How FHA Could Help BorrowersRefinance and Avoid Foreclosure

By Deborah Solomon From The Wall Street Journal Online

As the subprime-mortgage crisis ripples through the broader housing market, the Bush administration is eyeing an often overlooked federal mortgage insurer to help low- and middle-income homeowners avoid foreclosure.

President Bush has balked at allowing mortgage giants Fannie Mae and Freddie Mac to buy more mortgages for their portfolios to ease the credit crunch triggered by rising defaults on home loans to borrowers with poor credit. But he said earlier this month that he supports giving the Federal Housing Administration more flexibility to help those facing foreclosure refinance their homes.

• What's Happening:

The Bush administration is eyeing the Federal Housing Administration, an often-overlooked federal mortgage insurer, to help low- and middle-income homeowners avoid foreclosure.

• How It Would Work:

The FHA could offer refinancing options to homeowners, including those who aren't yet in default, but who risk falling behind on payments that jump when rates are reset.

• What Needs to Happen First:

The effort is likely to jump-start legislation in Congress to give the housing authority more tools to assist homeowners. Senate Banking Chairman Christopher Dodd said recently that FHA reform will be among his top priorities, and a bill passed by committee is set to head to the full House this fall.

Treasury Secretary Henry Paulson, meanwhile, has instructed staff to work with the Housing and Urban Development department, which oversees FHA, to find ways to help individuals caught in the fallout of the credit crunch.

The administration is looking to FHA to offer refinancing options to homeowners, including those who aren't yet in default or foreclosure, but who are at risk of falling behind in their payments on mortgages that were structured to offer payments that were very low at first but then escalated.

The effort is likely to jump-start legislation in Congress to give the housing authority more tools to assist homeowners. Senate Banking Chairman Christopher Dodd (D., Conn.), said recently that FHA reform will be among his top priorities when Congress returns from its August recess. The House Financial Services Committee passed a bill in June that is expected to head to the full House this fall.

For decades, the New Deal-era agency was used by low- and middle-income home buyers who had little or poor credit and would have trouble getting a loan in the primary market. The FHA didn't originate loans, but insured them against default by somewhat risky buyers, giving lenders an incentive to issue a mortgage.

In recent years, the agency lost market share as the market for subprime loans exploded and home buyers of all income levels were offered a range of exotic loan products, such as no-money-down mortgages and interest-only payments. While FHA-insured loans once accounted for roughly 15% of the mortgage market, that number has fallen below 5%.

But many buyers who got subprime loans are beginning to have trouble making their mortgage payments as the attractive initial "teaser" interest rates are reset at much higher levels. While many of those buyers believed they could refinance their loans, that has become much harder as mortgage lenders tighten their standards in the face of defaults and foreclosures. The Center for Responsible Lending estimates as many as 2.2 million loans will reset over the next two years.

FHA says it is constrained from doing more now because of limits on the size of the loans it can back and some requirements that borrowers must meet. While its refinancing business has picked up and the agency expects to refinance about 120,000 loans this year, FHA officials say they could easily double that amount if given greater flexibility.

Among the options being discussed in Congress is eliminating or reducing the required 3% down payment, raising the size of the loans FHA can insure to as much as $417,000 from $362,790, and being able to charge insurance premiums based on a borrower's risk instead of a one-size-fits-all rate.

Federal Housing Commissioner Brian Montgomery said the current rules effectively prevent FHA from helping borrowers in high-cost states, such as California and New York. Most of the loans it insures are in places such as Texas and the Midwest.

For the Bush administration, backing FHA reform offers a way to straddle the growing calls for government assistance to those caught in the subprime mess without advocating a financial bailout.

Fannie and Freddie, backed by a host of Democratic lawmakers, have argued they could provide liquidity to the rattled housing market if allowed to grow their portfolios beyond strict limits.

Their portfolios are capped in part because of accounting scandals at the government-sponsored entities and Mr. Bush has said Congress should pass long-awaited reforms that would tighten oversight of Fannie and Freddie before allowing them to grow.

Today's Rates

30 yr fixed mtg 6.17%
30 yr fixed jumbo mtg 7.13%
15 yr fixed mtg 5.79%
$30K home equity loan 8.47%
7/1 ARM 6.27%
$30K HELOC 7.96%

Still, an administration official said the government is sensitive to the need to help minimize "collateral damage" from the subprime woes, such as massive foreclosures that could hit certain neighborhoods hard and affect property values broadly. To that end, Treasury and HUD are looking to find ways to assist borrowers who are creditworthy, but who got caught in a pinch and are facing higher mortgage payments than they can afford.

One challenge for the administration is trying to identify borrowers who are likely to get hit with a change in their loan payment -- known as a reset -- that could force them to default on their mortgage, and then figuring out ways to help them refinance. Among the possible options are for government agencies such as FHA or Fannie Mae and Freddie Mac to refinance some of those loans at a lower interest rate.

But not everyone is convinced, and FHA reform may run into trouble in the Senate. Alabama Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, has expressed concern about expanding FHA, saying it could ultimately hurt taxpayers.

"One lesson learned from the current pattern of defaults and delinquencies in the subprime market is that those borrowers with little or no equity in their home will be the most likely to fail," he said at a hearing last month. "We must approach any attempt to expand the program or lower the program's standards with great caution."

About Credit Scores....

Question: You always seem to be advising readers with poor or just OK credit on how to boost their credit scores. What if a person has no credit-card debt, no bad marks on their credit report, no other debt besides car and house, and a credit score of 769? How do I get my credit score into the 800s?

Answer: A score of 769 is extremely good. Congratulations, you obviously know how to handle credit. But to try to push your score to 800 and beyond would be sweating the small stuff. A core of 800-plus won't get you a lower rate or better terms than you can obtain with a 769, so why bother? In the words of a famous Chicagoan, forgetaboutit.

Q: My credit score hovers just below 800, and I have been trying to figure out what to do to get it over 800 simply as point of personal pride. It won't make any difference on my rates, just in how I rate myself.

A: The scoring programs are so intricate -- and somewhat different for each of the major credit depositories -- that it is impossible for me and anyone else to give this kind of advice without first seeing your score and the explanation codes that go along with it. The key lies in the explanation of why you may not have scored as well as you could. Once you see what the program has to say, go from there.

But honestly, you are really wasting your time. A credit score is based on a snapshot of your credit record on a particular day and hour. Since the information in your file changes on at least a monthly basis -- and possibly more frequently -- a small move this week could be offset by something next week.

Therefore, I say take pride in your almost 800 and leave it at that. You are one of the few, the brave, the mighty!

Q: I have been seeing a Countrywide ad on TV in which it is advertised that the borrower pays no closing costs, appraisal and other costs associated with the refinance of a home. Normally this would amount to about $4,500. Of course, this is offered through its retail branches only. Are they servicing the loan until their "costs" are recaptured? Or are they limiting this offer to someone with a 750 credit score (exaggeration intended) and then offering a client with 749 or below a different loan at a much higher rate with "some" closing costs? Smoke and mirrors or bait and switch. Either way, it seems too good to be true.

A: Many lenders offer "no cost" products to prompt homeowners to consider whether a change in their current financing makes sense. In some cases, the costs you mention -- appraisal, etc. -- are covered by charging a somewhat higher rate. In other cases, the lender requires, as you suggest, that the loan be kept in force for a certain period of time. Otherwise, a prepayment penalty is charged so that the lender can recoup all or some of the cost involved in originating the loan.

However, the big guys like Countrywide can and often do offer true "no cost" loans in the hopes that they will be able to cross-sell other, more lucrative products to new customers. In this case, no-cost loans could be considered a loss-leader to get folks in the door.

At least two other large institutions, Bank of America and Washington Mutual, also offer no-cost loans -- no origination fee, annual fee, mortgage insurance or closing fees.

Under WaMu's new Mortgage Plus product, the Seattle-based lender says it will waive more than 30 fees for the borrower, though the specific number depends on the state. It will pay closing fees, which are those associated with the loan. But mortgage taxes, transfer fees and other state and county levies are still the borrower's responsibility.

How can they do it? Either these giant lenders have volume deals with settlement providers or they have people on their staff who do the chores other lenders pay outside vendors to do.

That said, it still behooves a would-be borrower to consider several loan choices before deciding. Depending on how long a borrower plans to stay with the mortgage, it may be less expensive to pay the fees out of pocket or to roll them into the loan principal. As always, take a paper to pencil and figure out the differences.

In fact, Countrywide recently launched a broad national initiative designed to educate mortgage consumers about the fact that they have many options available to them regarding how certain costs are paid when refinancing or obtaining a home loan, no matter which mortgage lender they choose. One of their key messages is that while a no-cost loan may be right for some, it isn't necessarily the best choice for every borrower.

"People clearly understand that there will be costs when they finance a home," said Dan Hanson, managing director of Countrywide. "Home buyers look to us for information, so we've decided to recommit ourselves to educating people about the cost options that work best for their unique situations.

By presenting our customers with a menu of options, they can make an informed choice that's right for them now and into the future. The best choice in the long run isn't necessarily the one with the least out-of-pocket costs, but rather the one that brings the best total value over the life of the loan." Read about borrowers angry at Countrywide.

Nationally syndicated columnist Lew Sichelman has been covering the housing market for 35 years. Because of the volume of mail he receives, he cannot answer individual questions, nor can all questions be answered in this space. E-mail lsichelman@aol.com

My living trust became nearly worthless

Homeowner makes big mistake after refinancing

By Robert J. Bruss Inman News

Nobody, including me, likes to think about death. But it is inevitable, as I was reminded during a recent hospitalization for major surgery. Thankfully, because of the excellent surgeons, nurses and my friends, I came through the experience successfully.

After I recovered, I learned from the doctors I had been very close to death. When I got home and was feeling better, one of the first things I did was review my estate plan.
Purchase Bob Bruss reports online.

In the process, I discovered my old living trust had become nearly worthless. The primary reason was, like most real estate owners, in the last few years I refinanced my properties to take advantage of lower mortgage interest rates. As part of the process, the lenders required me to take my property titles out of my living trust, record the new mortgages, and then put the titles back into my living trust.

But I carelessly didn't follow up and the title companies failed to re-deed my properties back into my living trust. The result was my living trust had become virtually empty because it was "unfunded." If I could make that mistake, think of how many other homeowners and realty investors also have worthless, empty living trusts.

Especially because I wanted to revise my estate plan and change my beneficiaries, I decided to hire a trusts and estates attorney. The total cost, including recording fees, was about $1,300. That is far less than the 3 to 10 percent of gross assets it costs to probate a typical estate.

Frankly, although I am an attorney and could prepare my own living trust to avoid probate costs and delays, I'm glad I hired another attorney.

Among the extra improvements he suggested were (1) a durable power of attorney for lifetime asset management (in case I become unable to manage my assets); (2) a "living will" (also called an advanced health care directive) so the designated person can make health care decisions, such as taking me off life support if there is no reasonable hope for recovery; and (3) a "pour-over will" for any assets omitted from my new living trust. The attorney also made certain all my property titles were correctly transferred to fund my living trust.

EVERYBODY NEEDS A WILL. Shockingly, less than 20 percent of U.S. residents have a written will. For those who have a will, after they die their assets will be distributed according to their wills by the local Probate Court. Probating an estate, even a modest one, usually takes six to 18 months or longer before the heirs can receive their inheritances.

For individuals who die without a written will, the state law of intestate succession determines who will receive their assets. Especially in second marriages, the result is often not what the decedent would have wanted. Again, the local probate court supervises intestate succession distribution, subject to costs and delays.

However, if no written will and no relatives can be found, a person's assets "escheat" to the state. That means the probate court will sell the assets and deposit the proceeds into the state treasury. That is not the result most people want.

HOW TO AVOID PROBATE. Even if you have a written will, it usually won't avoid probate costs and delays. Well-known methods of probate court avoidance include holding real estate titles in joint tenancy with right of survivorship (or as tenants by the entireties between husband and wife) and holding bank accounts or stock brokerage accounts with "payable upon death" designations.

But all these methods have major drawbacks, especially when two or more persons own an asset but one becomes incapacitated such as by Alzheimer's disease, a coma or a severe stroke.

A better alternative to avoid probate costs and delays for most individuals is a revocable living trust. This is simply a method of holding title to major assets, such as a home, investment property, bank accounts, common stocks, mutual funds, and other major assets.

When a living-trust grantor creates a living trust, he is its initial trustor, trustee and beneficiary. That means he can buy, sell, refinance and manage the assets as before.

However, if he becomes incapacitated, then the named successor trustee, such as a spouse or adult child, takes over management and can even sell the assets if necessary. There is no necessity to have a conservator appointed by the probate court. Husband and wife can either have individual living trusts or a joint living trust.

After a living-trust grantor dies, the successor trustee then distributes the living-trust assets to the individuals and/or charities named in the document. The local probate court does not become involved, so distribution usually is completed within six months.

ADVANTAGES OF LIVING TRUSTS. Among the many advantages of a revocable living trust are (1) easy amendments or revocation as desired by the trustor; (2) ownership benefits remain unchanged, including income-tax deductions and the principal-residence-sale tax exemption; (3) avoidance of multistate probates if real estate is owned in more than one state; (4) privacy because living trusts do not become public, as do written wills filed for probate; (5) the successor trustee manages the living-trust assets if the trustor becomes incapacitated; and (6) the successor trustee distributes the assets after the grantor's death.

DISADVANTAGES OF LIVING TRUSTS. Among the few disadvantages of revocable living trusts are (1) no statutory period to limit creditor claims (as occurs in probate court); (2) the cost and inconvenience of "funding" the living trust (usually far less than the cost of probating an estate); (3) when refinancing mortgages, lenders usually require taking real estate out of the living trust for a moment while the mortgage papers are signed and recorded; and (4) a living-trust trustor needs a "pour-over will" or a "back-up will" for any assets that were not included in the living trust.

SUMMARY: Revocable living trusts offer many advantages and few disadvantages to avoid probate costs and delays for heirs as well as conservatorship during the grantor's lifetime.

By avoiding involvement of the local probate court, living-trust beneficiaries usually receive their assets within six months after the decedent's death.

More details are in my new special report, "Pros and Cons of Living Trusts to Avoid Conservatorship and Probate Costs and Delays for Your Heirs," available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at http://www.bobbruss.com/.

(For more information on Bob Bruss publications, visit his Real Estate Center

Can You Afford A Home?

The time has come to buy a house. Questions buzz around in your head like a swarm of angry bees: “How much can I borrow? How much do I have to put down? How much will my payments be?” Well, let me suggest starting with the “How much can I borrow?” question.

I know you should never answer a question with a question, but in this case we need to ask a few more questions in order to figure out the answer to our first question, and for those of you who would like start crunching numbers right away, try out these helpful mortgage calculators.

There are many factors you need to take into consideration when purchasing a home. First and foremost, ask yourself what size monthly payment you can afford. When determining how large a mortgage you can afford, be sure to factor in all your current expenses such as car payments, credit card bills, student loans, utilities, and the like.

You may also want to factor in how much you spend on things like entertainment, eating out, and traveling. You don't want to add a mortgage payment and say goodbye to your social life. Instead, you want to make sure that you're not overextending yourself financially and thus ensuring the survival of your social life.


At the present time, most lenders will allow for a whopping debt-to-income ratio of 45% - 50%. Your debt-to-income ratio is the sum of your mortgage payment and any other credit card or loan payments, divided by your monthly gross income. Lenders use this ratio to help determine your credit worthiness.

So, all of your revolving debts along with your mortgage payment divided by your monthly gross income should not exceed the 36% - 45% debt-to-income ratio. So, here’s a quick little formula to help you figure out how much you can afford to put toward your monthly house payment:

--Multiply your gross monthly income by 0.45
--Subtract your non-mortgage debt payments from the result
--What's left is your allowable mortgage payment

So, if we have a couple with a combined monthly gross income of $5000 and they pay $700 a month toward two auto loans and one credit card, they would qualify for a monthly payment of $1550.

Also, be aware that not all of your monthly housing payment goes toward your principal and interest. A portion must go toward homeowner's insurance and property taxes. I mention this because on most mortgage calculators that’ll you use, you’ll need to enter these figures to get an accurate idea of what your real monthly mortgage payment will look like.

Property taxes are typically a percentage of your home's assessed value. To calculate property taxes, local jurisdictions generally multiply the tax rate by a home's assessed value. For example, if you pay 0.5% in property taxes of the assessed value, a home assessed at $250,000 would have a yearly property tax bill of $1,250.

In order to find out the tax rate, you will need to contact your county tax assessor, or a local mortgage broker or bank may be able to assist you. As for the homeowner’s insurance, your best bet is talking to a local broker or bank to get a general idea of what it is for your area.

Mortgage calculators will ask you for a percentage rate sometimes and others will ask for a yearly figure. It can be confusing for a new buyer, so don't be afraid to seek a little assistance.

Figuring out how much you can afford to put toward your monthly house payment is a start. Now, you want to know how much house you can afford. There are mortgage calculators galore that will help you do this, but, as I mentioned above, they will require you to enter real estate taxes, homeowner’s insurance, and interest rates. Some calculators will provide you with figures, but they aren’t necessarily correct, so I would suggest a little leg work.

Once you know how much you can comfortably spend a month toward a home, and you’ve gathered your tax and insurance rates, you only need an idea of what kind of interest rate you’ll get (Oh, did I forget to mention that you can call your local bank or mortgage broker to get pre-qualified as well, and they usually don’t charge anything?).

If you’re curious, try out some mortgage calculators. Once you have a good idea of what you think you can afford, call a local bank or broker and get pre-qualified to see if you’re in the ballpark, and soon you’ll be on your way to owning a home.

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About the Author: Brian Daniel is a loan officer/marketing coordinator for Bend Mortgage Group Ltd. a mortgage company in Bend, Oregon. For more information or help with a Bend, Oregon home loan visit www.bendmortgagegroup.com.

Basics of Borrowing Money

Are you thinking about starting a business but have no money to do it with. Well, you're not alone. This article will tell you the basics of borrowing money.

A loan is money that is borrowed, and has to be paid back along with interest. If the money is borrowed from an institution such as a bank, this is called a commercial loan. Money that is borrowed from a friend or a relative is called a personal loan.

The borrower, or debtor, is the business or individual that takes out the loan. The lender, or creditor, is the source from which the money was borrowed. The term, or period, is the time that is specified during which the borrower has to use the money borrowed before he has to repay the loan. The maturity of a loan is when a loan term reaches its end. The Principal is the amount that is borrowed from the lender.
When you or your business borrows money, the lender wants to know when they will get their money back. Keep this in mind when you are looking for a lending source.

If the business is not able to repay the loan, the lending source has a right to legally come after assets to recoup it's money. The extent to which you are personally liable depends on the business structure your business is operating under.

If you are approved for a loan, that you will have to make scheduled payments (typically on monthly basis) plus interest. A loan can sometimes be set up as a balloon loan. A balloon loan will typically require smaller initial payments and one lump sum of what was borrowed as the final payment at the end of the term.

Borrowing from Institutions
Business loans generally fall into two main categories: short term and long term loans. A short term loan is a loan that is to be payed back within one year. Examples of short term loans include:

Working capital loans
Accounts receivable loans
Lines of credit
Long term loans are loans that are to be payed back typically from one to seven years. Long term loans are typically used for:
an expansion of a business
the purchase of equipment
real estate
Most business loans that are used for starting a business are long term loans.

When you approach an institution for a business loan, it will be looking at you as the business owner as closely as it will be looking at the business itself. One of the ways lending institutions make money is by lending money and they want to be as sure as possible that they get back their money with the interest owed.

The time between applying for a loan and learning that you have been approved (or disapproved) can vary. If you are disapproved, you may be told almost instantly. If you are approved, it may take a few days though it usually takes longer. It may even take several months to learn whether you or your business has being approved for the loan.

Borrowing from Family and Friends
If you don't want to, or can't get a commercial loan, you can consider getting a private loan from family or friends. This is usually real informal. However, you need to be careful because this can lead to ruined relationships.

If you are getting a private loan, it is in the best interest of the lender to have an agreement put in writing. The written agreement should state the principal, the interest charged and the terms of repayment. This puts the lender in better position either write off the loan on his or her tax return or to legally come after you.

You are free to reprint this only if the article link and text are included:

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About the Author: article source: A Guide to Starting a Business at http://www.aguidetostartingabusiness.com

Print Article | Email Article | Download PDF | 332 views | Jun 21 2005 by Jose Valdez