As a recent series of articles on CNNMoney points out, some homeowners in distress are able to have some or all of their debt forgiven, or have their interest rates on their mortgages reduced to as little as 2% fixed for the remaining life of their loan.

Getting those modifications can be very difficult, however–according to Treasury Department statistics, only 4% of homeowners in distress have been able to get permanent modifications to their loans.

One key word in that statistic is “permanent”. Many lenders are currently putting distressed owners in “trial” modifications, to confirm that the owners can at least make the new, smaller, payments–but during that trial period, the owners are technically not making their full payments, which is in turn causing them to be reported to credit bureaus as delinquent; the end result is that borrowers who are in good faith complying with lenders’ modification plans are finding that they’ve ruined their credit history.

Anecdotally, we’ve found that owners who retain professional help to negotiate with lenders on their behalf tend to have much better results in terms of getting their modifications approved. Those modifications often do still result in damaged credit (often because of deficiency judgments obtain against the homeowners, or “P&L loss writeoffs” that the lenders declare on the homeowners’ credit reports), but for some owners they can still be worth it if they result in avoiding foreclosure or bankruptcy.

If you’re contemplating a loan modification and would like to first explore your options for a traditional refinance, we may be able to help; we can also provide you with referrals to lawyers and negotiators who can help you with your loan modification, bankruptcy, or short sale. If you’re interested in any of those services, please fill out the form below and we’d be glad to assist you.

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We’ve previously commented on serious issues with this drywall, often called “Chinese” drywall since most initial reports related to drywall that had been imported from China, although later reports have indicated that similar issues may exist with some domestically-produced drywall as well. In HUD’s mortgagee letter 02-17, released today, HUD and FHA ordered lenders to provide reduced or suspended payments to affected homeowners who have FHA-insured mortgages.

“We’re instructing our FHA mortgage lenders nationwide to extend temporary relief to allow these families time to remove problem damaging drywall and repair their homes,” said FHA Commissioner David Stevens. “We want to remove additional pressures for these families as they find solutions to allow them to return to a safe, decent and sanitary home.”

Affected homeowners who have FHA financing on their property are advised to contact their loan servicing company to explore their options under the new mortgagee letter.

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What is Credit?

When a lender refers to “checking your credit”, they mean that they are going to be reviewing your credit report when determining whether or not you qualify for a loan.

Your credit report will be obtained from an agency that maintains information about your credit history–that is, your use of credit and how much credit you currently have available to you.

In addition to your credit history, your credit report will include identifying information including your current and past employers, your current and past addresses, and your social security number.

The third component of your credit report is information from public records, including information such as personal bankruptcies, foreclosures, and court judgments.

All recent inquiries about your credit are also included in your report.

Your Credit Score

Credit agencies devise a credit score based on various factors, including payment history, debt owed, and other factors. With a favorable credit score, you may have more options when choosing a mortgage.

Serious delinquencies, accounts turned over to a collection agency, number of accounts with delinquent payments, total amount owed on accounts, or too many accounts with balances can have a negative impact on your credit report and credit score.

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The new mortgagee letter sets out criteria that pretty much mirror the criteria that we discussed here earlier for conforming mortgages after a short sale–basically, the short seller must not have gone into default prior to the short sale (or else at least 3 years must have passed since the short sale was concluded), and must not have agreed to a deficiency judgment or other condition that indicates that the short sale was not payment in full for the old mortgage.

The mortgagee letter does clarify, however, that for FHA financing, underwriters will also be looking at the reason for the short sale; if it was for convenience or financial gain, then the short seller is not eligible for subsequent FHA financing. The specific example given in the mortgagee letter of a short sale that disqualifies the short seller from getting subsequent FHA financing is if that seller then purchased a “similar or superior property within reasonable commuting distance”.

Note that this rule as currently worded technically prohibits a “for gain/convenience” short seller or a short seller who agreed to a deficiency judgment from ever obtaining FHA financing afterwards; underwriters that I have spoken to say that they suspect that the rule will be interpreted to mean that those cases will simply be treated as “default” short sales and have a 3 year waiting period before they are eligible for FHA financing, but that is all very uncertain at the moment.

Are you considering a short sale or loan modification? Your future plans to buy another home some day could be affected by how you structure your loan renegotiations now, so it’s important to have your lawyer, agent, and/or future lender in on the discussions to make sure that decisions you make now don’t come back to bite you a few years down the road. Contact us and we’d be glad to set up an appointment to discuss your situation, and refer you to the correct combination of agent and/or lawyer to help you with your short sale or loan modification.

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DC’s hypothermia hotline is the model that all other local jurisdictions should seek to emulate; if you see a homeless person in need of assistance inside the District, just call their hotline and they will send someone out to provide them with blankets, gloves, etc., as well as transportation to the nearest shelter if needed.

• DC Hypothermia Hotline: 800-535-7252

Unfortunately, most Northern Virginia jurisdictions appear to rely solely on individual (often privately-run) shelters to assist with hypothermia during the winter and do not have any sort of specific centralized hotline that you can call. In our experience, however, calls in those jurisdictions to the local non-emergency police numbers will usually result in an officer at least checking on the person in need of assistance and often assisting in getting them to shelter. Those non-emergency police numbers are:

• Alexandria Non-Emergency Police: 703-838-4444
• Arlington County Non-Emergency Police: 240-777-4000
• Fairfax County Non-Emergency Police: 703-691-2131
• Falls Church Non-Emergency Police: 703-241-5053

Local Maryland jurisdictions do have centralized hotlines, but the staffs at those hotlines often can’t assist in the pickup of people in need, so we are providing the numbers for both the hotlines and the local non-emergency police dispatchers:

• Montgomery County Community Crisis Center: 240-777-4000
• Montgomery County Non-Emergency Police: 301-279-8000
• Prince George’s County Homeless Hotline: 888-731-0999
• Prince George’s County Non-Emergency Police: 301-333-4000

(These are the contact numbers for the jurisdictions closest to Washington DC; if you know of the appropriate contact info for other jurisdictions in the Metro DC area, please let us know and we would be glad to add them to this page.)

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The Ethical Homes team offers construction/A&D loans for terms of up to 2 years, on loan amounts of between $500k and $500 million. Interest rates for these loans generally run between 1-9 percentage points higher than conventional residential mortgage rates (depending on the specifics of the scenario). Borrowers generally need to contribute at least 20% of the initial acquisition costs (30% preferred), and the eventual stabilized post-construction value of the property should provide a final LTV of no more than 75% (65% preferred).

If you have acquisition & development funding needs, please do not hesitate to contact us and we would be glad to review your scenario for you.

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In particular, bridge loans are useful when “coinciding settlements” fall apart. For example, if the buyer of Property A was expecting to use money earned from closing on another transaction such as the sale of Property B as their down payment on Property A, and was planning on having the sale of Property B happen shortly before the closing for Property A, and then for whatever reason the sale of Property B gets delayed, then normally, the buyer of Property A would be in default on their contract since they would not have the money available to close on that purchase. As an alternative, a bridge loan would give them the money to close on the purchase of Property A as scheduled, and then they could pay off the bridge loan with the proceeds of the sale of property B when that eventually occurred. (Bridge loans usually have interest rates significantly higher than the rates available for traditional residential mortgages–generally about 5-9 percentage points higher–and somewhat higher than for commercial/investment mortgages.)

The biggest requirement for a bridge loan is that it does actually need to be a “bridge”, spanning the gap between two transactions; the underwriters for a bridge loan will need to see paperwork confirming where the funds to pay off the bridge loan will be coming from, as well as evidence that it’s likely that those funds will eventually show up within a relatively short period of time (generally no more than 36 months).

In addition, bridge loans usually require that the borrower have at least a 25% down payment on the bridge loan.

Finally, bridge loans are generally easiest to obtain for income-producing properties (existing, under construction, or for rehabilitation), such as:

• Hotels/Motels
• Office Buildings
• Retail Space
• Warehouses
• Hospitals
• Multifamily buildings
• Single-family Rentals
• Assisted Living
• Mixed-Use Properties

Bridge loans are harder to obtain for non-income-producing properties such as single-family owner-occupied properties, but they are still available for well-qualified borrowers.

If you may have need of a bridge loan, please don’t hesitate to contact us. In particular, the Ethical Homes team specializes in placing bridge loans between $500,000 and $75 million for acquisition, refinance, and construction needs, as well as providing “mezzanine” financing and funding for bankruptcy and foreclosure situations, and can often close such loans in as little as 10 days.

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(These scenarios are for example purposes only, and are not an offer of credit. All scenarios, unless otherwise noted, presume a borrower with at least a 780 median FICO score and sufficient income, assets, and employment history to qualify for the loans in question, purchasing a detached single-family property in Virginia and planning to occupy that property, with a fully-amortizing mortgage. Rates and guidelines are currently changing very rapidly, so scenarios from even a few days ago may not reflect current market conditions; again, all scenarios below are provided for historical example purposes only and are not an offer of credit under any of these terms.)

• $1.5 million purchase, $1.2 million loan (20% down), 5/1 ARM: 4.125% paying 0 discount points, for a monthly PI payment of $5,815.50.
• $1.2 million purchase, $960k loan (20% down), 10/1 Interest-Only ARM: 4.750% paying 0 discount points, for a monthly Interest-Only payment of $3,800.
• $250k HARP PIW refi–no appraisal/LTV required, 30-yr FRM: 4.750% paying 0 discount points, for a monthly PI payment of $1304.12.

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The “investor ratio” for a condominium development is simply the number of units in the development that are currently “non-owner occupied” (i.e. rented out) divided by the total number of units in the development, expressed as a percentage; if a condo development has 200 units, of which 40 are rented out and the remaining 160 are owner-occupied (as either a primary residence or a second home), then the investor ratio would be 20% (40 divided by 200).

For conventional mortgages that fall under Fannie Mae and Freddie Mac guidelines, loans generally cannot be made on condos in developments where the investor ratios are higher than 40%. (Fannie Mae technically no longer has an official maximum investor ratio guideline, but I have never heard of a Fannie Mae loan being approved with a ratio above 40%).

Loans requiring private Mortgage Insurance (MI) are handled much the same way as other conventional mortgages, but all MI companies currently also impose a 30% cap on investor ratios; since MI loans must meet all conventional underwriting guidelines as well as all MI guidelines, that 30% cap supercedes the 40% cap.

Many lenders, moreover, impose their own more-stringent restrictions on conventional mortgages, and usually cap investor ratios in the 20-30% range (with some having caps as low as 15% or even 10%).

The traditional fallback solution for developments with high investor ratios has been to use an FHA loan, as FHA loans allow investor ratios as high as 49%, and most lenders do not impose their own restrictions on the investor ratios for FHA loans. (FHA loans do have slightly higher fees and rates than conventional mortgages, but for many high-investor-ratio developments, they are often the only available mortgages.)

For developments with investor ratios above 49%, other options do exist; the Ethical Homes team can place loans with certain lenders, for example, who can approve loans on properties with investor ratios 60% or higher. Note that these approvals are not guaranteed; they depend on many factors, including the specific condo development as well as the size of the down payment (which needs to be at least 20% of the value of the property), and need to be evaluated on a case-by-case basis.

We strongly advise borrowers to work with their agent and mortgage broker to find out what the investor ratios are for a particular condo unit before submitting an offer on it; if you find yourself needing to put an offer on a property that does have a very high investor ratio, feel free to contact us and we can help you determine whether a loan on that property might be possible.

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FHA insures nearly 1/4 of all mortgage loans currently originated, and 50% of all first-time home buyers’ mortgages, so any changes in those loans will have potentially widespread impacts.

FHA is required by law to keep a reserve fund to pay out on loans that they’ve insured, equal to at least 2% of the total amount of all loans currently insured by FHA; a recent audit of FHA’s books, however, found that this year, those reserves dropped as low as 0.53%. Secretary Donovan’s prepared remarks were designed to explain to Congress how FHA intends to get that reserve back up to the required level. Those plans boil down to continuing a few trends that FHA had started in 2008, when it became clear that they would probably drop below the 2% threshold: insuring fewer risky loans, and collecting more money on the loans that they do insure.

Donovan proposed 5 specific changes to FHA’s policies; the first is fairly non-controversial, but the others are all potential game-changers for the real estate market given FHA’s huge share of current mortgage originations.

The common sense proposal involved stepping up enforcement against lenders who issue FHA loans that end up not actually meeting FHA guidelines, including punishing parent companies of branches that violate FHA rules (since FHA can currently only punish individual branches).

The more controversial proposals were:

• Reducing the maximum seller contributions from 6% of the loan amount to 3% of the loan amount. That 3% cap is the cap that is in effect for most conventional loans, and 3% can usually cover most if not all of a buyer’s closing costs, but the ability of the seller to provide extra assistance over and above the regular closing costs to “buy down” a purchaser’s interest rate is a very important factor in whether many buyers are actually able to afford the payments on the properties that they buy. As a result, the risk reduction effects of this move are questionable; it’s not immediately self-evident that reducing the ability of a buyer to get a lower rate wouldn’t actually increase the number of defaults that result as buyers stretch themselves too thin making higher payments.

• Increasing the minimum FICO score for borrowers. FHA formerly had no minimum score as long as the rest of the borrower’s file made sense; they recently instituted a minimum FICO for automated underwriting approval of 580 and a hard floor for manual underwriting of 500, and Donovan says that those floors will be raised again, although he says that they have not yet determined the new levels. Most lenders have currently set the floor for FICOs for conventional loans in the 640-680 range, so raising the floor for FHA will remove the only remaining option that many borrowers in the high 500s and low 600s have–including many who might otherwise be good candidates to purchase homes but who because of imprudent/unlucky circumstances after the boom years may have had to go through a short sale, which can significantly lower FICO scores.

• Raising the minimum down payment on purchases. Last year, FHA raised that minimum from 2.25% to 3.5%; they are now planning to raise it again, although they again have not yet decided on the exact amount of the change.

• Increasing the mortgage insurance premiums on their loans. Currently, most FHA loans charge mortgage insurance in two parts: a 1.75% upfront fee (usually rolled into the loan by the buyer), as well as 0.55% annual fee (split into monthly payments of 0.04853% per month). FHA is legally allowed to increase that upfront fee as high as 3%, and Donovan implied that they might do so; the 0.55% annual fee is as high as FHA can legally charge at the moment, but Donovan asked Congress to increase that limit so that FHA could increase the annual fee as well.

Even if Congress does not authorize the higher annual fee, increasing the upfront fee to its current statutory maximum would have the effect of making FHA mortgage insurance roughly comparable to privately available mortgage insurance. One of the biggest advantages of FHA loans, and the reason that borrowers are often willing to put up with the sometimes more complicated process of obtaining them, is that they have lower mortgage insurance costs than comparable conventional loans with the same down payment, but if that advantage goes away AND the minimum down payment is increased to roughly the level where the private market is already allowing mortgages (currently a minimum of 5% down), then the advantages of FHA loans will be essentially eliminated.

And if a quarter of all mortgage loans currently are using FHA presumably because they can’t qualify for the conventional option, and then FHA guidelines and rates are essentially brought in line with the private market, then we would expect that quarter of the market to no longer be able to purchase homes; the end result is that purchase volumes would probably drop by about that much.

We’ll be following these proposed changes closely and will keep you informed as more details emerge.

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