Wednesday, December 24, 2008

$300 billion FHA rescue funds available to homeowners -- with a hitch

From the Inland Empire & Inland Valley Breaking News:

A $300 billion Federal Housing Administration rescue plan aimed at cutting troubled homeowners' monthly payments by hundreds of dollars a month is available to lenders willing to use it.The White House has said the Hope for Homeowners plan has the potential of keeping as many as 400,000 homeowners from going into foreclosure.

But there's a hitch.

Kurt Eggert, a Chapman University law professor and former member of the Federal Reserve Board's Consumer Advisory Council, said the FHA program's challenge is to "build in enough motivation for the financial industry to play along."

For some banks, that motivation is in offering the same high-dollar incentives to loan officers and independent mortgage brokers that were offered before the housing crash, according to mortgage industry insiders in Washington, D.C.

The fear is that these middle men will use the rescue plan to once again line their pockets by putting borrowers into loans with inflated interest rates, which means higher monthly mortgage payments than what some of the plan's proponents intended."

They have to give lenders something so they'll do the FHA refinances, and so mortgage brokers will handle it," Eggert said. "The challenge is, how much do you give them? Certainly we don't want to give (loan officers and brokers) so much where we have a repeat of the abuses of the past, where borrowers were jammed into loans that weren't appropriate for them. I don't know if they've struck that balance."

On Oct. 1, FHA started administering the rescue program, which is mandated by the 2008 Housing and Economic Recovery Act.

The program doesn't put credit-score requirements on borrowers, whose scores drop with every payment they've missed. But there are no provisions mandating that banks and lenders buy into that approach.In fact, some mortgage lenders plan on turning away homeowners with credit scores below 580, sources in Washington, D.C., say.

For homeowners with credit scores above 580, and who are upside-down in their loans, mortgage lenders would write new government-backed mortgages. Upside-down homeowners are those who owe more on their mortgages than their properties are worth.

The new loans would be written based on a home's current value, which likely would be drastically lower than the original mortgage.Writing down these mortgages means huge losses for the lenders. Still, many homeowners with rewritten loans will be able to keep their homes, which lets the banks bypass the higher cost of foreclosure.

That's a win for all parties.But there's no provision in the law that stops lenders from shifting qualified borrowers into higher-cost loans, which is how much of the current mortgage mess was created.Because of this, lenders may push financially fragile homeowners into loans that generate extra income for independent mortgage brokers and bank loan officers.

The higher income comes through an incentive called a yield-spread premium, which allows independent brokers and bank loan officers to make more money when they sell a loan with a higher interest rate.And if a debt-straddled homeowner still ends up defaulting on the mortgage and goes into foreclosure, the lender is assured to be paid in full by the U.S. government.

Bill Glavin, special assistant to the FHA commissioner, said his agency has no control over banks and lenders' decision to do that."There's not much we can do about that," Glavin said.Congressman Joe Baca, D-San Bernardino and co-author of the Hope for Homeowners program, said a provision in the program forces independent brokers to disclose details on those higher-cost loans in a loan document's closing statement.

That's nothing new. Independent brokers are already mandated to do that by the Real Estate Settlement Procedures Act of 1974.But given their complexity, it's very possible some borrowers simply won't understand the yield-spread premiums -- a common occurrence during the housing boom.

And federal real-estate law has never required banks to disclose details on yield-spread premiums. Borrowers dealing with a bank loan officer may ask to see paperwork which shows the amount the officer is making on the deal, but the bank isn't required to show customers that information.

The problem with regulating yield-spread premiums: There's a higher chance that banks and lenders wouldn't participate in the FHA program if they can't use incentives, Baca said.

But if troubled homeowners getting loans through Hope for Homeowners don't understand how to read yield-spread premiums, there's a higher chance they'll sign off on these loans and never know how much money their independent brokers or bank loan officers made, said mortgage broker Paul Ostrowski, owner of Anaheim-based

Borrowers will most likely be paying higher mortgage rates than if they understood the yield-spread premium incentive and decided to shop around for a better deal, he said.Ostrowski and others are questioning why lenders are using this incentive model with a program that's backed by taxpayer money.

Some FHA participants on the brink of foreclosure might end up losing their homes anyway. Those FHA mortgages are government-insured, which means the government is holding the bag on any loans that go belly up.

Ostrowski, who has deep roots in the mortgage industry, worked as a home-loan officer for Wells Fargo in 2004 when the housing boom and subprime market were in full swing."I realized back then that there were going to be major problems because of the loans given to borrowers," he said.

Now, Ostrowski said, he's bewildered at banks and lenders being allowed to put their own spin on the FHA program.Martin Eakes, chief executive officer of the Durham, N.C.-based Center for Responsible Lending -- a nonprofit research and policy group -- said it's just not right."

If lenders are indeed using yield-spread premiums or credit scores to encourage mortgage brokers to steer distressed homeowners into FHA-backed loans that are more expensive than they need be, that is ethically outrageous and certainly not what Congress intended for this program," he said.

Yield Spread Premium: What You Need to Know (from the RefiAdviser)

The number one reason homeowners overpay for their mortgage loans is a little known fee known as Yield Spread Premium. Yield Spread Premium is so bad that the Secretary of Housing and Urban Development was recently quoted that American homeowners will overpay sixteen billion dollars this year alone.

What is Yield Spread Premium? Simply put Yield Spread Premium is the markup of your mortgage interest rate for a commission by the mortgage company or broker. The problem with this markup is that it is rarely disclosed and will cost you in addition to any other fees you pay for loan origination.

Here’s an example of how hidden Yield Spread Premium drives up your monthly mortgage payment costing you thousands of dollars unnecessarily. Suppose you are refinancing your existing home loan for $350,000. Your mortgage company quotes you a mortgage rate of 6.25% and charges you an origination fee of 3% for their part in arranging your loan. This means you will be required to pay $10,500 at closing for loan origination.

What your mortgage company isn’t telling you is that you actually qualified for a 5.5% mortgage rate and they have marked it up for a commission from the lender. The lender behind your loan rewards the mortgage company or broker for overcharging you by paying one percent of your loan amount for every .25% they markup your mortgage rate. In this example the mortgage company was paid an additional $10,500 for overcharging you in addition to the $10,500 you’re paying for loan origination. That’s right; your mortgage company doubled their commission by lying to you about your mortgage rate.

What does this mean for your monthly mortgage payment? With the mortgage rate you got at 6.25% your monthly payment will be $2155. If you had gotten the mortgage rate you deserve at 5.5% your payment would have been only $1980. That’s a difference of $175 per month or $2,100 you’re overpaying every year!

There is good news today since you’ve found this website. The free mortgage videos available online will show you how to avoid Yield Spread Premium when refinancing your mortgage and will get a wholesale mortgage rate. You will also learn which fees charged by the mortgage company and broker are garbage and can be avoided. There are a number of fees mortgage companies and brokers charge like rate lock fees that are complete garbage…if you want the best deal for your home loan you’ll need to avoid these fees in addition to Yield Spread Premium.

HUD Dumps Limits on FHA Origination Fees (Peter G. Miller at FHALoanPros)

As a parting gift to the lending industry, HUD has published its final rule to “Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs.”

“Millions of families go to the settlement table each year without clearly understanding what they are paying for,” says HUD Secretary Steve Preston. “In many respects, it’s clear that the current way people buy and refinance their homes isn’t serving us very well at all and has contributed to the current housing crisis.”

But, oh my, buried on page 68227 what do we find but a decision to dump limits on loan origination fees.Previously FHA mortgage borrowers were protected because HUD limited origination fees to 1 percent of the mortgage amount for most FHA loans. However, with the new final rule, the limitations are out and borrower beware is in.

Why? Because HUD says that its new good faith estimate (GFE) forms should protect borrowers.

What’s remarkable about HUD’s explanation of the matter is that its proposed ruling was opposed by the National Community Reinvestment Coalition. No one, apparently, agreed with HUD’s position otherwise another comment would surely have been cited.

No matter. HUD did what it was going to do in a last-minute ruling that the new Administration will have to undo. Meanwhile, borrowers have still-another complexity with which to deal.
ruling and comment are below.

3. FHA Limitation on Origination Fees of Mortgagees
Under its codified regulations, HUD places specific limits on the amount a mortgagee may collect from a mortgagor to compensate the mortgagee for expenses incurred in originating and closing a FHA-insured mortgage loan (see 24 CFR 203.27).1 The March 2008 proposed rule would have removed the current specific limitations on the amounts mortgagees are presently allowed to charge borrowers directly for originating and closing an FHA loan. Under HUD’s proposal, the FHA Commissioner would have retained authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan. In addition, the proposed rule would have also permitted other government program charges to be disclosed on the blank lines in Section 800 of the HUD1/1A.

There was little comment on this issue. NCRC (the National Community Reinvestment Coalition) disagreed with the proposal to remove the specific limitations on the amount mortgagees are allowed to charge for originating and closing an FHA loan. NCRC stated that a government-guaranteed loan product should shield borrowers from excessive charges by establishing reasonable limits on fees. According to NCRC, while it may be acceptable to carefully raise origination fee limits, this should be done only in conjunction with establishing reasonable limits on YSPs. This commenter stated that by establishing standard limits on origination fees and YSPs, the FHA loan product can keep the nongovernment guaranteed products competing by constraining direct fee and YSP costs.

HUD Determination
HUD believes that its RESPA policy statements on lender payments to mortgage brokers restrict the total origination charges for mortgages, including FHA mortgages, to reasonable compensation for goods, facilities, or services. (See Statement of Policy 1999-1, 64 FR 10080, March 1, 1999, and Statement of Policy 2001-1, 66 FR 53052, October 18, 2001.) Moreover, the improvements to the disclosure requirements for all loans sought to be achieved as a result of this rulemaking should make total loan charges more transparent and allow market forces to lower these charges for all borrowers, including FHA borrowers. Therefore, HUD has determined to finalize the proposed rule to remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan. The FHA Commissioner retains authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan.

Note 1: Under 24 CFR 203.27(a)(2)(i), origination fees are limited to one percent of the mortgage amount. For new construction involving construction advances, that charge may be increased to a maximum of 2.5 percent of the original principal amount of the mortgage to compensate the mortgagee for necessary inspections and administrative costs connected with making construction advances. For mortgages on properties requiring repair or rehabilitation, mortgagor charges may be assessed at a maximum of 2.5 percent of the mortgage attributable to the repair or rehabilitation, plus one percent on the balance of the mortgage. (See 24 CFR 203.27(a)(2)(ii), and (iii).)

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