March 18, 2009 Newsletter
The housing recovery plan has been unveiled and everyone is hopeful that the plan will succeed in stabilizing the real estate market and drive the buyers and borrowers back into the marketplace. Part of the proposal is that the government will ask participating lenders to drop the interest rate and payment amounts to levels where the homeowners who currently are struggling with payments are able to meet their monthly obligation. The government will pay both the borrower and the lender incentive “bonuses” if they stay the course. Some economists however predict that participating lenders will then have to increase the rates charged their “A” borrowers to cover the shortfall.
Why not try this. Let the government buy 30% of the loan from the lender and take a second position behind the existing first. The lender recasts the loan based on the lower balance the borrower owes them. The borrower would not be required to pay the government anything, but when the home is sold or refinanced, the government would be paid back their investment. The lender would only have 70% exposure, the borrower would only have to pay on a loan of 70% rather than 100% (most of the existing loans in trouble are 100% financing or close thereto), and the government would have a good chance of recouping some if not all of its investment when the property is sold. As it is the government is putting billions in to a pot with no hope of a return.
Follow this example. Harry Homeowner has a $100,000.00 loan at 6.5% on a home worth approximately $100,000.00. The government buys $30,000.00 of that loan from the lender and takes a second position. The lender recasts the loan so the Harry’s payments are based on a $70,000.00 at 6.5%. Harry’s payments of principal and interest go from $632.07 to $442.45. Without adjusting the interest rate Harry saves $190.00 a month. Adjusting the rate to 5.5% Harry saves another $46.00 per month. The concept is similar to shared equity partnerships which we prepared in many instances where the borrower has no money for a down payment, but can make the payments if there is someone to put up the equity. In essence the government becomes the equity partner. If the lenders risk is reduced by exposure on only 70% of the value, and the loans became performing loans, lenders should be less reticent to make loans in the marketplace. And Harry Homeowner would be better off, paying only on 70% with the government as his “silent partner”. And these adjustments would have less impact on the rest of the marketplace.
Rates continue to float around 5.25% -5.125% with no points. If you go to a 10-15 day lock the rate is a little better. Paying a half point should get you in the high 4’s. Some of our lenders are going to 10-15 day locks. Again, start the process now if you anticipate refinancing or buying. If you are in the queue, and the rate looks attractive you can lock and settle. Timing the market is very tough, (ask the day traders who are not day trading anymore) so once the rate that works for you is available, go for it.
As always our law firm and title company are here to assist you. You can call me at 410 884 1160 x3007 or email me at firstname.lastname@example.org.