Two ways the new mortgage rules impact consumers and taxpayersThe CMPS InstituteCMPS Institute, Gibran Nicholas, Making Home Affordable, loan modification
"There is much confusion surrounding the potential impact of the
new Making Home Affordable programs announced by the government,"
said Gibran Nicholas, chairman of the CMPS Institute, an
organization that certifies mortgage bankers and brokers. "When you
boil it down though, there are two ways that the programs will
impact consumers and tax payers."
Impact 1: Modification program
"Despite all the hoopla and fanfare surrounding this program, it
remains 100 percent voluntary, and mortgage servicers (the
companies that actually collect borrowers' mortgage payments) are
not obligated by law to follow these rules and guidelines,"
Nicholas said. "Oddly enough, if a financial institution has
already received government funding, they are NOT obligated to
participate. However, if a financial institution receives new or
more government funding in the FUTURE, they WILL be obligated to
participate. In other words, the rules are still a bit sketchy and
nobody really knows who will participate and how it will all work
from a practical perspective."
The modification program has three elements:
• The government is offering financial incentives to
mortgage servicers who modify loans for borrowers
• The government is offering financial reimbursement to
investors if they allow servicers to modify loans and then take a
hit on the borrower's re-default if the property declines in value
after the loan modification
• The government is offering financial incentives to
borrowers who modify their loans and make their new payments on
time
"This whole scenario could be very reckless because there is no
maximum total debt ratio under these guidelines," Nicholas said.
"You could have a situation where a borrower's mortgage payment is
brought down to 31 percent of their income (subsidized by our
government), but their total overall debt ratio (including car
loans, credit cards, etc.) could be in excess of 55 percent, or 65
percent, or 75 percent, or even higher. Then, if the borrower
defaults on the loan modification, tax payers are on the hook for
more money."
Also, vacation homes and investment properties don't qualify for
the program; only primary residences are eligible. "Keep in mind
that 36% of all home sales in 2005, and 40 percent of all home
sales in 2006 were vacation homes and investment properties,"
Nicholas said. "Many of these properties are now experiencing
negative equity, and a considerable number of these property owners
are just walking away. This latest government intervention will do
nothing to address this issue."
Only primary residence borrowers who have experienced some type
of financial hardship can qualify. "In other words, you will need
to document that your financial situation is worse now than it was
at the time that you originally got the loan," Nicholas said. "Your
income needs to have gone down, and/or your expenses need to have
gone up."
Click on this
link if you want to see if you qualify for at least the minimum
requirements.
Remember, even if you do qualify under these minimum
requirements, your servicer (the company where you send your
payments) might not be participating in the program just yet.
Impact 2: Refinance program
Here's how it works:
• You need to be current on your mortgage payments (no
late payments in the last 12 months)
• Your mortgage balance cannot exceed 105% of the current
value of your home
• Your mortgage needs to be owned or guaranteed by Fannie
Mae or Freddie Mac
"You should consider refinancing under this program if you have
an adjustable rate, interest only, or balloon mortgage that you
want to convert into a traditional fixed rate," Nicholas said.
"Also, if you have a fixed rate mortgage with an interest rate that
is greater than 5.5 percent, you should talk to your Certified
Mortgage Planning Specialist about whether you would benefit by
refinancing. At the very least, you could enter a rate watch
program and your CMPS professional will contact you when rates hit
your target level."
Other recent developments
There have been many other recent developments in the markets as
well as new government legislation. Here are just a few recent
items that may impact you or someone you know:
• Home improvement tax credit
• First-time home buyer tax credit
• Reverse mortgages for home purchase transactions (age 62 or
older)
"All the changes taking place in mortgage markets may or may not
be relevant to your situation," Nicholas said. "It is more
important than ever to work with a Certified Mortgage Planning
Specialist that can help you make sense of all the chaos and
confusion in the market."
For more information, visit www.CMPSInstitute.org.
