New Appraisal Rules – A Problem, or A Solution?

May 18, 2009

appraisalSaturday’s Washington Post Real Estate section featured an article by Ken Harney entitled, “New Appraisal Rules Come With Costs,” in which he posits the following scenarios:

  • The real estate appraisal that used to cost you $325 now costs $450, even though the appraiser doing the work is getting only $175 or $200.
  • Your appraisal-related charges may now be subject to add-on feessuch as $50 to $100 extra in “no show” penalties if you get stuck in traffic and miss your appointment with the appraiser, or an extra $50 to $150 if the property is worth more than $500,000.
  • Your mortgage loan officer requires you to pay for the appraisal upfront with a credit or debit card, rather than including the fee with the usual lender origination costs at settlement. Your card may be charged more than the anticipated cost of the appraisalleaving debit-card holders in a potential overdraft situation.
  • The person conducting your appraisal may be new to the fieldwilling to work for a cut rateand may not be as familiar with local value trends and pricing adjustments as an appraiser with more experience.
  • If your mortgage application is denied by one lender, you could be forced to pay for a second full appraisal because the new lender may not accept the first one.

The “new appraisal rules,” which go by the name Home Valuation Code of Conduct, were imposed May 1 by Fannie Mae and Freddie Mac, and are intended to improve the accuracy of appraisals by eliminating pressure on appraisers from loan officers. The code pushes most large lenders to use third-party “appraisal management companies” that contract with networks of independent appraisers around the country who thus are not in direct contact with retail loan officers or mortgage brokers. The Code came about as a result of an agreement made between the Federal Housing Finance Agency and the New York State Attorney General. The intent of the agreement was made to enhance the independence of appraisers. The most relevant part of the code seems to be the following:

The lender or any third party specifically authorized by the lender (including, but not limited to, appraisal companies, appraisal management companies, and correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The lender will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third party (including mortgage brokers and real estate agents)

It used to be that a mortgage professional – whether working for a specific lender or as a broker – might have a “stable” of appraisers he or she could call on to provide services. Most of them just wanted a reliably thorough and competent job. However, and this is the reason for the new rules, some only wanted appraisers who were willing to find the right “comps” to hit a specific valuation necessary for the loan to go through. Under pressure to produce that number or perish, many appraisers buckled.

But are the new rules helpful or harmful to the more ethical mortgage lenders and brokers out there? Are they seeing big increases in appraisal costs? How about appraisal quality, now that they can’t choose one of their go-to guys? I asked several of the mortgage professionals I work with every day in Northern Virginia to give me their impressions about whether they find the scenarios suggested in Harney’s article to be happening here:.

We’ve actually been working under these rules for many years . . . All appraisals have been ordered through a 3rd party management company, and while we did have some communication with the appraiser (although not encouraged), we cannot any longer . . .

This is actually a good thing that is happening. Too many times appraisers have been bullied by agents, mortgage lenders and borrowers for not having the same opinion. This will take that opportunity away. This does NOT mean that you can’t call the appraiser, still meet them at the home, etc . . . this is so that lenders cannot contact the appraisers directly – even for a status, as this is seen as undue pressure. These appraisers are professionally trained, educated and have to uphold ethical standards just like all of us; yet no one challenges our decisions like these people.

[The fees and time requirements] are the same, for now. I bet the appraisal costs will go up, and they should. The appraisers can’t live on a “cut” and they have been required to do so many more compliance checks etc . . [Turnaround times] are longer due to volume.

This won’t change the quality . . . if anything the quality will improve because the lenders and agents are now separated from any undue influence.

Jennifer Duplessis, Prosperity Mortgage

Interesting article and I am happy to say we have not had the issues mentioned. [Local] appraisers have only added $25.00 to their fees due to some additional addendums that required extra research. Appraisal fees have ranged from $350 to $375 and now are $375.00 to $400.00 for under $1 million sale price, and they have always charged more for above $1 million – that is not new. Yes, loan officers are no longer allowed to directly pick the appraiser – it is an automated random selection of a pool of known appraisers in our local area.

I think the worst [problem] is the extreme pressure the appraisers are [receiving from the lenders] to include the foreclosures and short sales when determining values. During the recession In the early 90’s foreclosures and short sales were considered distress sales and discarded as [comparable to a] homeowner selling their property. In my opinion, this change in [guideline] has escalated the erosion of home prices. They should have allowed for an adjustment upward on the distress sale, but they did not, they are requiring the appraisers to use them thus providing for lower and lower values – how unfair to the normal seller is that?

Shirley Jones, First Savings Mortgage

I haven't experienced any true horror stories yet, but the new system will definitely change things. I think the appraisers will feel empowered to bring in property values at whatever they feel the value is, regardless of what it may mean for the transaction. The old system had a conflict of interest where (I believe) appraisers didn't want to ruin too many deals with a low appraisals since they were hurting their referral sources (potentially their future income) by bringing in the low appraisal. This new system will potentially change that, which ultimately will be a good thing, but could be painful. I think that will be the biggest change. I believe we will see more low appraisals (meaning appraisal comes in below contract price).

In the past we could choose appraisers and go with ones that we felt were "good appraisers." We now have less of a say. It also adds a layer to the process which usually means more time. I do agree with what the article said about the costs of the appraisals being higher. Mortgage brokers definitely kept costs down with the old system. Appraisals have gone up by about $100 over the past year I believe. I haven't noticed a big difference in the quality of appraisal, but it is still early in the process.

Overall I don't love the new system but the old system definitely had it's flaws also. I'm not sure I would want to go back to the old system even if we could.

Kevin Haddon, Wells Fargo Home Mortgage

So on balance, it seems, in the Northern Virginia area the new rules are seen in an overall positive light by people who I believe to be in a position to know. Yes, costs my have increased slightly, and there may be a somewhat longer turnaround – especially as the system gets established – but I think the horror story scenarios drawn by critics are not reflected in the actuality. I do agree with Shirley's view about separating the distress sales from the normal sales – it's unreasonable, but it's not a part of the new rules, just a lender-imposed requirement. Appraisers should be able to reflect adjustments for condition, given the lousy condition of most foreclosures, but it's unlikely to fill the gaps.

Kim Hannemann, Real Estate Consultant/Realtor®, Samson Realty
Cell: 703-861-9234 • Fax: 703-896-5055 • Email:

It's Good To Have A Friend In The Business®

If you would like to discuss real estate questions, sell or buy a home in Northern Virginia - including Alexandria, Annandale, Arlington, Burke, Centreville, Chantilly, Clifton, Fairfax, Fairfax Station, Falls Church, Kingstowne, Lorton, McLean, Reston, Springfield, or Vienna - contact Kim today.

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Looking For Mortgage Money? Might Get Tough.

April 2, 2009

Here’s an article from this morning’s Washington Post:no_moneytransp

Lenders Struggle to Find Cash to Quench Growing Demand for Refinancing

By Dina ElBoghdady
Washington Post Staff Writer
Thursday, April 2, 2009; A15

Now that mortgage refinancing is popular again, one big concern is that there won’t be enough money to keep up with the demand.

Mortgage bankers say the money they borrow to finance home loans — called warehouse lines of credit — has dried up and that borrowers may pay the price in artificially inflated interest rates and maddening delays in loan closings.

Interest rates are at record lows. The average on a 30-year, fixed-rate mortgage fell to 4.61 percent for the week ended March 27, according to a survey released yesterday by the Mortgage Bankers Association. But many capital-starved bankers said rates could be 0.25 to 0.75 percentage points lower if they had better access to warehouse lines.

These credit lines provide bankers who are not licensed to take deposits with the money they need to close a mortgage. The bankers then pay down the credit line after the mortgage is sold to Fannie Mae, Freddie Mac or other investors.

But the amount of available credit has plummeted to about $25 billion from $200 billion a year ago, according to the mortgage bankers group. Many of the large financial institutions that extend credit to the bankers have left the business, imposed tough restrictions or capped existing lines as they try to shore up their own capital. In the past few weeks, National City Bank, J.P. Morgan Chase and Guaranty Bank have announced plans to end warehouse lending.

Mortgage bankers say the supply of money available to them is shrinking just as demand for loans is taking off, blunting the Obama administration’s efforts to loosen consumer lending. Last week, loan applications were up 3 percent from the previous week and almost 69 percent compared with the previous year, the mortgage bankers’ survey found.

“When demand outstrips supply, lenders manage that by raising rates” or slowing the pace of lending, said John Courson, chief executive of the mortgage bankers group. “The end result is that borrowers are not enjoying the full benefit of these lower rates.”

Mahesh Swaminathan, an analyst at Credit Suisse, said he agrees that lending volume might be higher and loans might be processed more quickly if there were no credit-line problems. “But at the same time, it is not the case that activity is stalling because of that,” Swaminathan said.

The new mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae totaled $172 billion in March and could reach nearly $200 billion by June, he said. That’s more than the monthly high of $190 billion in 2003, suggesting that lending activity is robust, driven mostly by refinancing.

Still, some borrowers are watching their mortgage deals fall apart at the last minute. For instance, Greystone Financial’s sole warehouse line was pulled in February. The Las Vegas company has shut down its operations in the District and 17 states, including Maryland and Virginia.

“We had 500 loans in the pipeline, and we had 30 loans that were signed and ready to go, but we could not fund them,” said Michael Sweeney, Greystone’s chief executive. “It caused a tremendous amount of headaches for the buyers, and we’re not sure how much longer we can continue doing business this way.”

The Warehouse Lending Project, a coalition of independent mortgage bankers, and the mortgage bankers association are working with the regulator that oversees Fannie Mae and Freddie Mac to devise a plan to bolster warehouse lending.

That regulator, the Federal Housing Finance Agency, said in a statement that it is aware of the effects of the decline in warehouse lending and that it has met with industry and administration officials to “try to develop solutions.”

The warehouse-lending coalition estimates that non-depository banks supply roughly 40 percent of loans and contends that the mortgage market would suffer if they went out of business.

“Think about it: If all of a sudden there was a big demand for gasoline and 40 percent of the gas stations went out of business, you’d have chaos and disruption and higher prices. That’s the situation we’re drifting toward in the lending arena,” said Glen Corso, a principal at the Warehouse Lending Project.

I think the situation for the lenders I work with – such as Wells Fargo, Prosperity, and First Savings – is better than for most mortgage brokers because they rely on their own funding rather than on “warehouse” lines of credit. But the overall tightness could still serve to increase rates.

The Fed’s Buying – How About You?

March 22, 2009

Info from this week’s Mortgage Market Guide:


Last week, the Fed used their regularly scheduled meeting to make a blockbuster announcement.

Over the course of 2009, the Fed will purchase an additional $750 billion of mortgage-backed securities, as well as $300 billion in long-term Treasuries, primarily to help shore up the housing market and keep home loan rates low. On the announcement, bonds exploded higher, leaving bond prices within whiskers of the best levels ever.

How does this really impact home loan rates?

While the Fed’s actions may keep mortgage rates from moving higher, they may not cause them to move dramatically lower. The Fed’s actions create demand for mortgage-backed securities, which should help keep the ceiling on home loan rates from moving much higher in the foreseeable future. That’s good news for homebuyers who are seeing the bargains out there and understand that now is the time to act.

But – and this is very important – what actually happens to mortgage rates depends on which bond coupons the Fed purchases. If they purchase higher rate coupons – as they have done so far this year – their continued purchasing will likely keep a lid on rates, but not necessarily push them significantly lower. Additionally, due to many understaffed lenders and investors currently working at maximum capacity, we could once again see that improvements in pricing may not all be passed through to borrowers.

usamcashAnother factor that could impact whether mortgage rates see significant improvement are concerns of future inflation brought on by all the recent aggressive moves by the Fed. While we know there is little inflation at the present time, chatter about future inflation could have a negative impact on home loan rates, or at least stifle any improvements.

Although the media is already spinning it differently, this is not a time to stay on the fence, hoping and waiting for lower rates. Home loan rates remain within inches of all-time historic lows, but may not necessarily move significantly lower, so waiting could be a risky move.

Also, an update on Mark-to-Market – the accounting rule which has had a devastating impact on the financial markets: The Financial Accounting Standards Board (FASB) agreed that it will propose to allow companies to use more “leeway” in applying the accounting rules they use to value their assets, and planned a final vote for April 2. If this rule change is approved, it could result in better first-quarter financial statements for companies that have been affected by this rule. Stocks have been moving higher lately in the hopes that Mark-to-Market will be fixed, and a resolution could help stocks further improve.

Kim Hannemann, Real Estate Consultant/Realtor®, Samson Realty
Cell: 703-861-9234 • Fax: 703-896-5055 • Email:

It’s Good To Have A Friend In The Business®

If you would like to discuss real estate questions, sell or buy a home in Northern Virginia – including Alexandria, Annandale, Arlington, Burke, Centreville, Chantilly, Clifton, Fairfax, Fairfax Station, Falls Church, Kingstowne, Lorton, McLean, Reston, Springfield, or Vienna – contact Kim today.

4 – 4.5% Listings with First-Class Service — Cash Back to My Buyers!

Tips for First-Time Northern Virginia Buyers

March 20, 2009

pricedownReductions in Northern Virginia home prices, and unprecedented low interest rates for mortgages, have combined to offer tremendous opportunities for renters to become homeowners. The prospect of making the change may be exciting, but also overwhelming.

Here are a few common mistakes to avoid:

hud-logoNot understanding the home buying process. Educate yourself. Find a homebuyer seminar that you can attend, or research online. The U.S. Department of Housing and Urban Development has an entire section devoted to first-time homebuyers, information on mortgage programs, downloadable tools such as a “wish list” and home-shopping checklist, tips on selecting a real estate professional, and so on. Another good source is a solid lender such as Wells Fargo or  Prosperity Mortgage whose websites offer consumers a variety of tools and resources on purchasing a home.

housequestionNot asking questions. There are many intricacies to the home buying process, and even though you can gain a basic knowledge on your own, you will still have questions. Be sure to tell your real estate professional that you are new to the process. Choose an agent (like me!) who is willing to spend time with you and walk you through the entire process. A good agent will expect you to have questions at each step – from house-hunting, to making an offer, to the closing (such as, “What the heck is a closing?”). This is one of the largest financial transactions of your life, so you want to have a clear understanding of what’s going on at all times.

Looking outside your price range. Before beginning your home search, get pre-approved by a mortgage professional – preferably one you know or one recommended by your agent – to get an idea of how much you may be able to borrow. Use this information as a starting point in determining your price range. Then take into consideration other factors that will affect your monthly budget once you are a homeowner, such as property taxes, homeowners insurance, utilities, and maintenance. Don’t go out looking at homes before you have a firm idea of your range.

Buying on impulse. Don’t feel pressured into making an offer on the first home you see. Buyers, especially first-timers, may be impressed by the first two or three homes they view. Look at a good selection, then narrow the prospects to a select few and return for a closer look. When you decide to make an offer, work with your agent to get all of your questions answered first. But don’t wait too long to make an offer. The longer you wait, the greater the chance other prospective buyers may place offers, making it harder for you to negotiate a good deal.

storkNot planning ahead. Think about personal changes you are planning in the next five years. For instance, are you starting a family, and if so, is the home large enough and will it continue to be? If you think you’ll be relocating in a few years, you’ll probably want to pay closer attention to potential appreciation and resale value. If two incomes are needed to qualify for financing or to make your payments, do your plans include the ability to sustain those incomes?

Failure to consider location. Don’t just focus on the house. Examine the community. Does it suit your lifestyle? Is the area safe, well-maintained, close to work, stores and schools? Find out about zoning and whether new construction is planned on vacant land in the immediate area. Also consider the potential market for resale in the future. Your agent can also help with that.

    Above all, remember knowledge is key. No question is silly. Your agent and your mortgage professional are invaluable assets throughout the process, and they want you to succeed. Making smart home buying decisions will make the home-buying process less scary and your first home purchase a rewarding experience.

    The ‘Mark to Market’ Accounting Rule: What it is and why it is important to you now!

    March 12, 2009

    If you are not an accounting type, you probably cannot imagine why anyone would care.

    Barry Habib of the Mortgage Market Guide put this together a couple of months ago. Congress is discussing the issue this week (you know they are certainly not accounting types) so it will be in the news. Amaze your friends with your knowledgeable explanation.

    The financial crisis we are in today was not caused by mortgages or housing, although they were both catalysts. [Kim – Also see my post about these mortgage issues that are related to the problem.] The real reason was an accounting rule called “Mark to Market” (also known as FASB 157).

    Few people have a strong grasp of this rule, and even those who do have a tough time explaining it on air due to time restrictions. So let’s take a few minutes to break it down, so you can have the inside track on this very important concept and understand why it represents some great opportunities.

    Why does ‘Mark to Market’ exist?

    Let’s go back to the stock market crash, which occurred between 2000 and 2002. With the S&P down 49% and the NASDAQ down 71%, many people lost much of their life savings and they were very angry.

    Companies like Enron and Arthur Andersen were able to find ways to make their books look more attractive, which was reflected in an artificially inflated stock price.

    Both the public and Congress had a call for more transparency in business and hastened the passage of “Mark to Market” accounting.

    This is the notion that all assets should be valued as if they were sold on a daily basis. Under the letter of the law, failure to do this conservatively can now result in jail time.

    So what’s the problem?

    Before we get into what this means for banks, let me make a quick analogy using a scenario that should make perfect sense to you and your clients.

    Let’s imagine that you own a house in a neighborhood where all of the houses are priced at around $300,000. Unfortunately, your neighbor, who owns his home free and clear, falls ill and needs emergency cash quickly. Because he is under duress, he must sell the home for $200,000 in order to get the cash he needs right away, even though the home is worth considerably more.

    mtm11Now would this mean that your home is now worth the same $200,000 that your neighbor sold his for? Of course not, because you are not forced to sell under duress. It just means that your new neighbor got a great deal.

    However, if you were a publicly traded company and had to abide by Mark to Market account rules, you and the rest of your neighbors would now have to say, by law, that your home was worth only $200,000 – not the $300,000 you would get for it if you actually sold. So what’s the big deal? Read on.

    So how does this principle apply to banks?

    Let’s say we decide to start a bank . . . call it XYZ Bank. We raise $2 Million to open our doors. Remember that our capital account is $2 Million. Banks make money by taking in deposits and paying low rates of interest to those depositors (maybe throw in a toaster too). We then take that money and make loans with it at higher rates. We keep the difference.

    mtm2So, we turn the $2 Million worth of deposits into $30 Million worth of loans. This puts our ratio of loans to capital (our Capital Ratio) at 15:1 ($15 Million in Loans to $1 Million in Capital). This level is acceptable, as long as we can shoulder some losses and recover.

    Because we are very conservative here at XYZ Bank, the loans we make require a minimum down payment of 30%, a credit score of 800 or better (that’s nearly an 850 which is perfect), proof of income and assets, a reserve of at least two years of mortgage payments (normal is two months) and income requirements that only allow 10% of monthly income to cover all expenses (normal is 40%).

    We do this and our loans perform perfectly. We make lots of money. Nobody is paying late and our clients are sending us holiday cards. They love us . . . it’s a party. You and I are celebrating as we see our stock price soar.

    But real estate values decline and, even though all of our loans are paying perfectly, we must re-assess the loan portfolio to account for the decline in real estate values, which leaves us with less of an equity cushion. We had a minimum 30% down payment, which means the loans were 70% of the value of our assets – until we account for the decline in the market. Now, our position goes from 70% to 90%. That’s riskier and, therefore, worth less than when our loans had a 70% safety position.

    Our accountants tell us that we must “Mark to Market” or risk jail. They say our value is now reduced by $1 Million. Whoa!

    We must take or write down this loss against our capital account. It is a paper loss – we don’t write a check, we have no late payers, no defaults, no bad business decisions. Still, we must reflect this $1 Million paper loss in our Capital Account, which drops from a $2 Million to $1 Million in value.

    Here’s where things get problematic.

    At this level, with $30 Million in loans outstanding, we now have a capital ratio of 30:1. At this level of leverage, alarms begin to sound.

    Our ratios are out of the safe zone; we could go under with just a few losses, deposits are in jeopardy. Hello FDIC examiner, we are on the watch list, the Securities and Exchange Commission (SEC) is asking questions and our stock starts to tumble. The business networks are showing negative coverage of our now troubled bank. We are in big trouble.

    The problem – we are “over-leveraged”. The solution – we have to “de-lever” . . . and do so quickly. But there are only two ways to do that, and one of them isn’t really an option.


    The first way is to raise capital, but that’s not going to happen when our ratios are out of whack and we are in serious trouble as well as on the FDIC watch list. It is unlikely that anyone will be willing to invest cash in XYZ Bank.

    The other option is that we can sell assets, like the outstanding loans, which are increasing our capital ratio. Like your neighbor, who owned his home outright but needed cash for medical bills, we are now under duress. The paper we are holding has a lot of value, but we have to sell it quickly and, because of that, cheaply. So, we offload the loans at a loss, which exacerbates the problem because those losses further reduce our capital account.

    Very quickly, like a flushing toilet, things start to spiral – we are going down.

    The problem multiplies . . . 

    The problem doesn’t stop there. The fire sale we just had on our loans makes things worse – even for the banks that bought them up and thought they were getting a great deal.

    mtm3Under Mark to Market, the loans we just sold must be included in the comparables that other financial institutions use to value their assets. This is how the problem spread and got so bad so fast. Other good institutions, with good loans, have to mark down. Just like us, they become over-leveraged. It’s a chain reaction, all triggered by a well intentioned, but over-reaching accounting rule.

    Financial institutions fold, sell, or freeze. Credit – the life blood of our economy – is cut off at the source. Because of a lack of available credit, home sales and refinances crawl, auto sales drop and jobs are lost. Additionally, the economy enters a recession.

    During the last recession in 2001, the economy recovered relatively quickly thanks to $3 Trillion worth of home equity withdrawals. But, more restrictive programs, a lack of available credit, and lower home values will make it difficult for us to use home equity to help pull us out of a recession this time around.

    Fixing the Problem

    The Federal Reserve has passed a rescue plan, which, over time, will provide some level of help. Some banks will get money to infuse into their capital accounts. Others can sell some assets to the government in an effort to “de-lever”.

    But, the big thing that is not talked about, not well understood, is the part of the rescue plan that traces this financial crisis back to the source.

    The US Congress has given the SEC its blessing to modify “Mark to Market” accounting. [Kim – A growing number of regulators seem to think some relaxation of the rules may make sense. The top U.S. banking supervisor, Comptroller of the Currency John Dugan, told TIME he is in favor of letting the banks mark back up the value of some of their toxic assets. “I think there are some changes that ought to be made,” Dugan says. Mark-to-market accounting is a problem, he says, for illiquid assets because “those things have just stopped trading altogether.” Dugan does not support doing away with mark-to-market entirely; not even industry lobbyists want that. But his deputy will argue at the congressional hearings on Thursday that limited changes affecting the pricing of illiquid toxic assets should be made.

    Others seem to be coming around to the banking industry’s position. On Tuesday, Federal Reserve Chairman Ben Bernanke said he would support changes in pricing illiquid assets. Also this week, investor Warren Buffett said in a CNBC interview that he would favor suspending the mark-to-market rules. Even the Securities and Exchange Commission (SEC), which has long backed these rules, recently asked the Financial Accounting Standards Board (FASB), a private group based in Norwalk, Conn., that sets accounting rules in the U.S., to look into the matter.

    The Financial Accounting Standards Board is working on new guidance to help banks determine whether a market is active or inactive and whether a transaction is distressed. Securities and Exchange Commission Chairman Mary Schapiro told Congress on Wednesday that she was pushing FASB to issue the guidance in the second quarter.]

    It won’t be eliminated, as we will not want to go back to the Enron days. But [the SEC] is likely to adjust the Mark to Market provisions.

    Here’s one potential solution – even rental or commercial real estate properties can be valued two ways:

    1. The comparable sales method, which determines the value based on what other assets have sold for, which is the way Mark to Market works currently.

    2. A cash flow method, which values the property based upon cash coming in.

    If we see Mark to Market modified to use cash flow to value assets, without requiring a large percentage discounting mechanism – wow! What a shot in the arm that would be. We’d likely see the stock market rally, with financial stocks leading the uphill charge.

    Consider that [as of the end of 2008] fund managers are holding 27% of their assets in cash, compared with just 3% they held in cash when the stock market peaked in October of 2007. That means there is a lot of money on the sidelines that can push stock prices higher. Additionally, think about the redemptions from hedge funds that eventually need to be put back to work. A good stock market helps individuals feel better about purchasing homes. Additionally, stronger balance sheets for financial institutions will allow them to lend more money.

    Making Your Home Affordable – The Plan

    March 4, 2009


    The US government’s Making Home Affordable plan was released this morning. Millions of homeowners wanting to see if they qualify under the plan for either a refinancing or a loan modification will be eager to check out this program.

    You might qualify for refinancing under the plan:

    • If the home you want to refinance is your primary residence; and
    • The loan on your home is controlled by Fannie Mae or Freddie Mac; and
    • You’re current on your mortgage payments (not more than 30 days late on your mortgage in the last 12 months); and 
    • You have sufficient income to support a new mortgage.

    You can owe between 80-105% of the current value of your home, but no higher than 105%.

    If you think you might qualify to refinance, you’ll need to give the following documents to your mortgage lender:documents

    • Your monthly gross (before taxes) income of your household, including recent pay stubs.
    • Your last income tax return.
    • Information about any second mortgage on the house (you can only refinance your first mortgage under the plan, but having a second mortgage won’t automatically exclude you).
    • Account balances and minimum monthly payments due on all your credit cards.
    • Account balances and minimum monthly payments for all your other debts, like student loans or car loans.

    You might qualify for a loan modification (first mortgage only) under the plan: 

    • If you originated your mortgage before Jan. 1, 2009; and
    • You are an owner-occupant; and
    • You have an unpaid balance that is equal to or less than $729,750 (for a single-family home); and
    • You have trouble paying your mortgage due to financial hardship – perhaps because your  mortgage payments increased, or your income was reduced, or you suffered a hardship (such as medical problems) that increased your bills, or you can show that you soon will be unable to make your payments. You will be required to enter an affidavit of financial hardship; and,
    • Your monthly mortgage payment must be more than 31% of your gross (pre-tax) monthly income.

    You must successfully complete a three-month trial period at the modified rate. If you make all payments on time, you will keep this lower rate that will be fixed for five years.

    The idea is for your monthly payments (not including private mortgage insurance) to reach 31% of your pre-tax monthly income. The monthly payments are defined as payments on the principal, interest, taxes, insurance (not including mortgage insurance) and homeowners association/condo fees. First, the lender will reduce the interest rate to no less than 2% on the loan, so that the monthly payments are less than 38% of your monthly income. Then, the Treasury will match further reductions, dollar-for-dollar, with your lender, to bring the monthly payments down further, to 31% of your monthly income.

    If you keep your payments on time after the modification, the government will pay up to $1,000 each year in the first five years toward reducing the principal on your mortgage.

    After five years, the interest rate on the loan will start to increase by no more than 1% per year, but can’t go higher than what the market rate was on the day your loan was modified.

    The amount you owe versus the current value of your home doesn’t matter for this program.

    The foreclosure process will stop while you’re being considered for the program, or for any alternative foreclosure prevention option.

    The borrower does not have to pay any charges or fees. Any fees are supposed to be paid by the company that holds the loan, and the servicer of the loan will pay for your credit report. The company that services your loan will get a an incentive fee of $500 for each modification they do. Once your lender modifies your loan, they’ll be paid a $1,500 incentive.

    Gather these required loan modification documents:

    • Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources;
    • Your most recent income tax return;
    • Information about your assets;
    • Information about any second mortgage on the house;
    • Account balances and minimum monthly payments due on all of your credit cards;
    • Account balances and monthly payments on all your other debts such as student loans and car loans;
    • A letter describing the circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, illness, etc.).

    Then call your mortgage servicer (the company you make payments to). Your servicer is not required to join the program, but the government hopes that the incentives will motivate them to participate.

    Kim Hannemann, Real Estate Consultant/Realtor®, Samson Realty
    Cell: 703-861-9234 • Fax: 703-896-5055 • Email:

    It’s Good To Have A Friend In The Business®

    If you would like to discuss real estate questions, sell or buy a home in Northern Virginia – including Alexandria, Annandale, Arlington, Burke, Centreville, Chantilly, Clifton, Fairfax, Fairfax Station, Falls Church, Kingstowne, Lorton, McLean, Reston, Springfield, or Vienna – contact Kim today.

    4 – 4.5% Listings with First-Class Service — Cash Back to My Buyers!

    Looking for A Mortgage Lender?

    February 14, 2009

    You’re thinking about buying a home, but you can’t pay all cash. Gee, join the least-exclusive club we know! Now you have to get a loan secured by whatever home you want to buy, a loan we call a mortgage.


    You Lose!

    “Oh, I’ll just click on one of those ubiquitous pop-up Internet ads, and lenders will come begging for my business!”  Please, please, don’t! Whether it’s the one where lenders advertise their “best rates,” or the one where you ask for four lender quotes (and get hundreds of them calling you day and night), they won’t be any good at this point. What you need to know first is what loans are available to you, and how much house you can afford based upon those loans. You want someone who will tell you what’s going on in the loan market right now.

    You are not ready to sign up for any loan yet. Instead, you are trying to find a loan officer who will be there when you are ready. Will they guide you through the process, and explain how they get from A to B? Taking your income as a starting point, they would subtract from that your current monthly obligations, to arrive at a reasonable monthly budget for housing, using current interest rates, tax and insurance costs. As for what kind of mortgages, they should start with a fully amortized 30-year fixed-rate mortgage with no more than one point of combined origination and/or discount fees. (A “point” is 1 percent of the mortgage amount.) They should then discuss alternative loan types, such as the 5/1 adjustable (see below), but the main purpose here is to ensure you will not be getting in over your head.

    You might like the numbers the first lender gives you, but don’t stop looking. You want to have this same discussion with at least three different loan officers. You need to confirm that what you’re hearing is the truth, both in terms of what you can afford and the likelihood that the loan terms are valid. You see, loan officers in general have an incentive to tell you what you want to hear, and despite the existence of a “Good Faith Estimate” and/or “Truth in Lending” documents, they don’t have to deliver what they promise unless and until they provide a loan quote guarantee or “lock.”

    What kinds of loans are out there that are worth considering? In the current interest rate environment, where rates are historically low, forget negative amortization (where you pay less interest than the actual loan rate, and the underpaid interest is then added to the loan balance). And forget “teaser” loans, where the first couple of years is at an artificially low rate, like 1.25%. Both of these are sure recipes for disaster – they were the cause of many of the foreclosures we are going through right now.

    All the rest have their advantages and disadvantages. The fixed rate loan is almost always at a higher rate. In effect, it’s 30 years of insurance against rate changes. Yet most people either move or refinance in 5 years or less, so why would they pay for a 30-year guarantee? The 5/1 (or 3/1, 7/1, or 10/1) ARM – where the rate is fixed for the first several years and adjusts annually after that – is usually a lower rate.

    And why spend money “buying down” your interest rate by paying discount points, if you’re not likely to keep it long enough to recover the money? You might cut your monthly interest charge, but it takes 6-8 years to break even.


    Once you have believable info on how much you can afford, then you can start looking at properties. Stay in touch with the lenders you believe would be most reliable. You’ll notice I said “lenders” – keep reading.

    You might want to strongly consider having a backup loan. When you’ve decided who your first choice lender will be, ask the next best lender if they will be your backup. They might, if they don’t think the first lender can deliver. If they’re right, you’ll be signing their paperwork at the end. You will need to do everything necessary so that both loans are ready to go. The backup loan is useless to you if it’s not ready to go at the same time as the main one. You may have to pay for an extra appraisal, but it’s $300 or so well spent.


    If you decide not to have a backup loan, you will have to sign whatever papers your one lender gives you, whether they deliver on their promises or not – you won’t have a choice unless you decide to renege on your purchase contract, which can be extremely expensive, as you can imagine.

    Having said all that, I have only been involved in one settlement where the buyer had a backup loan waiting in case the first one fell through (it didn’t). Most of my buyer clients have used mortgage officers I knew would deliver. I have seen a couple of situations where the settlement (my sellers) was delayed because the buyers’ lender was incompetent or untruthful, and it’s not a pleasant place to be for anyone.

    UPDATE: Here is a great post about What To Look For In A Mortgage Lender