September 8, 2008 Newsletter
The marketplace continues to be stagnant, but the opportunities are growing for those with the foresight to move into the market. From recent discussions with several realtors there is some feeling that activity is increasing, just not at the pace that most industry experts would like to see. Rates remain in the low to mid 6 percent range for 30 year fixed. Again there is some spread between fixed and ARMs.
One change that has occurred within the last year is the advent of loan modifications, with attorneys, including our firm, assisting individuals with re-negotiating their existing loan with their existing lender. In the past loan modifications were typically used for one of two scenarios, either to fix a final interest rate when a construction loan was converting to a permanent loan, or to increase the credit limit on an existing home equity loan.
Today, lenders are faced with so many loans in default or in arrears, they are looking for new alternatives to foreclosure. If a lender forecloses, unless there is significant equity in the property, the likelihood of the lender taking a significant loss, possibly 25% or more, is very real. Part of the problem for lenders is the switch away from mortgage insurance to 80/10 or 80/15 loans. Mortgage insurance was required by the lender if the borrower could not make a 20% down payment. But the mortgage insurance premium paid by the borrower was becoming expensive, and of no benefit to the borrower. So the industry invented 80/10 or 80/15 loans where the lender would take a first mortgage at a normal market rate and a second mortgage for the remaining 10 or 15 % at a higher rate. The borrowers liked it as they could deduct the interest on the second mortgage where the mortgage insurance was just “lost money” paid solely to protect the lender in the event of foreclosure. But the lenders were betting on the second being fairly secure as long as the property values continued to rise. In the current economy, the second mortgage holders are the big losers if the property goes into default.
Therefore it is very appealing for the lender to attempt a workout with the existing borrower to keep the loan as a performing loan, even if the yield is diminished. Some of the agreements we’ve seen include the lender reducing the rate dramatically for a period of time allowing the borrower to pay any arrears over time, or when the property sells. If you know of someone who is in default or is about to be, have them call their lender. If they feel uncomfortable handling that and negotiating better terms, we can help.
As always, we look forward to your input. We want to be your title company and your law firm. Feel free to email me at email@example.com or call at 410 884 1160 x3007.