Pam Marron Home Lending

3 Equity Solutions for Homeowners Who Want to Stay

3 SOLUTIONS for Underwater Homeowners to Gain Back Equity NOW:
  • RH Reward
  • HARP 2.0 (for FNMA/FHLMC loans) 
  • NEW proposed Obama Plan (for non-FNMA/FHLMC loans) that needs our support to get through Congress! 

1) Responsible Homeowner Reward

Benefit: A solution to stay… “If I stay current on my payment, the bank will return a portion of my lost equity.”

        See Video:Mortgage Default Solution - RHR

Loan Value Group (LVG), a private New Jersey investment firm, came up with the Responsible Homeowner Reward (RHR) Program in 2010. This program works through banks and investors, giving back a small percentage of equity to underwater homeowners who continue to make their payments on time for the next 3 to 5 years.

Here’s how it works. Borrowers pay nothing. They sign up with the program, promising to keep current on their mortgages for a certain period, generally 36 to 60 months, worked out with the participating lender/investor.

After that period, the borrower will be paid anywhere from 10 to 30% of the loan principal, depending on the contract with their lender/investor. The lender/investor pays LVG a servicing fee, and LVG pays the borrowers. Again, the borrowers pay nothing for this equity bonus.

To date, 38 states have borrowers enrolled in the LVG program, totaling approximately 10,000, according to LVG. The largest numbers of borrowers are from the hardest hit states, California, Florida, Arizona, Nevada and Michigan.

All of those states have achieved greater than 50% reduction in default rates than respective control group.

By targeting borrowers with the most negative equity and therefore at the greatest risk of strategic default, lenders and investors are cutting their losses by keeping the borrowers current. The lender/investor stands to lose more in a foreclosure.

For more information, click here.

 

 2) HARP 2.0 (Home Affordable Refinance Program)

This program allows for FNMA and FHLMC current mortgage holders to refinance with no maximum loan to value! Program available through current servicers and other participating lenders effective March 12th! This refinance program available to current paying mortgage holders:

  • Reducing monthly principal and interest payments
  • Reducing interest rate
  • Reducing amortization period (strongly suggested to gain back equity quicker!)
  • Moving from a more risky loan (interest only or short term ARM) to a stable product

The HARP 2.0 program provides for:

  • Manual underwriting by current servicer
  • Automated approval/underwriting by any lender
  • Expanded approvals and no max. ratios with automated underwriting
  • Unlimited LTV! Solution for borrowers with LTVs above 80% who currently cannot refinance due to MI restrictions
  • Can be owner occupied, 2nd home or investment property
  • Can combine with subordinate financing but must be re-subordinated
  • Principal reduction of loan can be made
  • Closing costs can be included in loan

Restrictions:

  • Must be FNMA or FHLMC loan (to determine is you have an acceptable FNMA or FHLMC loan: www.freddiemac.com/ my mortgage or http://www.fanniemae.com/loanlookup/
  • Specific times loan needs to have been originated
  • On manual underwrites, these guidelines apply: min. credit score of 620, max. DTI of 45%, verif. of all income sources/amounts, verif. of assets if applied.

What’s the difference between HARP and HAMP (Home Affordable Modification Program)?

  • HARP is a refinance to a lower rate or shorter term, with capped closing costs that can be rolled into the loan, increasing the principal balance of the loan.
  • HAMP is a modification, where the payment is temporarily reduced to a lower rate for a period of 5 yrs., then escalates 1%/yr for 3 yrs after, with a capped rate in the 8th yr. The difference not paid of the note rate is added to the back of the loan, increasing the principal balance by this amount. 

 3) NEW proposed Obama Plan: (Not yet approved by Congress, provides FHA refinance for non-FNMA/FHLMC mortgages!)

For more, go to  FACT SHEET: President Obama’s Plan to Help Responsible Homeowners and Heal the Housing Market 

Simple and straightforward eligibility criteria: Any borrower with a loan that is not currently guaranteed by the GSEs can qualify if they meet the following criteria:

• They are current on their mortgage: Borrowers will need to have been current on their loan for the past 6 months and have missed no more than one payment in the 6 months prior.
• They meet a minimum credit score. Borrowers must have a current FICO score of 580 to be eligible. Approximately 9 in 10 borrowers have a credit score adequate to meet that requirement.
• They have a loan that is no larger than the current FHA conforming loan limits in their area: Currently, FHA limits vary geographically with the median area home price – set at $271,050 in lowest cost areas and as high as $729,750 in the highest cost areas
• The loan they are refinancing is for a single family, owner-occupied principal residence.  This will ensure that the program is focused on responsible homeowners trying to stay in their homes.

Streamlined application process: Borrowers will apply through a streamlined process designed to make it simpler and less expensive for borrowers and lenders to refinance. Borrowers will not be required to submit a new appraisal or tax return. To determine a borrower’s eligibility, a lender need only confirm that the borrower is employed. (Those who are not employed may still be eligible if they meet the other requirements and present limited credit risk. However, a lender will need to perform a full underwriting of these borrowers to determine whether they are a good fit for the program.)

Program parameters to reduce program cost: The President’s plan includes additional steps to reduce program costs, including:

• Establishing loan-to-value limits for these loans. The Administration will work with Congress to establish risk-mitigation measures which could include requiring lenders interested in refinancing deeply underwater loans (e.g. greater than 140 LTV) to write down the balance of these loans before they qualify. This would reduce the risk associated with the program and relieve the strain of negative equity on the borrower.
• Creating a separate fund for new streamlined refinancing program. This will help the FHA better track and manage the risk involved and ensure that it has no effect on the operation of the existing Mutual Mortgage Insurance (MMI) fund.

• Refinancing Plan Will Be Fully Paid For By a Portion of Fee on Largest Financial Institutions: The Administration estimates the cost of its refinancing plan will be in the range of $5 to $10 billion, depending on exact parameters and take-up. This cost will be fully offset by using a portion of the President’s proposed Financial Crisis Responsibility Fee, which imposes a fee on the largest financial institutions based on their size and the riskiness of their activities – ensuring that the program does not add a dime to the deficit.

 … and the best part of this plan to help gain equity back….

• Giving Borrowers the Chance to Rebuild Equity in their Homes Through Refinancing: All underwater borrowers who decide to participate in either HARP or the refinancing program through the FHA outlined above will have a choice: they can take the benefit of the reduced interest rate in the form of lower monthly payments, or they can apply that savings to rebuilding equity in their homes. The latter course, when combined with a shorter loan term of 20 years, will give the majority of underwater borrowers the chance to get back above water within five years, or less.

To encourage borrowers to make the decision to rebuild equity in their homes, we are proposing that the legislation provide for the GSEs and FHA to cover the closing costs of borrowers who chose this option – a benefit averaging about $3,000 per homeowner. To be eligible, a participant in either program must agree to refinance into a loan with a no more than 20 year term with monthly payments roughly equal to those they make under their current loan. For those who agree to these terms, the lender will receive payment for all closing costs directly from the GSEs or the FHA, depending on the entity involved.

EXAMPLE: How Rebuilding Equity Can Benefit a Borrower

 A borrower has a 6.5 percent $214,000 30-year mortgage originated in 2006. It now has an outstanding balance of $200,000, but the house is worth $160,000 (a loan-to-value ratio of 125). The monthly payment on this mortgage is $1,350.

 While this borrower is responsibly paying her monthly mortgage, she is locked out of refinancing.

 By refinancing into a 4.25 percent 30-year mortgage loan, this borrower will reduce her monthly payment by $370. However, after five years her mortgage balance will remain at $182,000.

 Under the rebuilding equity program, the borrower would refinance into a 20-year mortgage at 3.75 percent and commit her monthly savings to paying down principal. After five years, her mortgage balance would decline to $152,000, bringing the borrower above water.

 If the borrower took this option, the GSEs or FHA would also cover her closing costs – potentially saving her about $3,000.

Marron’s recommendation for BEST SOLUTION to Escalate Equity in Underwater Properties:

HARP 2.0   x 20 year (or less) amortization at lower interest rate    +    RH Reward   =   Maximum Equity

New Obama Plan   x 20 year (or less) amortization at lower interest rate    +    RH Reward   =   Maximum Equity

Banks are reluctant to do principal reductions.  So, RH Reward joined with HARP 2.0 or new Obama plan TOGETHER  provide the greatest escalation of equity!