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Money Talks, Do You Hear What It's Saying?
by Keith S. Donald
You know the phrase, Money Talks and B.S. walks! The amazing thing is Britney Spears, aka B.S., and her exploits is of greater interest on the internet than solutions to the biggest home mortgage and credit crisis of the modern era!
Even so, everyone in America is aware of the housing, mortgage, and credit crisis. Much has been said and written about why it happened, who is at fault and who should solve the problems. Because of the worldwide impact of the U.S. financial markets the problems need solutions and they need them fast.
Money talks, so the Federal Reserve Bank has alerted the world of its intentions to support the economy by any means necessary. Even though thousands of people have lost their life savings, jobs, and companies have filed bankruptcy, the question remains, "how do we solve these home financing problems"?
The A-R-M, Adjustable Rate Mortgage resets are causing monumental problems for everyone involved. Trying to refinance the mortgage before the reset has revealed more problems than anyone has imagined. I don't think it makes sense to expect a "one size fits all" solution for such complex problems. When money talks, do you hear what it is saying? This is one possible solution that may be a perfect fit for you or someone you know.
Problem(s): Borrowers with Adjustable Rate Mortgages (ARM) that are about to adjust are having a difficult time refinancing into fixed rate loans. It is more difficult now because of the revised underwriting guidelines of the mortgage lenders. Money talks.
In order to refinance today your credit must be better than when you financed your property. Informed sources report 64% of the applications are rejected. Depending on your lender, you can expect to have a minimum FICO score of 620 to qualify for refinancing.
You must also deal with the problem of inflated property values. A buyer's market ends when home prices reach the point of least resistance. In other words, when buyers meet all of the underwriting guidelines and the home prices are low enough so more people can afford the properties, equilibrium will have been reached. (The problem is over.) Once again, money talks.
While there may be quite a few more problems, there is one you may have finally heard about. For every foreclosure a lender has, a certain amount of money must be held in reserve to mitigate the bad debt. It is called a loan loss reserve. The amount held in reserve may be anywhere between 1.5 to 8 times the amount of the defaulted mortgage! Money talks big time.
Think about this. If the lenders are losing money with defaulted loans, and the lenders have to hold a certain amount of money that exceeds the face amount of the bad paper in reserve, do you see how the possibility of not having money to lend may be the real problem? When money talks, people listen.
We have maintained for some time there are 169 different ways to finance a property. That suggests there should be quite a few different ways to solve financing related problems. Here is one example.
Solution: If the rate adjustment on your mortgage will make the payment so high you simply cannot afford it, contact your lender immediately. Be proactive. You may have been one of thousands of people placed into your loan by a mortgage broker. As you must know by now, mortgage brokers were compensated by the lenders to place people in the loans that have since proven to be bad paper. If you look around you may also notice there aren't many mortgage brokers in business right now. Ask the mortgage brokers if money talks....if you can find one.
The point here is, "what affects one of directly, affects all of us indirectly". It is just as important for the lender as it is for you to make arrangements that will let you to continue to make your monthly payments. Remember, most of the mortgage commitments are for 30 years. What is happening now is simply a bump in the road.
Suggest a loan modification that is based on your ability to pay your mortgage to the lender. If the lender is properly motivated you just might find a solution that will let you keep making payments at the current rate. One other thing you might discover is an adjusted value of the property which is based on the amount of cash flow generated by the property.
Here is an example. Your current mortgage details are: (N - Number of payments, I/Y - Interest rate or yield, PV - Present Value, PMT - payment of principal and interest)
N = 360, I/Y = 6.5%, PV = $100,000, PMT = $632.07
If your goal is to keep your payment the same as it is right now, your lender can justify your request by simply increasing the interest rate or yield of the loan. It might look like this:
N = 360, I/Y = 9.5%, PV = $75,169.75, PMT = $632.07
In this example the interest rate or yield is increased from 6.5% to 9.5%. The payment remains the same at $632.07, but the present value or mortgage amount is reduced from $100,000 to $75,169.75.
Most people realize that home values are declining as a result of the buyer's market. What they don't know is how much are they declining.
The illustration above shows the relationship between the interest rate and the present value of the property. It is computed with mathematical precision. Keep in mind, the value of the property is most meaningful at the time you try to sell it. At that time you will have the property appraised.
The objective in the above illustration is to stabilize your monthly payment to prevent an adjustment you cannot afford.
What are the benefits for you and the lender?
You get:
-To keep your payment at the current level
-The mortgage on the property is adjusted to reflect the current market value
-You avoid a foreclosure
-You avoid a possible bankruptcy
-You continue to live in your home
-To refinance the property later when conditions improve
The lender gets:
-To keep a performing loan on the books
-To avoid adding to the loan loss reserve
-To continue collecting cash flow
-To avoid a costly foreclosure worth at least $35,000 in savings
-A blue print for other troubled borrowers
-An incentive to be more proactive with borrowers in creating win-win solutions
-The potential to refinance the borrower later when conditions improve
Part two of the solution goes into effect when the property is refinanced. Our assumptions are, enough time has passed for the downward trend in home prices to be reversed; your credit has improved to the point your FICO score is well above 620; lenders are in a position to lend money for mortgage loans at interest rates below the current market.
N = 360, I/Y = 5.5%, PV = $111,320.93, PMT = $632.07
Just remember this. The higher the interest rate the lower the present value. Conversely, the lower the interest rate the higher the present value of the property.
What are the benefits for you and the lender in this scenario?
You get:
-An increase in property value from $75,169.75 to $111,320.93, or $36,151.18
-Better terms or cash out depending on your needs
-The same monthly payment (in this illustration)
-A lower interest rate
-A new fixed rate loan
-No monthly payment anguish
-No foreclosure
-No bankruptcy
The lender gets:
-A new higher valued loan
-A continuous cash flow from an existing client
-Bad debt reserve reduction
-Improved client perception for better community Goodwill
-A potential testimonial that demonstrates customer commitment
-A plan to contact borrowers to help them solve their mortgage problem
When money talks, you should listen. It will tell you what it wants. Money always goes where it is treated best.
This is just one of many examples of how to approach and solve home financing problems. Every situation is unique. While this may not be a perfect solution, it is an example of how really good ideas can be developed.
The borrower and the lender can actually work out the details if they are willing to commit to a mutually beneficial solution. Just remember when money talks you understand what it is saying to you.