No.  ARMs are not bad loan products.  But they do have a time and place, a specific purpose and use.  The problems that we are seeing right now are a result of the ARM loan products being used incorrectly.  So what would be the appropriate use of an ARM loan?

The ARM loan product was designed to be a short term program to assist those who are otherwise financially challenged (bad credit mostly) to be able to get into a home and begin rebuilding their credit.  A person with bad credit could get a home loan which is the single best credit building credit line available.  Then over the course of those first 2-3 years this person could restore their credit worthiness in order to get into a standard fixed-rate mortgage at market rates.

The problems that we see today are the result of those ARM loan products being marketed to everyone regardless of ability to repay.  Many people were given ARM loans and their ability to repay was based on the introductory rate.  Once the rate adjusted these people were unable to afford their mortgages any more.  The shorter the time frame to an adjustment the shorter the time frame before default.

Should we keep ARM loan products on the market?  Absolutely.  But they should be used for their intended purpose, a time for a person to improve their credit so that they can get a good fixed rate mortgage on their home.  It may be appropriate to require home buyer education and financial literacy before an ARM loan is originated to guarantee that the borrower understands what kind of loan they are getting and to help them make appropriate plans to improve their credit within the time frame of their loan product.

1. The loan modification will be 31% of your gross income or,
2. The loan will be modified to a 2% interest rate.

Unfortunately neither option is correct.  The Home Affordability Modification Program (HAMP) Standard Modificatin Waterfall (loan modification calculation) follows the following steps to calculate a modified payment for a borrower:

1. The borrower’s interest rate on converted to a fixed interest rate on a fully amortizing loan.  If the Adjustable Rate Loan (ARM) is set to adjust within 120 days then the rate will be calculated at the higher interest rate.
2. The accrued interest, escrow advances, and servicing fees are capitalized into the principal balance owed.  Note: Late fees may not be capitalized and must be waived if the borrower qualifies for a permanent modification.
3. The interest rate is reduced in increments of .125% to reach a payment equal to 31% of the borrower’s gross income.  The interest rate cannot go below 2%.
4. If the target mortgage payment has not been reached then the loan may be ammortized up to 40 years (480 months) from the date of the permanent modification.  No negative ammortization is allowed.
5. If the target mortgage payment has not been reached then a principal forbearance (no interest, no payments) must be created so that any principal over 100% LTV is not included in the modification payment.
6. This is no requirement for lenders to forgive any principal under the HAMP modification.  If the target mortgage payment cannot be achieved through the previous 5 steps then the borrower does not meet the income qualifications for the loan modification under the HAMP and will have to pursue other workout options.

Example 1:

Let’s pretend that John Borrower bought a $300,000 home 2 years ago.  He paid $25,000 down payment and got a$275,000 ARM loan at 7% interest and a PITI payment of $1,830/mo (assuming $125 for taxes and insurance).  His loan is going to adjust to 7.25% in 90 days and his payment will increase to $2,005/mo.  John’s employment income has been reduced to $2,355/mo gross income and his property value has fallen to $200,000.  Due to the reduced income John is now behind 3 months.  Here is how John’s modification would work out…

John’s target mortgage rate is 31% of his gross monthly income.  With $2,400/mo gross monthly income his target payment is $744/mo.

1. John’s interest rate is converted to a fixed rate, fully ammortizing loan.  Because his rate will adjust in less than 120 days the higher rate is used for the conversion (7.25%).  John’s loan payment would become $2,005/mo.
2. John’s 3 late payments ($5,490 would be capitalized into his loan) for a new balance of $280,490.  The resulting payment would now be $2,038/mo.
3. The interest rate in now adjusted down in  .125% increments from his converted interest rate until the modified payment reaches the target monthly payment or 2%.  In John’s case the interest rate reaches 2% resulting in a payment of $1,162/mo ($280,490 principal, 2% interst, 30 year fixed rate mortgage, $125 taxes and insurance).
4. Since the target mortgage payment has not been reached the length of the loan is extended to 40 years resulting in a payment of $974/mo ($280,490 principal, 2% interest, 40 year fixed rate mortgage, $125 taxes and insurance).
5. The target payment has not been reached so the lender must give a principal forbearance.  In this case the market value of the property is $200,000.  The lender will have to give a forebearance in an amount up to $80,490 (the final Loan To Value on the interest bearing principal must be 100% or more).  The modified payment now becomes $744/mo ($204,408 interest bearing principal, 2% interest, 40 year fixed rate loan, $125 taxes and insurance).
6. Because we reached the target payment amount John would qualify for the loan modification under this program with a modified payment of $744/mo.  If John made less than $2,360/mo gross income (target payment of $730/mo) then he would not qualify for the loan modification based on income.

Example 2:

Let’s pretend that John Borrower income is actually $4,000/mo gross monthly income.  This creates a new target payment of $1,240 (31% of $4,000).  John’s modified mortgage payment is calculated as above (as follows)…

1. John’s rate is converted to a fixed 7.25%, fully amortized loan.
2. The mortgage is capitalized to $280,490.
3. The interest is reduced in .125% increments to as close to $1,240 without going under.  The resulting interest rate would be 2.625% and the resulting payment would be $1,252/mo ($280,490 princpal, 2.625% interest, 30 year fixed rate, $125 taxes and insurance).
4. At this point John would be qualified for a modified payment under the HAMP program with a payment of $1,252/mo. 

Keep in mind that there are other factors required to qualify for the loan modification.  This information is designed to give a consumer a general idea of how the modification payments are calculated.

Remember, loan modification help is FREE. Beware of scams! For more information on the Making Home Affordable loan modification program check out their website at http://makinghomeaffordable.gov.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

The essense of the program works like this…the lender will modify the home’s first (1st)  mortgage to 31% of the household’s gross income.  This reduction remains in effect for 5 years.  After the 5th year the interest rate will rise 1% per year until it reaches the original mortgage interest rate where it remains fixed for the life of the loan.

In order to accomplish this modified mortgage payment the lender has 3 options:

1. Reduce the interest rate down to (as low as) 2%
2. Ammortize the loan out to (a maximum of) 40 years
3. Forgive a portion of the loan principle.

To determine if your income would justify a MHA modification you need to determine if 31% of your gross income is equal to (or greater) than the lowest minimum payment allowed by the lender under this program.  The lowest minimum payment is figured by taking your loan balance plus all accrued late fee, charges and missed payments and ammortizing that amount over 40 years at 2% interest.  Then add in your property taxes, hazard insurance and mortgage insurance (if applicable).  This represents the lowest minimum payment under the MHA program.

Example:  John Homeowner has a $100,000 mortgage with payments of $845/month ($125/mo for taxes and insurance).  John has missed 5 payments and the lender has begun foreclosure proceedings (late fees of $400 and attorney’s fees of $3,000).  So John now owes the lender:

• $100,000 principle balance
• $4,225 in missed payments
• $400 in late fees
• $3,000 for attorney’s fees
• $107,625 Now owed to the lender

John’s lowest possible payment under the MHA program ammortizes $107,625 over 40 years at 2% which equals $325.92/mo PLUS $125 ) for taxes and insurance) which equals $450.92/mo.

Most people understand this lowest payment calculation but fail to understand the gross income calculation.  In order to qualify for the modification John’s income must support $450.92 at 31% of his income.  So John must have a gross income of $1,454.58/month and be able to show that he can support the balance of his monthly obligations at that income after the mortgage modification.  Keep in mind that the more money John makes the higher the modification amount will be to keep it at 31% of his gross monthly income.

Should you find yourself facing a potential mortgage default or foreclosure be sure to contact your lender or a HUD-approved housing counselor.  Both are very interested in keeping you in your home and helping you find a solution to your current economic struggles.  And both will usually provide these services for FREE.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

Traditionally there were two places a person would go if they needed a mortgage, to their local “mortgage broker” or to their local depository bank or credit union. Having worked at both, let me discuss a few of the advantages and disadvantages of each medium:

Depository Banks and credit Unions:

PROS:

CONS:

Mortgage Brokers:

PROS:

CONS:

As you can see, the pros of a bank are cons of the broker, and visa versa. 
But what if there was a better way, a “hybrid lender” so to speak, one with the advantages of both bankers and brokers, with none of the disadvantages?  Wouldn’t that type of lender be ideal?

So let’s look at how a “hybrid lender” will benefit you:

PROS:

CONS:

Some Hybrid Lenders:

Security Home Mortgage
Rick Anderton
(801) 414-8055
rick@lendutah.com

City1st Mortgage
DJ Gardner
(801) 226-7018
djgardner@city1st.com

In order to qualify you must use an “approved” lender like Rick Anderton at Security Home Mortgage. You can reach Rick regarding the Home Run 2 Grant at (801) 414-8055 or by email at rick@lendutah.com. He can answer any further questions about qualifications but you need to hurry. Only about 1,000 grants have been authorized for the entire state of Utah. And don’t forget to tell Rick that Khayyam sent you!!!

Reprinted from Realtor.org

If you’re applying for a loan to purchase a primary or secondary home, or planning to refinance, you should be aware of a little-publicized new set of federal consumer-protection rules that takes effect July 30.

Among other key changes, the new Federal Reserve guidelines require lenders to give you initial disclosures of your mortgage costs within three business days of your loan application. If you don’t get them, you can pull the plug.

The rule also prohibits lenders from collecting any fees, except a reasonable charge for checking your credit, until you have been given the loan-cost disclosures. This means no more out-of-pocket, upfront application charges until you have received the truth-in-lending disclosures and an annual percentage rate (APR) calculation of those loan costs.

Since many mortgage brokers and lenders traditionally have collected fees covering appraisal, credit and various other charges at the time of application — sometimes amounting to hundreds of dollars — this will be a significant change in procedure for the lending industry.

The rule also prohibits quickie closings on loans by requiring a seven-day waiting period after applicants are handed their early disclosures or the disclosures are mailed. You will now have up to a week to think about the transaction and decide whether it’s right for you. Final truth-in-lending disclosures are due three business days before closing.

Here’s an even more sweeping change for applications on or after July 30: The new Fed rules require lenders to deliver a copy of the real estate appraisal to you three business days before the scheduled closing on the loan.

In the past, even though federal regulations guaranteed that consumers could request and obtain a copy of the appraisal, lenders and home buyers frequently ignored that right. In fact, many consumers had no knowledge of this right because no one in the home purchase, financing or settlement process told them about it.

Now, the timing of the loan closing itself — which is the financial ballgame for loan officers, real estate agents, and title and escrow officials — will be dependent upon your receipt of the appraisal in advance. The exception will be that the three-day rule can be waived if you don’t think receiving the appraisal is necessary.

Another significant change under the new rules: If the APR on the early truth-in-lending disclosure increases by more than one-eighth of a percentage point (0.125), the lender will be required to “redisclose” — provide you a corrected version and allow you an additional seven business days to consider the transaction before settlement.

What might cause the APR to increase following the initial, early disclosure? Lots of things. If you allowed your initial rate on the loan to float with the market but rates increased, you would need to get an amended truth-in-lending disclosure. Or if the lender got inaccurate estimates of costs from a third-party participant in the transaction such as the settlement or escrow company. Or if unexpected, 11th-hour junk fees materialize.

All of these events, which have been frequent sources of consumer complaints this decade, could force the lender to redisclose loan costs and set back timing for the settlement.

What are some of the likely repercussions of the Fed’s new mandates? First, the traditional approach of aiming in advance for a date-certain settlement target for home loan transactions almost certainly will be affected. Actual closing dates will be more closely tied to lenders’ and settlement agents’ accurate estimates and their ability to deliver disclosures and appraisals by the required dates. For example, if appraisers are backlogged and can’t produce valuation reports quickly enough, settlements will have to be postponed.

Second, the purposes of the rules are to afford consumers better access to and more time to consider key elements of what, for most people, are major financial transactions. There might be fewer instances of last-minute closing-date surprises on fees, where buyers are slammed with hundreds of dollars of charges they never expected. But nobody can say that for sure.

Finally, the rules may well trigger new waves of litigation if lenders and their business partners are not scrupulous in their compliance. There is an aggressive segment of the legal profession that specializes in going after banks and mortgage companies for truth-in-lending violations. Don’t be surprised if you hear of lawsuits seeking cancellation of mortgage deals because timing deadlines were not met or appraisals were not received.

As David Berenbaum, executive vice president of the National Community Reinvestment Coalition, put it in an e-mail comment: “Consumer advocates will closely monitor” compliance with the new Fed regulations, and the lending industry can expect “civil litigation against bad actors.”

Kenneth R. Harney’s e-mail address is kenharney@earthlink.net.

First time home buyers can now utilize their tax credit toward the purchase of their homes. But this money comes with some stipulations. FHA still requires that the buyer bring 3.5% of the purchase price as a down payments, however, the tax credit can be used to lower their principal balance, closing costs, buy-downs, etc.

The tax credit money is utilized through a bridge loan (a short term loan). Some other states have already implemented plans to help these first-time home buyers to utilize their tax credits. These states include Colorado, Missouri, New Jersey, Pennsylvania, Tennessee and Washington. Each of these states has created a different plan for utilizing the credit but it has allowed many new homeowner buy their homes without completely depleting their cash reserves.

The FHA loan limits for Salt Lake County are as follows:
Single Family Home – $729,750
Duplex (2-family) – $934,200
Triplex (3-family) – $1,129,250
4-plex (4-family) – $1,403,400

These limits were effective as of Wednesday, February 25, 2009.
For more current info check at HUD.gov

According to a recent news article in The Arizona Republic, “HUD says bridge-loan program hasn’t been killed.” There are still some details to be worked out before this program becomes official but it will be a fantastic program to help first-time home owners utilize their tax credit to buy their first home and capitalize on the record low interest rates of today’s market.