With the election in the rearview mirror, it’s time to start speculating on what the next four years will mean to the mortgage and housing industry.
When President Barack Obama took office in January 2009, the housing and credit markets were in shambles. Foreclosures were rising and a “short sale” was becoming a part of a Realtors’ dictionary and skill set.
Mortgage rates were beginning their downward slide from the 5 percent range to 4 percent to where they are now, the 3 percent territory for a 30-year fixed rate.
The squeeze on money for jumbo loans that were beyond the realm of Fannie Mae and Freddie Mac was suffocating, and money that was available was high-priced. Slowly, the nonconforming jumbo market has been revived and banks have become more willing to lend with competitive rates.
Four years ago, flexible and common sense underwriting for mortgages was replaced with strict guidelines and multiple overlays by investors who sought to ensure that every loan was going to be a perfect, airtight investment that would never be subject to a buyback. That is still the case.
The administration did address the need to help homeowners who had lost 20 to 40 percent of the equity in their homes, leaving them underwater, by enacting the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program. Over the years the programs have been tweaked and refined to help those homeowners, but more can be done.
HARP is limited to those homeowners who had a Fannie Mae- or Freddie Mac-owned or guaranteed mortgage that was sold to those government agencies prior to June 1, 2009. I am sure there is a good reason why June 1 was picked, but the reality is that homeowners who purchased homes on June 2, 2009, and well into 2010 and even into 2011 have lost equity. My suggestion is for the government to open up the program to those homeowners who had loans that were sold to Fannie or Freddie by Dec. 31, 2010. That would help millions of borrowers to participate in the lower rates that are now available.
In addition, hopefully the U.S. Department of Housing and Urban Development and Congress will pay some attention to the other millions of homeowners who are underwater but whose loans are not owned or guaranteed by Fannie or Freddie. There must be some enticement for those lending institutions to help out those homeowners.
There is a sense that foreclosures are slowing and that short sales will become fewer as home values continue to stabilize, or — even in some sought-after neighborhoods — rise. However, there is little talk about the millions of underwater homeowners who in the next few years will see their very affordable interest-only first mortgages turn into principal-and-interest payments with shorter amortizations. Similarly, those who have home equity loans under interest-only payments will see likewise recalculations.
For example, many homeowners in 2004 took out a 30-year fixed rate mortgage with a 10-year interest-only period. After the 10 years, the remaining balance is amortized over the final 20 years of the loan. So what does that do to the borrower’s payment?
If their rate was 6 percent, and the original loan amount of $300,000 remains, the interest-only payment is $1,500. In 2015, that payment will become $2,149, a nearly $650 monthly increase.
The homeowner can’t refinance because the house has lost too much value and the combined housing payments may be too burdensome. Now, a previously “on-time” borrower may be under duress and may not be able to make the new higher payments and a new wave of foreclosures may be just around the corner.
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Likewise, Congress needs to address the soon-to-expire Mortgage Forgiveness Debt Relief Act of 2007. This act provided an exemption for any income tax on debt forgiveness for money used to purchase, or make improvements to, a principal residence.
Prior to the act, if you agreed to a short sale with your lender, you would be required to pay tax on the difference between what you owed and what you agreed to sell for. That was viewed as a significant hardship for the homeowners and an impediment to those seeking short sales.
The act is set to expire at the end of this year. Hopefully the lame duck session of Congress will take this up and significantly extend this act. This is certainly a middle-class concern, and if the Obama campaign was all about the middle class, then hopefully his administration will champion the extension of this act.
Robert Nusgart is a loan officer with Mortgage Master Inc. in Baltimore. He can be reached at 443-632-0858 or by email at [email protected] Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.