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Interesting article on how to purchase a foreclosure or short sale home
http://blog.seattlepi.com/intelligentinvestor/archives/212001.asp
The above link provides an exhaustive outline of what someone interested in purchasing a foreclosure/short sale home should consider.
Housing market continues to struggle
This article in Business Week outlines the ongoing (and troubling) picture of the US housing market:
Suit filed against Bank of America over alleged failure to disburse TARP funds
A Seattle law firm, Hagens Berman Sobol & Shapiro, has filed a lawsuit against Bank of America over its apparent failure to satisfactorily distribute TARP funds to stem foreclosures.
According to a press release by Hagens Berman, Bank of America has made an “affirmative decision to slow the loan modification process for reasons that are solely in the bank’s financial interests.”
It will be interesting to monitor how this suit develops, as it strikes at the core issue of whether the government’s injection of capital into the banking market actually resulted in a positive result.
If at first you don’t succeed, try, try again! The federal government takes another shot at curbing the foreclosure crisis
After the first attempt by the Obama Administration to stem the foreclosure tide fell flat (only a fraction of eligible home owners facing foreclosure secured permanent modifications), the federal government is proposing a broad new initiative.
The New York Times reports that the government will now try to reduce the principal for home loan modifications. To do this, it intends to provide a program by which those who are “underwater” (home value less than what is owed) can refinance into a government-backed mortgage.
This is significant because most (if not all) loan modifications up to now consisted of banks largely shifting interest rates and extending payment terms. Thus, the actual principal of the loan was never really effected, merely the interest. As a result, the underlying problem which plagued a lot of homeowners was never truly addressed (that they simply had purchased homes which were beyond their budget).
To fund this new program, the government intends to utilize $50 billion funds previously allotted to the Troubled Asset Relief Program, more commonly known as “TARP.” Though reaction from many non-profit groups is generally positive, it remains to be seen whether banks will cooperate with the new program.
Understanding debt-to-income ratios and how they relate to loan modifications
In determining whether to grant a loan modification, there are generally three central factors that a lender takes into consideration: 1) the financial hardship of the borrower; 2) whether the borrower is currently delinquent on mortgage payments or is at risk of becoming delinquent in the immediate future; and 3) the borrower’s debt-to-income ratios. While the first two factors seem relatively straightforward, understanding your debt-to-income ratios is oftentimes confusing and may seem complex.
What is a debt-to-income ratio?
Simply put, a “debt-to-income ratio” (DTI) is the percentage of a homeowner’s grossmonthly income that goes toward paying the homeowner’s debts. In the context of a home loan modification, two DTI ratios are considered: a “front-end” DTI ratio and a “back-end” DTI ratio.
Why are Your Debt-to-Income Ratios Important?
Because lenders want to avoid as much risk as possible, they will pay special attention to your DTI ratios. In essence, lenders use your DTI ratios as indicators of your ability to repay your debts. Therefore, if your DTI ratios are low, lenders may be more inclined to assist you because they believe that you have a higher probability of repaying your debts. On the other hand, if your DTI ratios are high, lenders may be less likely to assist you because they believe you have a lower probability of repaying your debts (and, therefore, you are a greater risk).
Because your DTI ratios play such a significant role in the home loan modification process, it is a good idea for you to do a rough calculation of your own front-end and back-end DTI ratios before seeking a loan modification. By doing your own calculation, you can estimate whether a lender is more likely or less likely to grant you a loan modification.
How Do You Calculate Your Front-end DTI Ratio?
To calculate your front-end DTI ratio, you divide your total “monthly house payment” by your gross monthly household income:
Monthly House Payment ÷ Gross Monthly Household Income= Front-end DTI Ratio
Your “monthly house payment” is often referred to as “PITIA.” “PITIA” is defined as principal, interest, taxes, insurance (including homeowners insurance and hazard and flood insurance) and homeowners association fees (if applicable). Note that if you pay property taxes, insurance, and/or homeowners association fees separately from you mortgage principal and interest, these expenses need to be added to your total “monthly house payment.”
Examples
1) Mr. Smith’s monthly house payment is $1,100. Mr. Smith is a carpenter and his gross monthly household income is $2,700. To figure out his front-end DTI ratio, Mr. Smith takes the amount of his monthly house payment ($1,300) and divides it by the amount of his gross monthly household income ($2,700). Mr. Smith’s front-end DTI ratio is 40.7%, because $1,300 ÷ $2,700= 40.7%.
2) Mr. and Mrs. Baker’s monthly house payment is $1,900. Mr. Baker is an electrician and his gross monthly income is $2,800. Mrs. Baker is a seamstress and her gross monthly income is $1,200. Combined, Mr. and Mrs. Baker’s gross monthly household income is $4,000. To figure out their front-end DTI ratio, the Bakers take the amount of their monthly house payment ($1,900) and divide it by the amount of their gross monthly household income ($4,000). The Bakers’ front-end DTI ratio is 47.5%, because $1,900 ÷ $4,000= 47.5%.
How Do You Calculate Your Back-end DTI Ratio?
To calculate your back-end DTI ratio, you add up all of your monthly debt payments (do not include any expenses that are not listed on your credit report), which may include:
· Your “house payment” or PITIA (this was used in calculating your front-end DTI)
· Credit card payments
· Automobile loan or lease payments
· Alimony/child support
· Educational/student loan payments
· Any personal loans
· Any other accounts reported in your credit reports
After adding all of these monthly debts up, you then take the total and divide it by your total gross monthly household income:
Monthly Debt Payments ÷ Gross Monthly Household Income= Back-end DTI Ratio
Examples
1) Mr. Smith’s monthly debt payments come out to $1,700 ($1,100 for his monthly house payment, $300 for his car loan, and $300 for alimony). Mr. Smith is a carpenter and his gross monthly household income is $2,700. To figure out his back-end DTI ratio, Mr. Smith takes the amount of his monthly debt payments ($1,700) and divides it by the amount of his gross monthly household income ($2,700). Mr. Smith’s back-end DTI ratio is 62.9%, because $1,700 ÷ $2,700= 62.9%.
2) Mr. and Mrs. Baker’s monthly debt payments come out to $2,300 ($1,900 for their monthly house payment, $200 for their car lease, and $200 in credit card payments). Mr. Baker is an electrician and his gross monthly income is $2,800. Mrs. Baker is a seamstress and her gross monthly income is $1,200. Combined, Mr. and Mrs. Baker’s gross monthly household income is $4,000. To figure out their back-end DTI ratio, the Bakers take the amount of their monthly debt payments ($2,300) and divide it by the amount of their gross monthly household income ($4,000). The Bakers’ back-end DTI ratio is 57.5%, because $2,300 ÷ $4,000= 57.5%.
3) Ms. Garcia’s monthly debt payments come out to $1,600. Ms. Garcia is a civil engineer and her gross monthly income is $5,000. To figure out her back-end DTI ratio, Ms. Garcia takes the amount of her monthly debt payments ($1,600) and divides it by the amount of her gross monthly household income ($5,000). Ms. Garcia’s back-end DTI ratio is 32%, because $1,600 ÷ $5,000= 32%.
Why Do Your DTI Ratios Matter and What Should You Do?
Today, lenders have specific target ranges and limitations on allowable DTI ratios for loan modifications. Although your lender may have slightly differing DTI ratio targets and limitations, most lenders are willing to grant loan modification to homeowner’s whose DTI ratios are below 50%. Remember, lenders want to avoid risk and only want to extend loan modifications to homeowners who have a high probability of repaying their debts.
Therefore, it is a good idea for you to do your own initial front-end and back-end DTI calculations so that you can get a general sense of whether a lender is more likely or less likely to grant you a loan modification. When doing these calculations keep in mind that DTI ratios well below 50% are ideal. Doing these calculations can save you time in determining whether a loan modification is right for you or whether another option might be more advantageous to you in protecting your house.
As always, remember that the earlier you look into the requirements of loan modifications and begin the process, the better. Start by doing your own front-end and back-end DTI calculations and go from there. If you have questions, do not hesitate to ask for help. Also, remember that a qualified attorney who has experience in working with loan modifications can be extremely beneficial to you and can assist you in working directly with your lender and in protecting your interests.
Bankruptcy: what are my options?
For people experiencing severe financial difficulties and who are overwhelmed with debt, bankruptcy may be an important option. Whether difficult times are brought on by job loss, medical problems, family breakups, or even financial irresponsibility, bankruptcy can grant you much desired relief. Understanding some basic principles of consumer bankruptcy, however, is imperative in knowing which form of bankruptcy is appropriate.
Within bankruptcy law, there are several different “chapters.” Each “chapter” is specifically designed to help either individuals or businesses in eliminating, resolving, and/or repaying their debts. Selecting which bankruptcy chapter to proceed under, depends on the individual’s or business’s specific circumstances. For individuals (“consumers”) who are seeking relief through the bankruptcy process, two chapters are available: Chapter 7 and Chapter 13. These two bankruptcy chapters differ significantly and offer different results.
Chapter 7 Bankruptcy
Chapter 7 is commonly referred to as “liquidation bankruptcy.” When an individual proceeds under Chapter 7, a trustee is appointed by the bankruptcy court. The trustee then gathers all of the individual’s property (except any property that is exempt), sells (“liquidates”) it, and distributes the proceeds of the sale to the individual’s creditors. At the end of this process, any outstanding debts are discharged (eliminated). The creditors then chalk-up their losses and move on, while the individual must start anew with very little assets leftover. The Chapter 7 process generally takes about four to six months.
Not everyone is allowed to proceed under Chapter 7, however. To be eligible under Chapter 7, an individual must pass the “means test” (a mechanical formula that is used to determine who can and cannot repay some debt.) If it is determined by the court that the individual’s “current monthly income” is above a certain amount and the individual has the ability to repay some debt, the individual may be denied Chapter 7 relief and may be forced to proceed under Chapter 13. Most people who meet the eligibility requirements proceed under Chapter 7 because, unlike Chapter 13, Chapter 7 takes less time to complete and does not require the individual to pay back any portion of his or her debts.
Chapter 13 Bankruptcy
Chapter 13 differs significantly from Chapter 7’s liquidation method. Commonly referred to as an “Adjustment of Debt” or “Wage Earner’s Plan,” Chapter 13 focuses on using the individual’s future earnings, rather than liquidated property, to pay creditors. When an individual files under Chapter 13, a court-approved plan allows the individual to keep all of his or her property, but the individual must pay a portion of all future income to the creditors. This payout plan lasts for three to five years, depending on the circumstances and the court-approved plan. When the individual has completed the agreed payout plan, any remaining obligations are discharged.
Naturally, eligibility to proceed under Chapter 13 requires that an individual must prove that he or she is capable of paying a portion of his or her future monthly income to creditors for a period of three to five years. If the individual’s income is not regular or is too low, Chapter 13 may be denied. Likewise, if the individual’s total amount of debt is too high, the court may deny Chapter 13. Unlike Chapter 7, Chapter 13 takes much more time to complete. However, the major benefit of Chapter 13 is that the individual is allowed to keep his or her property.
Understanding the main differences between Chapter 7 and Chapter 13 can assist you in knowing which form of bankruptcy will most likely work best for you. Keep in mind, however, that because the bankruptcy process is complex and oftentimes requires professional knowledge to be successful, seeking professional help is your best bet.
Loan modification options for property investors (non owner-occupied properties)
The Obama legislation, which passed in March, aimed specifically to assist those in danger of losing their primary residence to foreclosure. It was thought that individuals purchasing property for investment (namely those acquiring property then leasing it out) would not be eligible under the new law.
While that has not changed, our office has seen some interesting movement by banks and loan servicers regarding investment properties. Under many circumstances, even the investor may gain some relief through loan modification.
Banks/servicers largely follow the same pattern as the owner-occupied loan modifications. First, they require a signed forbearance agreement, then they require an extensive disclosure of the investor’s financial status in the form of a “Hardship Packet”. When they have those two things in hand, the servicer/bank will decide whether to modify the loan. The following is what is most often required:
1. Letter describing hardship
2. Last two pay stubs
3. Length of time at current employer
4. One month’s complete bank statement
5. Most recent tax return
6. Statement of your complete income (including family members residing with you)
7. Proof of paid property taxes, homeowners insurance, and HOA fees
8. (If self-employed): (a) Profit/loss statements; (b) three pay stubs; (c) last two years tax returns; and (d) business and personal bank statements.
Loan modifications – Seven things you need to know
The US News and World Report online provides a dynamic breakdown of the basic components of the federally-backed loan modification program.
According to the article, here are “Seven things you need to know” about a loan modification:
1. The plan focuses on payments made to lenders rather than the price of the loan. Experts believe that even if the value of the home possesses little or no equity, if the modified loan payment is affordable, the homeowner will continue making payments.
2. The plan would seek to reduce the mortgage payment to 31 percent of the borrower’s gross monthly income. “To that end, the administration’s plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower’s gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower’s monthly income. In lowering the payment, the servicer would first reduce the interest rate to as low as 2 percent. If that’s not enough to hit the 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that’s still not enough, the servicer would forebear loan principal at no interest.”
3. The plan would then encourage loan servicer participation by providing cash incentives: “To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months.”
4. The plan would only apply to those under financial hardship. Only owner-occupied residences with an outstanding balance of $729,750 or lower would be eligible. (Sorry, no speculators.)
5. The plan will require the loan modification to meet the net present value test. What this means is that the lenders would compare the expected cash flow of the proposed modified loan with the expected cash flow of the loan unmodified. If the modified loan would create more cash flow, then the loan will be modified and or restructured.
6. The plan will offer loan servicers with incentives to extinguish second lienslike home equity lines of credit.
7. The plan may or may not work. (Not the most satisfying conclusion, I know).
Please refer to the full US News and World Report article by Luke Mullins here.