New Fannie and Freddie Teaser Rate Program (AKA the NEW Streamlined Loan Mod)
New Fannie and Freddie Teaser Rate Program (AKA the NEW Streamlined Loan Mod)
The new Streamlined Loan Modification introduced today, is more than meets the eye. The program is essentially a New Teaser Rate Loan Program that could do more harm than good!
To qualify for the new program a Borrower must be 90 days down on their mortgage (3 Months late/delinquency). Must have a loan that >90% of appraised value.
New Loan will be based on a rate between 3-4%, and borrowers Debt to Income must not be greater than 38% (i.e. $3,500 income new mortgage no greater than $1,330). The current deficiency (3 months mortgage) is placed in arrears (added to the back). Please note at a 3%, minimal principle will be eliminated, there is also talk of the loans being interest only (zero principle eliminated). The Terms will be extended from ARMs to Fixed. The Frozen Principle and Arrears is still due on sell i.e. a Balloon Payment.
The pitfalls:
· The mortgage has to be a Fannie or Freddie loan, not a serviced loan.
· If the home is in a declining market, and the current amount owed is more than it is worth or teetering on the edge (90% mighty closes). When the borrower decides to sell they will have a balloon/balance owed (Loan balance modified at $150k home is in a declining market, borrower decides to sell in 2-3yr after getting back on their feet and home is only worth $100k. Borrower will owe the remaining/deficiency of $50k.)
· In the previous bullet the borrower maybe better of just defaulting now vs. dragging it out.
· If the borrower is currently behind 90 days and there ARM has not adjusted, and they have not lost their Job or have an extenuating circumstances for delinquency, “The borrower does not deserve the Mod”; they most likely don’t have the ability or integrity to pay their current obligations, why should we assume they will pay the modified payment.
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· This could entice individuals to default and ask for the Loan Mod. “Hey my home is in a declining market, it’s not what it was worth 2 years ago, I have a fixed rate of 6%, but would Sure like a 3% fixed rate.”
Overall this is not a Fix just another finger in the dam.
We need to accelerate the foreclosures, reduce business taxes (spur employment), Invest in R&D (create new jobs), loosen loan guidelines, create incentives for both First Time Homebuyers and Investors, place a temporary freeze on new building. New loan should require to be closed with 6 months of PITI in escrow. Leave Fed Funds where it is! It does not need to be cut, the warmth of the economy will thaw the credit freeze and we will start to see the effects of the previous cuts take que.
(image: CNN/Money)
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Great Post! Speaking as a homeowner that purchased in 2006 and lives within my means, I think it is fair. I was sick at the idea of people that overextended themselves getting a freebee on their principal! But I agree this will drag out the situation. Your recipe at the end of the post for getting us out of this mess is right on.