Relief for unemployed homeowners . . . big deal

What do you think Congress and the Administration should do for California’s underwater homeowner?

• Require lenders to grant homeowners loan mods, a la HAMP.
• Let the judiciary decide when a mortgage cramdown is appropriate.
• Nothing, homeowners must honor their agreement to pay their mortgage.

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Eligible homeowners may skip all or part of their monthly mortgage payments for one year or more as part of the administration’s new foreclosure avoidance program. The effort is directed at unemployed homeowners in an effort to keep people in their homes while they get back on their feet.

Here, under yet another government program, lenders whose loans are insured by the Federal Housing Administration (FHA) will be required to defer payments for eligible homeowners. Currently, 14% of mortgages nationally are insured by the FHA.

The requirement will not, however, apply to loans owned or guaranteed by Freddie Mac of Fannie Mae, who have roughly 70% of all mortgages. Lenders who participate in HAMP will be encouraged, not required, to participate.

first tuesday take: Congress needs to first legislate handouts which create jobs if we are to expect a cure for the housing downturn. They cannot continually rely on unemployment programs such as this moratorium on FHA loan foreclosures for the jobless. Get unemployed homeowners a job and you will end one major cause of foreclosures.

If the government’s purpose is to help the unemployed, then allow them to live rent free in the 200,000 plus real estate owned (REO) homes the government via Freddie and Fannie now own. Most likely 40,000 of them are in California.

4% of the statewide mortgages in trouble are FHA-insured ― the market share until they began insuring a 40% share of annual originations following the onset of the credit crunch of the 2007-2009 Great Recession. Those loans are not likely involved in default.

For those lucky few FHA-insured and unemployed homeowners who bought during the 2000-2007 financing era, the government acknowledges you have a need. This program may be the saving grace for that narrow group as they are still on the job hunt, unsupported by government assistance. [For more information regarding California employment, see the June 2011 first tuesday Market Chart, Jobs move real estate.]

Unfortunately, the majority of homeowners have a mortgage held or guaranteed by Fannie, Freddie or a lender not insured by the FHA.  They will continue their desperate search for what has become a totally insufficient job market, all the while with an impending foreclosure notice on their minds.

The administration is in serious denial by now if they think lenders will voluntarily agree to cut homeowners a break without being required to by the government or a court. Just like with lenders who participate in HAMP, a kind invitation to defer payments for the unemployed will do nothing for California’s homeowners. [For more information regarding HAMP, see the June 2011 first tuesday article, More bad news for HAMP.]

Re: “New housing program is aimed at the unemployed” from the NY Times

Copyright © 2011 by first tuesday Realty Publications, Inc. Readers are encouraged to reprint or distribute this information with credit given to the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.

Treasury Unveils Do-It-Yourself NPV Assessment

By: Carrie Bay

The U.S. Treasury on Monday announced the launch of a Web-based tool that allows homeowners themselves to conduct a net present value (NPV) assessment of their mortgage.

As part of a borrower’s evaluation for the Home Affordable Modification Program (HAMP), servicers perform an NPV test to determine if modification is a more financially sound route to take than allowing the loan to proceed to foreclosure.

Oftentimes, the reason a homeowner is denied a HAMP modification is cited as “failed NPV.”

Treasury says homeowners who are turned down for the federal modification program can use the new tool – available at CheckMyNPV.com — to compare their own result against that of their servicer.

Homeowners may also use the site, prior to applying for a HAMP modification, to conduct an NPV self-evaluation using the same underlying formula required of HAMP servicers.

Treasury notes, though, that “due to differences in input data and other industry-related data referenced by the formula, users are informed that CheckMyNPV.com provides only an estimate of a servicer’s NPV evaluation and is intended for use only as a guide.”

Homeowners can complete their net present value calculation in around 15 minutes. The website, which also offers a detailed FAQ document, is designed to be a self-service, self-education tool to encourage homeowners to learn more about HAMP and the NPV evaluation process.

Treasury is encouraging homeowners to share the information provided by the site with their servicer and discuss the factors considered in the NPV evaluation to explore all foreclosure prevention options.

Mortgage Money IS Available…For Now

by Dean Hartman on May 19, 2011

One comment that I hear from real estate agents and lay people alike is that “it’s hard to get a mortgage; so hard, in fact, that no one can get one”.  This is just NOT true!  In reality, lenders are lending at a healthy pace.  Interest rates continue to cooperate and there are many programs for customers.  It’s just that lenders, for the most part, only approve borrowers now that can demonstrate their ABILITY to repay (via income verification)   and their WILLINGNESS to repay (via credit scoring and automated underwriting systems).

That being said, as I look ahead, the mortgage product menu is looking a bit blurry:

Let’s start with FHA…rumors are stronger about increasing the minimum down payment from 3.5% to 5%…there is also talk of cutting back the allowable seller’s concession from 6% to 3%…but further, the maximum loan limit allowable under FHA was inflated to assist in the housing recovery and that is set to expire later this year. Predictions vary on the cut range, but I think a $100,000+ reduction is likely. Is the government trying to lessen demand for FHA insured financing? Seems like they are.

Well, what about Conventional loans? Conforming products (typically underwritten to FannieMae or FreddieMac guidelines) seem okay for now, assuming the GSEs stay in business. But, Jumbo loans (those in excess of the $729,250 amount for a one family home) are facing the 5% Risk Retention requirements being brought on by QRM Rules. How will lenders price loans where they need to set aside 5% of the loan amount in reserve?

At the same time, Jumbo lenders are starting to explore different options for qualification. I am hearing things like “average monthly deposits as support for income when tax returns might appear insufficient” and such. This looks like more aggressive lending beginning to reappear in the non-conforming world.

With inflation starting to heat up, and rates likely to move higher, look for lenders to start offering more adjustable rate mortgages to help people qualify.  It is the standard reaction when the hike in rates either scares buyers back to their apartments or puts unlocked loans which are in process in jeopardy of not remaining approved.

My advice stays the same.  Pigs get slaughtered.  If you can get a mortgage today, at these rates, and with these guidelines, TAKE IT.  Too many people will regret missing this wonderful opportunity that 2011 has presented them.

Bill Proposes Mortgage Shake-Up

By NICK TIMIRAOS

Two lawmakers, a California Republican and a Michigan Democrat, are set to unveil legislation Thursday to replace mortgage giants Fannie Mae and Freddie Mac with at least five private companies that would issue mortgage-backed securities with explicit federal guarantees.

The measure is a compromise between conservative Republicans who have advanced bills to build a mostly private mortgage-finance system and Democrats, who say the government shouldn’t abandon the mortgage market.

Fannie and Freddie were taken over by the government in 2008 as rising mortgage losses wiped out thin capital cushions. Taxpayers are on the hook for $138 billion to keep the companies afloat and stabilize mortgage markets.

Amid an uneven housing recovery, lawmakers have largely shied away from fashioning a successor to the failed mortgage giants.

Analysts say that the compromise proposed by Rep. John Campbell (R., Calif.) and Rep. Gary Peters (D., Mich.) may be the only plan likely to attract sufficient support from both parties on a politically explosive subject, particularly at a time when gridlock looms over issues such as how to curb federal spending.

Other policy makers, including Treasury Secretary Timothy Geithner, have publicly discussed the merits of a limited but explicit government guarantee of securities backed by certain types of mortgages.

Rep. Campbell said, “Rather than putting out a political marker, we can move a piece of legislation that is significant…and can actually become law. The only other approach that’s out there in a bill is one that replaces Fannie and Freddie with nothing.”

Like Fannie and Freddie, the new entities would be restricted to buying loans that meet certain standards, including size caps. But the firms would have to hold much more capital than Fannie and Freddie. And only the mortgage-backed securities that they issue—not the companies themselves—would enjoy federal guarantees.

The companies would operate more as public utilities and likely wouldn’t have exchange-listed shares.

The approach signals policy makers’ desire to usher more private capital into the mortgage market, where the government currently backs more than nine in 10 new loans. But the measure also reflects an unwillingness to cut the federal cords entirely.

The bill comes as the housing and financial-services industries dial up efforts to block more aggressive overhauls of the mortgage market. Thursday’s measure mirrors proposals advanced by industry groups such as the Financial Services Roundtable’s Housing Policy Council.

Critics say the hybrid model risks recreating the same dynamics that led Fannie and Freddie to use their government ties to take risks that cost taxpayers. “In reality, this is almost surely going to be terrible,” said Dwight Jaffee, finance professor at the University of California, Berkeley. Government insurance programs, he says, inevitably lead to “a catastrophe.”

Advocates say taxpayers will be less exposed to losses because borrowers would be required to make significant down payments and the new firms would be required to hold more capital. The firms will also pay a fee for government backing to finance a catastrophic insurance fund, much as the Federal Deposit Insurance Corp. levies fees and handles bank failures.

“There is a lot of private capital ahead of the federal government and the taxpayers on this,” said Rep. Peters.

The proposal leaves many details to an independent regulator, which Rep. Campbell says should be insulated from Congress to prevent lawmakers from leaning on it “to do politically correct things, which may not be financially correct things.”

That role would fall to the Federal Housing Finance Agency, which currently regulates Fannie and Freddie. It would issue charters to the mortgage “guaranty associations,” and would be charged with setting guarantee fees and ensuring appropriate capital levels.

While the bill doesn’t specify whether the new entities would be allowed to hold mortgage portfolios, the more-stringent capital requirements would make such investment vehicles economically unattractive.

Since the Great Depression, the government has had a hand in the U.S. housing-finance system, which has featured an odd blend of public and private roles. The loans Fannie and Freddie buy from lenders are primarily long-term fixed-rate ones that banks are less willing to hold on their balance sheet. They repackage them for sale to investors as securities, offering guarantees to make investors whole if borrowers default.

Investors were willing to buy those securities in part because the shareholder-owned firms had an “implied” government guarantee. The government was forced to make good on that guarantee by taking the firms over in 2008. The bill pledges that the U.S. would stand behind the existing obligations of Fannie and Freddie, formalizing in writing a position thatthe Bush and Obama administrations never quite made explicit. The bill would require Fannie and Freddie to accelerate a planned run-off of their combined $1.5 trillion mortgage portfolios. But it wouldn’t liquidate the firms until after two or more new associations had been chartered.

Write to Nick Timiraos at nick.timiraos@wsj.com

California expands ‘Hardest Hit’ eligibility for distressed homeowners

Those who tapped home equity or took out loans after ’08 may qualify

By Inman News, Wednesday, April 6, 2011.

Inman News™

California has expanded the pool of borrowers who could qualify for three programs aimed at helping families at risk of losing their homes, by making those who tapped their home equity or who took out loans after Jan. 1, 2009, eligible for assistance.

The California Housing Finance Agency (CalHFA) is administering nearly $2 billion in federal “Hardest Hit” funds, a $4.1 billion program targeted at states with high foreclosure rates or unemployment.

CalHFA is using the Hardest Hit fund to provide four “Keep Your Home California” programs. More than 2,000 homeowners are in the process of receiving help since the programs launched in February, CalHFA said in announcing expanded eligibility requirements for three of those programs.

With the U.S. Treasury signing off on the changes, CalHFA said eligibility requirements are being expanded for:

• The Unemployment Mortgage Assistance Program (UMA), which provides a mortgage payment subsidy of up to $3,000 a month for six months for unemployed homeowners in imminent danger of foreclosure.
• The Mortgage Reinstatement Assistance Program (MRAP), which provides up to $15,000 per household for homeowners who have fallen behind on their mortgage payments due to a temporary change in household circumstance.
• The Transition Assistance Program, which provides relocation assistance in conjunction with a short sale or deed-in-lieu of foreclosure.

Borrowers who took out loans after Jan. 1, 2009, or who tapped into their home’s equity by refinancing or opening a home equity line of credit, were previously excluded from those programs.

Homeowners who were previously disqualified for one of these reasons are being contacted and offered an opportunity to reapply, CalHFA said. They are also being invited to contact the Keep Your Home California call center at (888) 954-5337.

A fourth “Keep Your Home California” initiative, the Principal Reduction Program (PRP), provides funding to reduce outstanding principal balances for qualifying borrowers with negative equity, often in conjunction with a loan modification.

To qualify for any of the four programs, borrowers must own and occupy the home as their primary residence, meet income limits, and face a documented financial hardship.

Loan servicers participating in all four programs are GMAC, Guild Mortgage, CalHFA and California Department of Veterans Affairs. Other servicers, including Bank of America, JPMorgan Chase, CitiMortgage and Wells Fargo are participating in some, but not all of the programs.

New mortgage roadblocks on horizon

How fees, Dodd-Frank bill, appraisals can impact your purchase

By Dian Hymer, Monday, March 21, 2011.

Inman News™

Going through the mortgage approval process hasn’t been easy these last few years, due to lender tightening and underwriting scrutiny. Aside from requiring mounds of documentation, large down payments and sterling credit scores, conforming lenders now want more of the buyer’s money.

Even though interest rates are low, the borrower’s cost of financing has increased recently due to new Fannie Mae and Freddie Mac add-ons to cover the cost of perceived risk factors.

For example, well-qualified buyers with credit scores above 800 and a 20 percent cash down payment are now charged an extra 1/4 percent of the loan amount. So if you’re applying for a $500,000 mortgage, you’ll be charged an extra $1,250 at closing. The extra 1/4 percent is waived if the borrower puts 25 percent cash down.

The extra fee is higher for buyers with lower credit scores, lower cash downs and other perceived risks like an interest-only loan.

On April 1, the Dodd-Frank bill regarding mortgage compliance requirements will take effect. Part of Dodd-Frank deals with how loan originators (mortgage brokers or loan agents) are compensated.

Dodd-Frank prohibits mortgage originators from basing their loan origination fee on the interest rate or terms of the loan. They cannot steer borrowers to a loan with a higher interest rate in order to collect a higher fee, unless they can prove that this was done in the client’s best interest.

Loan originators can still base their fee (called points) on the loan amount. However, under Dodd-Frank loan originators can’t charge the buyer points and collect an origination fee from the lender (called rebate financing). The lending industry is still working on compliance requirements, and the April 1 start date could be delayed.

Although the intent of the legislation is to protect consumers from being overcharged, there could be complications for buyers trying to get approved for a mortgage in a timely fashion. Most buyers don’t know when they make an offer if they want a loan with points or a no-point loan with a higher interest rate. Dodd-Frank could make it more difficult to move from one loan product to another.

HOUSE-HUNTING TIP: In addition to checking into add-on fees and how Dodd-Frank might affect your ability to switch loan products mid-stream, buyers should find out who their loan originator uses for appraisals. In most cases, mortgage approval is dependent on the lender’s underwriter accepting an appraisal of the property that will secure the loan. Appraisals that come in lower than the price the buyers have agreed to pay can cause a transaction to collapse.

Due to changes in Fannie Mae home mortgage appraisal guidelines last year, loan originators are no longer permitted to select the appraiser. They are also prohibited from having any direct contact with the appraiser during the course of the appraisal process. Many mortgage lenders have used third-party appraisal companies to comply with this guideline.

This has in some cases resulted in unsatisfactory appraisals when inexperienced, out-of-area appraisers who don’t know the local market are hired to do the job. The third-party companies are often can be located out of state and they retain a portion of the appraiser’s fee. Many good appraisers won’t work for these companies.

Local appraisal services have sprung up that provide realistic appraisals from knowledgeable local appraisers. Some lenders and mortgage bankers who weren’t satisfied with the quality of the appraisal they received from third-party appraisal companies have set up their own group of local appraisers.

THE CLOSING: An employee from the lender, who is not involved in loan origination, selects the appraiser.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”

Must-do’s after mortgage is paid off

How to handle deed-of-trust release, automatic payments

By Benny Kass, Tuesday, March 15, 2011.

Inman News™

DEAR BENNY: Because savings interest rates are so low, I’ve decided to accelerate paying off my home mortgage. But after I pay off the mortgage, then what? What else do I need to do, or make sure is done by the bank/mortgage company? For instance, changing the home insurance beneficiary from the bank to me. Are there any other things I need to do? –Nelson

DEAR NELSON: That’s an excellent question. My standard and perhaps somewhat glib response is: “Don’t burn the mortgage.”

When you first obtained your mortgage loan, you signed two documents: a promissory note and a mortgage document (usually called a deed of trust). The trust was recorded among the land records in the county where your property is located. You must make sure that the deed of trust is formally released from land records. This is accomplished by filing a release — often called a “certificate of satisfaction” — on those same land records.

Lenders treat this in different ways. Some actually will arrange to have the release recorded, and will charge you a nominal fee for this service. Other lenders, however, will just send you the promissory note, marked “paid and canceled” and you have to record the release. If your lender is a private individual, make sure that you get the note back simultaneously when you make the final payment.

You should also (1) advise your insurance carrier in writing that you no longer have a mortgage; (2) advise the real estate taxing authorities in your jurisdiction to start sending you the original tax bills, assuming that you have been escrowing for taxes and insurance; and (3) don’t forget to stop any automatic payments that you have with your bank.

Then — and only then — enjoy your free-and-clear house.

DEAR BENNY: I purchased a new home from a large developer nine months ago. Prior to the purchase, I had the home inspected and the inspector noted in one corner of the unfinished basement some moisture around the metal tabs that connect the poured concrete forms. The inspector said it was probably the downspout, but I should confirm that with the builder.

The builder adjusted the downspout, ran some water at that corner for 20 minutes, and showed no water had seeped through. I closed on the house a few days later.

Every time it rains, moisture has come through that area and new areas are popping up each month. During this past winter, it did not happen; however, in two upper corners there was frost. The builder came out, used some kind of monitor, which showed heat was being lost there, and sprayed some additional foam insulation, which corrected that problem.

This weekend I had a basement waterproofing company come out to tell me why my basement continues to leak through these tabs that the builder had caulked and painted over. The technician said the builder used too little waterproofing material on the outside walls.

I sent an e-mail to the builder asking what will they do about it. I haven’t heard back from them. What do you suggest I do at this point? –Denise

DEAR DENISE: What kind of warranty did the builder give you? Review all of the various documents you received from the builder, including any promotional information about the house. Also, ask a lawyer if there are any laws in your state regarding new-home warranties.

You may also find this information on the Internet, by searching “builder warranties in (state name).” Additionally, your state attorney general’s office may have relevant information that may assist you.

I also suggest that you hire a structural engineer to give you a written report as to the cause of the problem and any proposed solutions.

Once you are armed with all this ammunition, I would send a strong letter to the builder, with a copy to your state’s attorney general. That should get the attention of your builder. Give him two weeks to respond.

If he does not answer or is otherwise unresponsive, you have to decide whether it makes sense to hire a lawyer and possibly file a lawsuit. This is always a difficult decision, and the amount to fix the problem should assist you in making that decision. Clearly, you do not want to spend more money on legal fees than it will cost to fix the problem.

I often tell my clients with similar situations that they should just “bite the bullet” and pay for the corrections. Keep in mind that litigation is time consuming, expensive and always uncertain.

DEAR BENNY: I would like to know if it is possible to add my name to the title on my mother’s house. She is 89 and I am 69, and we want the house to go to my grandson when we both pass away. Meanwhile, she wants my name on the house. Can this be done without complications? –Maria

DEAR MARIA: It’s very easy to add your name on title with your mother, but there may be tax complications. In order to determine capital gains tax, we use the concept of “tax basis,” which means the original price of the property. If you have made major improvements over the years, that is called the “adjusted tax basis.”

Let me give you this example. Your mother and father bought the house many years ago for $50,000. Assume for this discussion that no improvements were made. Your parents’ tax basis was $25,000 each. Let’s say your father died when the house was worth $100,000. Your mother received a “step-up” in basis on your father’s half of the property, which means that her basis is now $75,000 (i.e., $25,000 for her half and now $50,000 for her husband’s half).

If your mother puts you on title to the house, that is considered a gift. And the basis of the person giving a gift becomes the basis of the gift receiver. So if she gives you half of the house, your basis will now be $37,500.

Let’s further assume that the house will be worth $500,000 on your mother’s death. Once again, you get the stepped-up basis, or $250,000 on her half of the property. Add that to your basis and your tax basis is now $287,500.

If you decide to sell — and have not owned and lived in the property for two years out of the five years before the sale, you will have to pay capital gains tax. Even if you sell it for $500,000, ignoring selling costs such as real estate commissions, you will have made a profit of $212,500 ($500,000 minus $287,500). The current federal tax rate for capital gains is 15 percent, so you will have to pay $31,875.

But if you inherited the property on your mother’s death, and sold it for the value at the time she died, you would not have to pay any tax at all. In other words, your tax basis is increased by the “step-up” concept — i.e., the value of the property on the date of death.

In your case, because you want the property to go to your grandson, why not just have a last will and testament drawn up for your mother, whereby she specifically designates him to inherit the property?

I see no value in adding your name to title; it merely complicates matters. Talk with an attorney to get specific information relating to your own state laws.

DEAR BENNY: If a person owns a duplex titled in his and his wife’s name and two other duplexes titled in a corporation’s name, would he come under the fair housing rules on the duplex titled in husband and wife’s name? –Jean

DEAR JEAN: To try to find an answer to your question, I went to the Department of Housing and Urban Development’s website, as that agency is the primary enforcer of the act. But typical of government agencies, they did not give a direct response. Here’s what it says:

“The Fair Housing Act covers most housing. In some circumstances, the act exempts owner-occupied buildings with no more than four units, single-family housing sold or rented without the use of a broker, and housing operated by organizations and private clubs that limit occupancy to members.”

Oversimplified, that act requires property owners to make reasonable accommodations for consumers who have special needs, such as having a guide dog when the house rules permit no pets, or (in one case I had) having a hot tub for medicinal purposes when the bylaws specifically prohibited that.

Although I have been involved in a number of Fair Housing Act issues, they generally involved condominium associations, which clearly are covered under the act.

As I don’t have a clear answer to offer, I welcome input from readers on this matter.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

Reforming Real Estate Finance

Every few years, some members of Congress say they would like to see the functions of the Federal Housing Administration taken out of the Department of Housing and Urban Development and put into the private sector.

The historical HUD response has been that privatization would dramatically constrain the helpful programs that meet the needs of first-time homebuyers, low- and moderate-income families, and minorities. The FHA’s reason for being is to make housing more available through loan guarantee and insurance programs.

A study presented last week in the nation’s capital takes the concept even further. It proposes taking the government out of all housing finance, including the elimination of the government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac.

In a recent white paper, “Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market,” conservative think tank American Enterprise Institute, based in Washington, D.C., said it believes the U.S. housing system fails because government support of funds encourages overbuilding and speculation and relieves investors of risk through guarantees, making it possible for mortgage originators to offer zero- or low-down-payment loans with little or no documentation.

The study suggests that there would be plenty of “prime” funds available without Fannie and Freddie if proper down payments were made and if other criteria were met to ensure credit risk.

The study also states that special “subprime” category loans (such as those insured by FHA) be limited to those borrowers who truly fit the category. It calls for FHA-type financing to stop being a clearinghouse for all loans and go back to serving the needs of first-time homebuyers, low- and moderate-income families, and minorities. When the mortgage meltdown occurred in 2008, FHA became the go-to player for all loans.

Historically, when government accepted responsibility for providing low-income housing, it was at the local level, particularly by county government. With the collapse of the banking system in 1929, the federal government was forced to produce solutions to what quickly became a national housing crisis. Most home loans then were short-term, non-amortizing deals financed by local investors or local banks. Most of these loans forced homebuyers to refinance their homes every few years at the prevailing interest rate.

The Roosevelt administration began a number of initiatives directed at stabilizing the nation’s housing stock, encouraging home construction and promoting homeownership. The first of these programs was the Federal Home Loan Bank System that established a complex system of government support for home mortgages.

The Housing Act of 1934 created the Federal Housing Administration (FHA), which served as a review committee for banks and other loan institutions to make loans to low-income families.

The study calls for FHA-type benefits to be limited to low-income borrowers who are demonstrably unable to meet prime lending standards. FHA insures loans so that if the borrower defaults, the lender is guaranteed to receive the outstanding mortgage amount. For 60 years, FHA had been the primary low-down-payment option for home buyers.

“It is important to ensure that the FHA is fulfilling its social policy purposes rather than becoming a backdoor way for people who could otherwise meet prime lending standards to obtain mortgages at government-backed rates,” the AEI report states.

The depth of “social policy purposes” also needs to be explored. While any sweeping changes would take years to implement, the inclusion of special programs other than those for first-time and low-income buyers (FHA-type programs) need to be considered.

For example, FHA insures the nation’s most popular reverse mortgage program. While some private funds have been available in the past, most of those dried up during the recent crisis.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free.

FHA also has a home improvement loan program that has come in handy for folks who need cash and can’t get a home equity loan due to already high loan amounts or slumping home values. FHA Title 1 loans of up to $25,000 are available to owner-occupants and investors who want to repair or improve their property. Up to $15,000 can be obtained regardless of home value.

We do need to return to a home finance system where those people who intend to buy a home have “skin in the game” and have the means to afford a mortgage, taxes, insurance and monthly essentials. However, if the government were removed from home financing, special category loans would need to be included in any new system. We simply have to remember that special, by definition, means the minority, not the majority.

Avoid a prepay penalty in Real Estate Refi

Must-knows when paying off or refinancing home loan

By Tom Kelly, Thursday, February 3, 2011. Inman News™

Refinancing continues to be a hot topic. Many homeowners who are planning to stay in their homes for the long term are trying to find ways to lock in record-low interest rates.

Some borrowers are running into qualification issues for the first time in their lives. They are discovering they do not have enough income to refinance the home they have occupied for the past several years — even though the new loan comes with a lower interest rate than their current loan.

Loan representatives are reporting that their biggest challenge in the past 15 months has been explaining to existing customers that they “can’t even qualify for a mortgage under 5 percent.”

Others are upset because they are facing prepayment penalties on existing mortgages even though they have a flawless payment history and a terrific credit score.

A different wrinkle surfaced recently when a reader brought up an issue that we have not explored for years. She had purchased a home with the proceeds from her previous home plus a small balance that was financed by the owner.

She had planned to pay the small balance off within three years and save some interest money but was shocked to discover the loan structure — “the rule of 78s” — did not allow any savings.

Lenders frequently used the rule of 78s for personal loans and auto loans because it’s quick and simple to apply to a prepaid loan. The rule of 78s is only a problem for someone who decides to pay off a loan before the agreed-upon term of the loan. In this case, the owner of the home was a retired car dealer and opted to employ the loan method on the woman’s loan.

When lenders use the rule of 78s, they distribute the total finance charge over all payments but charge more interest early in the loan term and less later compared to other methods, such as simple interest. Mortgage interest is also front-loaded, but a prepayment penalty is not automatically built into the payment system like it is with the rule of 78s.

The rule of 78s, also called the sum-of-the-digits method, gets its name because the sum of digits 1 through 12, the months in a one-year loan, is 78.

Here’s how the rule of 78s works for a 12-month loan: You pay 12/78 of the total finance charge the first month, 11/78 the second month, 10/78 the third month, and so on. The rule of 78s applies the same way for long-term loans.

For example, a 24-month loan — where the sum of the digits for months one through 24 is 300 — would have a first month’s interest of 24/300, second month’s interest of 23/300, and 22/300 for the third month. Interest on a 36-month loan would be broken into 666 parts.

In contrast, credit unions traditionally charge simple interest on a declining balance. This method assesses interest only for the period that you use the money. With both loan calculation methods, each monthly payment is part principal and part interest. The rule of 78s assigns more interest to early payments than does the simple-interest approach.

Why should you care? It can cost you if you’re thinking about paying off or refinancing a rule of 78s loan before it matures. The rule of 78s is a method for refunding unearned interest when an installment loan is paid off before maturity.

In the end, if the loan is not prepaid and held for the full term, there is no loss to the borrower whether the loan is set up for the rule of 78s or simple interest.

The borrower gets snagged with the rule of 78s because it accelerates the interest recognition by assuming you will pay the total contracted interest, which favors the lender if you prepay. Therefore, it’s a hidden prepayment penalty.

Not sure if your loan uses the rule of 78s? Look at your Truth in Lending disclosure. If you see a phrase like “you will not be entitled to any rebate of part of the finance charge if you prepay,” ask the lender if it computes interest using the rule of 78s.

A private party probably will not supply you with a Truth in Lending sheet. While there’s only a remote chance you cannot prepay the balance without a penalty, always ask and require the party to discuss the prepayment possibilities.

Tom Kelly’s book “Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone” was written with Mitch Creekmore,  senior vice president of Stewart International, and Jeff Hornberger, the National Association of Realtors’ international market development manager. The book is available in retail stores, on Amazon.com and on tomkelly.com.