How does the Subprime Crisis Affect My Home?

I've received this question several times from my past customers so I figured it was a topic to cover here.

No doubt, you have heard about the crisis in the subprime mortgage market by now. Subprime mortgage lenders are truly in a tough situation. According to the New York Times over 20 mortgage lenders have already shut down their operations for good. And, many of the top 25 lenders in the nation from 2006 are reporting serious losses, filing for bankruptcy protection, or looking for another company to buy them.

Bill Dallas, former CEO of Ownit Solutions has been quoted as saying that all subprime lenders will be severely hurt by the current market situation. He also stated that 10% – 40% of all borrowers will be affected by tightening credit standards that lenders are adopting in light of this crisis. Anyone looking for a mortgage in the near future will notice tighter qualifying criteria and fewer products available to them.

What happened?

Over the past several years housing prices in the US have been soaring. It has benefitted almost every homeowner in the form of additional equity in their property. Over this time period many lenders had relaxed many of their underwriting guidelines and introduced and/or expanded mortgage product offerings that did not seem as risky as long as the value of homes continued to rise. Some of these products include interest only loans and loans with no down payments – even for applicants with less than perfect credit. Even if the borrowers were in trouble, the increase in equity would allow them to refinance or at least sell their homes for more than they borrowed.

When a mortgage is originated, prime or subprime, the loan is typically sold to a company that combines these mortgages in big pools of loans and then markets them as securities on Wall Street. This is the backbone of the mortgage system in the US and allows lenders to constantly have enough money to lend to borrowers. But, with up to 15% or more of these loans now in default, many of the Wall Street bankers are sending these loans back to the lenders and demanding them to re-purchase these loans. This has crippled many of these lenders.

In addition, mortgage lenders traditionally have warehouse lines of credit from the major commercial banks. This allows them to fund loans until they can be sold to the Wall Street Bankers. Many of these commercial banks have closed or reduced the amount of credit extended to the subprime lenders. This caused them to no longer be able to fund any more loans.

How will this affect my home and my mortgage?

If you are current on your mortgage and do not plan to move or refinance in the near future, the answer is it will not affect you.

If you are planning to move or refinance in the near future you may notice that the underwriting guidelines for many mortgage programs (both prime and subprime) have been tightened. For many people this will simply mean that they need to provide more documentation than they have in the past few years or certain programs may not be as readily available. Many of the interest only mortgages and no income verification loans may require larger down payments that before and/or higher credit scores. But, the impact for you will be limited.

If you are currently late or in default on your mortgage you may be impacted. In the past, if you were late or in default on your mortgage you could always refinance to a subprime mortgage program. Since the value in your home was always rising, there was usually an option for refinancing. Now, with home values flat, or in some cases declining, and the current crisis, there are far fewer options for you. Please contact me, or another experienced loan officer right away, to see what options are available to you.

---

How will Illinois HB 4050 affect you?

Illinois HB 4050, “The Illinois Predatory Lending Database Law,” was a pilot program designed to protect consumers in certain areas of Cook County Illinois from getting into mortgage programs they do not understand or cannot afford, thus, reducing the number of foreclosures in these zip codes.

This law called for all high risk loan applicants to attend counseling provided by approved counseling companies. High risk applicants were defined as:

1) applicants with a FICO score below 620;
2) applicants with a FICO score between 621 and 650 if they are applying for an interest-only loan, a no-income verification loan, an ARM loan with an initial fixed period of less than 3 years, or if the property had been previously financed in the past 12 months;
3) all applicants who applied for a mortgage with a pre-payment penalty and/or possible negative amortization; and
4) all applicants applying for a mortgage with points and fees that total more than 5% of the loan amount.

While this sounds like a great idea, it was disastrous. There were several reasons for this. First, it only applied to a few zip codes in Cook County. Second, it only covered borrowers who applied for a loan with state-registered loan originators – federally chartered banks were exempt (eg. Chase, Bank of America, Citibank, etc.). There was a lot of opposition to this law from title companies, lenders, the Illinois Association of Mortgage Brokers, Realtors, and consumer right advocates. Still, the law went forward.

In December 2006 a report from the University of Illinois reported that the law was not achieving its goals. It showed that the neighborhoods in which the law was active were negatively impacted. The home sales in the affected zip codes declined by over 50% while other similar zip codes not affected by the law only saw a decline in home sales of 20% in the same time period. It also went on to say, in addition to other things, that the law does not offer borrower’s additional consumer protection. You can read the report in its entirety at http://www.sal.uiuc.edu/sparc/research/working-papers/pdf/bates_vanzandt_revised_0131.pdf.

In response to this report, Gov. Blagojevich issued a press release stating he had ordered the Illinois Department of Financial and Professional Regulations (IDFPR), the state department charged with implementing this law, to “immediately suspend the Illinois Predatory Lending Database Pilot Program, also known as HB 4050. You can read this press release at http://www.idfpr.com/newsrls/011907GOVIDFPR4050SUSP.pdf.

This measure was applauded by many consumer advocates, as well as mortgage lenders, brokers and Realtors. It was thought that this was the death of HB 4050.

On March 21, 2007 another press release was released which announced the new rules of HB 4050 – bringing this law back to life: http://www.idfpr.com/newsrls/032107HB4050PressRelease.asp

This time, it applies to ALL zip codes in Cook County which may affect thousands of borrowers per year. These new rules, although not yet confirmed by the IDFPR, apply to the following classes of borrowers:

1) first time homebuyers;
2) borrowers who have not purchased a home in the past three years; and
3) all refinance borrowers. If a borrower is in one of these classes, they may be subject to counseling if the loan they are applying for have any of the following features:
• Interest-only payment
• Possible negative amortization
• Pre-payment penalty
• No-income verification
• A Loan-to-value (LTV) of 100%
• An ARM that adjusts within the first 5 years
• Has points and fees in excess of 5% of the loan amount

The last time this law was in effect, the affected zip codes were adversely affected – now it will affect all of Cook County. A group called the “Concerned Citizens of Cook County” launched a web site (http://www.nocounseling.com) to try to fight the new proposed rules of HB 4050. It gives you a lot of information on the new rules along with their opinion of the rules. It also gives you an easy way to contact the members of the Joint Committee on Administrative Rules (JCAR) – the people who are responsible for making decisions on HB 4050.

As of this writing, I am not sure who comprises the “Concerned Citizens of Cook County.” They could be anybody, and they do not take credit for their actions but rather have a generic yahoo e-mail address. But, the information I found on the web site seems to be accurate and if this law concerns you, this site makes it very easy for you to voice your opinions to JCAR.

If you are a resident of Cook County, and are concerned that you may be affected as adversely as the residents of the first 10 zip codes were by the old rules, you should be concerned. The current 45 day comment period is when you should be contacting JCAR to give your comments and opinions on the law. The 45 day comment period began April 6, 2007.

---

This is not your father’s FHA

Mention the term FHA Mortgage, and you get different responses from different people. If you ask a buyer who was able to purchase a home due to the availability of FHA mortgages, the response is quite favorable. Ask a seller or a Realtor, and the response will be much different.

Many sellers feel FHA mortgages are too restrictive on the seller, costs the seller too much money, requires the property to be perfect, has a million forms to sign, and take too long to close. Many sellers will not accept offers with FHA financing. Most Realtors have horror stories about how long an FHA loan took to close or how much the sellers had to pay for unnecessary repairs to the property.

Many of the negative idea about FHA were not warranted, though many were.

But, in 2005 and 2006 HUD has made many changes to the FHA program that reflects a more “user-friendly” approach to appraisals, forms and costs. By accepting homes that are less than perfect, lower down payments, and weaker credit histories FHA loans are more attractive than ever to buyers, sellers, and Realtors.


No Longer Required:

• Automatic Termite Reports – these are no only required when there is evidence of previous wood-destroying insect damage, and evidence of un-repaired structural damage.
• Repair of peeling paint in homes built after 1978
• Repair of broken windows or damaged exit doors
• Roof certification of flat roofs
• Separate well and septic inspections on existing homes
• Handrails for steps and stairs
• Repair of minor cosmetic issues such as cracked plaster/drywall, soiled carpeting, minor plumbing leaks, crawlspaces with debris or trash, etc.
• 10 year builder warranty if a property is 90-100% complete at time of appraisal with a building permit and certificate of occupancy

Now accepted:

• “As-is” appraisals; no more cumbersome evaluation condition sheets!
• Minor property deficiencies, usually a result of normal wear and tear, that don’t affect the safety of occupants or security of the property.
• Down payment assistance (DPA) from the seller, in the form of a contribution to a non-profit organization that is gifted to the buyer; the DPA is allowed in addition to the 6% seller concessions for closing costs, prepayments or discount points.
• Fee structure similar to conventional loans; the only non-allowable FHA closing cost is the tax service fee.
• 95% cash out refinance.
• Maximum financing for non-arm’s length transactions under certain conditions.
• Conventional HUD forms for FHA loans, versus those formerly required.
• Buyers in a Chapter 13 Bankruptcy or consumer credit counseling program are eligible with a satisfactory 12 month payment history, versus complete payment of all accounts.
• Collections up to $3,000 may remain open – over $3,000 considered on a case by case basis.
• Buyers with a Chapter 7 Bankruptcy are eligible 24 months after discharge.
• 15% vacancy factor (vs. 25% on conventional loans) for cash flow analysis on 2-4 unit properties.

Last year, the Expanding American Homeownership Act was introduced in the Senate which would make FHA mortgages a more attractive option in today’s market. Some of the proposed changes are:

• Eliminate the statutory 3% minimum investment for borrowers. Many first-time home buyers are now getting mortgages will no money down. FHA would offer various down payment options.
• Increase and simplify the FHA loan limits. In many parts of the country home prices have risen to the point that FHA financing is not an option. By raising the loan limits to become closer to conventional loan limits more borrowers will have the option of using FHA for their home financing.
• Create a risk-based mortgage insurance premium that would be determined by the borrower’s credit risk. FHA is already less restrictive on credit histories than conventional loans, but this would open the program to borrowers who now only have the option of sub-prime lending prorgrams.

FHA has always been a great program to help people afford the American Dream. With the crisis facing the sub-prime mortgage market, FHA is again becoming a more popular financing option and, with the changes already made as well as the upcoming changes, will become more popular in the future.