are going to ask for a Listing Agreement. If the offer nets the lender less than 92%, FDMC will require that the property is listed for at least 90 days before approval will be issued
  • The lender has the authority to approve short sales at a threshold of 92% or higher. Anything lower than 92% must be approved by FDMC
  • FDMC has a high customer service standard, which means that if the lender is not responsive to your offers, they are going to want to know about it. This creates another point of leverage to get your offer accepted

Fannie Mae (FNMA) Loans

  • FNMA has a high customer service standard. If the lender is not responsive to your offers, they may actually step in and take over the short sale negotiation process
  • The lender has the authority to approve short sales at a threshold of 90-92% or higher. Anything lower than 90% must be approved by FNMA
  • FNMA rarely requires that the property be listed with a real estate agent
  • FNMA will allow the lender the authority to approve short sales at a threshold of 90% or higher, but will also allow a heavier discount if needed

For Fannie Mae, Coventional, VA, & FHA short sales:

The buyer can be any entity, company, person or trust (the bank may require written proof of the company or of the trust). Most of the loans that you come across regarding short sales are going to be conventional loans.

Step 6: Memorizing the Minimum Accepted NET Offers (of the BPO or FHA Appraisal)

  • VA = 88%
  • FHA = 82%
  • Freddie Mac (FDMC) = 92%
  • Fannie Mae (FNMA) = 90 – 92%
  • Convential Loans = 80% (no set limit)

IMPORTANT: Understand that these are NET percentages to the bank. If you have your offers padded with things like realtor commissions, closing costs and additional fees, these are NOT to be included in this percentage.

EXAMPLE: The BPO on one of your deals comes in $100,000. Offers that may be accepted based on the above criteria would be:

  • VA = 88% = $88,000
  • FHA = 82% = $82,000
  • Freddie Mac (FDMC) = 92% = $92,000
  • Fannie Mae (FNMA) =  90 – 92% = $90,000 – $92,000

Something else to consider is this: all LOCAL banks, usually the smaller ones, will almost always NOT ALLOW more than a 10%-15% discount off the property depending on the amount of repairs needed to fix. Local banks tend to be more conservative in their approach to discount the property. This is partly due to the network of local affiliates the bank can call to get more than one opinion of repairs needed or value of the subject property.

Step 7: Dealing with Second Mortgages & Junior Liens

If you are dealing with a 2nd mortgage holder, you are basically going to negotiate with them the same way.

You will find that many 2nd mortgage holders will not require as much information to make a decision quickly on discounting their loan amount. They will generally order a BPO or have an appraisal on file. It could be older or current. Make sure and ask about it depending on the numbers you find out dealing with them.

Sometimes a lender will actually tell you a BPO price.

Now before you get all excited and think that is GREAT…think again! Typically, they will LIE to you about the price and actually inflate it. Yeah…I know… you never thought lenders lied, did you? Well…they do…and they do it a lot.

When you are dealing with the 1st mortgage holder, it is not uncommon to find out they will only allow $500 – $1000 towards paying off any 2nd Mortgages, Liens, Judgments etc. All lenders are a little different, but the norm is $1,000.

This is another reason why you will deal with more 2nd position lenders that are willing to take pennies on the dollar to satisfy their loans with the homeowner. In fact, you will often negotiate for 80-90% discounts or get approval for 10-20 cents on the dollar! It can be beneficial if you get the 1st mortage holder to accept a short sale and then present that information to the 2nd mortgage holder IN WRITING! If the 1st mortgage holder is willing to take a hit, where does that leave the 2nd mortgage holder? This can be a powerful negotiation technique.

Remember, any junior lien-holder who is holding an over-leveraged or nearly over-leverage asset (the house) is in a HORRIBLE position. They realize this and if you can build a strong case why it would be in their better interest to discount their holding position rather than risk losing EVERYTHING at the foreclosure auction sale. It will not only generally help them, but it can make you, the investor, a HUGE PILE OF MONEY. Why? You just created equity out of thin air. That is the power of short sale negotiations.

In Closing….

If you take the steps for preparing a short sale offer exactly as shown above and apply them to your real estate short sale business; the sky is the limit for your continued success getting them approved.

*This article was adapted from REI Tips


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