Mortgage Modifications, FHA Loan Refinancing and Little Hope for Homeowners

Let’s face it…the mortgage industry is in shambles.  The only sector that might be worse is the US economy and the primary reason that it tanked is fueled by the mortgage crisis.  Borrowers with late payments and bad credit have little hope as many homeowners now seek loan modifications over refinancing, because they simply don’t qualify for conventional or government refinanancing. The American economy had become contingent on home equity.  Over the last decade, homeowners began using their home like an ATM machine.  Millions of homeowners would run up credit card bills and then consolidate them with a home equity loan or a cash out refinance.  After the sub-prime mortgage market crashed in 2006, most mortgage lenders pulled back their second mortgage products.  By 2007 there were no second mortgage products that enabled borrowers to take out cash above 90% combined loan to value.  In 2008 the few lending banks that still offered home equity loans required a 70% combined loan to value.

The FHA home loan was reborn in 2007 with new cash out requirements that enabled borrowers to qualify for cash out refinancing up to 95%.  In an effort to curb foreclosures HUD introduced the FHA Secure refinance that enabled borrowers who were paralyzed with a high rate adjustable mortgage to lock into a fixed rate loan that they could afford.  The homeowners that had enough equity began utilizing FHA home loans for debt consolidation and home improvement funding.  In 2008, Congress finally passed an economic bill that mandated FHA mortgage loan amounts to increase nationally.  High cost area were now able to refinance with loan amounts up to $729,750 in some cases.  Many of the FHA mortgage lenders began to get nervous as foreclosure rates soared and they collectively believed that FHA loans were quickly becoming the replacement for sub-prime refinance loans.  Even though FHA has never made credit score minimums, the lenders took the guidelines into their own hands and started making credit score minimums like 580 and 620 for mortgage refinance transactions.  This was a huge blow for homeowners because FHA loans has always been based on the compensating factors and they were truly pioneers of “outside of the box” mortgage loans. 

2008 has been a turbulent year to say the least for the mortgage industry.  Foreclosure rates shattered records set in 2007 and major banks like Indy Mac and WAMU began to fail.  The FDIC began bailing out banks and the country found themselves in the worst economic state since the great depression.  Congress passed a bill that called for an $800 hundred billion dollar bail-out that was created to reopen the credit lines so that banks would start lending again.  Meanwhile home values have been tanking across the nation with short sales and foreclosure driving down the property values every month. 

FHA just introduced the Hope for Homeowners Loan that is considered a “short refinance” because it is the first mortgage loan modification endorsed by FHA.  The Hope for Homeowner loans offer an incentive to FHA mortgage lenders to write down the mortgage balance to fair market value and then turn around an offer a loan to these homeowners at 90% loan to value.  There are some contingencies like; the borrowers need to be at least 90 days late on their mortgage.  The borrowers aren’t allowed to take out a second mortgage for 5 years and if they sell the property or refinance in the five years they have to pay some of it back to FHA. 

Here is the problem; the lenders expect these borrowers to have a debt to income ratio under 38%.  If that was the case, these borrowers would not be 3 months behind on their mortgage.  In the first 2 weeks, FHA reported that only 45 in the country qualified for the Hope for Homeowners program.  Unfortunately very few borrowers qualify for this new FHA mortgage and you have to wonder how long the public will put up with the lending act from the mortgage giants as they take hand-outs from the government bail-out without coming through with any meaningful loan programs that meet the needs of todays “no equity” economy.

HOPE for Homeowners Interview

The main stream media has grabbed hold of the foreclosure crisis and the mortgage meltdown.  Unfortunately many newspapers are only reporting the shams of the loan modification brokers.  Most articles I read are warning distressed homeowners not to pay the $3,000 to $5,000 in fees to have a professional renegotiate the mortgage terms on your loans, because they say there are many non-profit companies out there that will do it for free.  These non profit foreclosure prevention companies are overwhelmed, underfunded and quite frankly have no intention of helping homeowners modify their mortgages.  With all of the misinformation and poser mortgage products, many homeowners are left with little hope as the mortgage meltdown and foreclosure crisis have turned our economy upside down. 

Article written by Bryan Dornan.