A Change to Bankruptcy Law

The Senate is debating on changes made to the bankruptcy law which allow judges to reduce a homeowners interest rate and mortgage payment. This is more good news for people facing the threat of foreclosure to save their homes.
Under the current law, judges cannot change the terms of a loan and mortgage companies can foreclose 90 days after a bankruptcy filing. The author of this bill, Senator Richard Durbin (D-Ill) believes that this new law enables homeowners to work out an affordable mortgage while keeping their homes. With the passing of this bill, The Helping Families Save Their Homes Act, families, as a last resort, can file for Chapter 13 Bankruptcy and work with a judge and the lender to modify the mortgage. This bill will reach out to approximately 2.2 million families in danger of losing their homes due to the collapse of the subprime mortgage market.
The current Bankruptcy Law allows virtually every type of personal debt, including vacation homes and family farms, to be restructured in bankruptcy with the exception of mortgages on a primary residence. This exception dates back to 1970's when most mortgage were fixed rates. Currently, most of the financial distress is caused by mortgages on primary residence. Therefore, an update to this law would be timely.

Jumbo Mortgage Loan

There are 2 types of conventional loans - conforming and non-conforming loans. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors.
Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Every year they will revise their loan limit. Currently, for one-family home, the limit is $417,000.
Loans that exceed the limits sets by Fannie Mae and Freddie Mac are known as "Jumbo Loans". This loan has a higher interest rate as they are bought and sold on a smaller scale.
For high-priced areas like Southern California, the $417,000 limit seems a little low. Therefore, the Economic Stimulus Act that was recently passed by President Bush in Feb 2008 enables the HUD to boost conforming loan limits in high-cost areas to as much as $729,750 through the end of this year. This will be good news for people like George DeAnda in Yorba Linda who wants to refinance his $540,000 mortgage.
However, as of this week, the HUD has not come up with numbers yet. They have 30 days from February 13th 2008 to revise the loan limits. The new conforming loan limits will be based on a county-by-county basis.
If this proposal goes through, we would see a conforming-loan limits increase from the current $417,000 to at least $572,500 in Los Angeles County and $650,000 in Orange County.
Homeowners who are currently carrying jumbo loans who have problems making their mortgage payment can look out for this program where you can refinance to a conforming loan with a lower interest rate.

Stop Foreclosure in San Diego

Today, I would like to talk about the housing market in San Diego. As most of you would have known, the housing market in the US in general has boomed over the last few years beginning 2001 when the Fed lowered the rates to a historical low of 1%. This made it very easy for Americans to get a mortgage loan. Added to that was the sub-prime lending which offers "teaser rates" to people with insufficient credit score. Before, one usually have to come up with 20% down payment to qualify for a loan. With these new policies, you can qualify for a loan even with 0% down payment. Therefore, it is no wonder that the housing boom started and ballooned through the roof. Here is a graph of the prices of homes in San Diego from the year 1989 to 2007.

Source from: http://www.voiceofsandiego.org/toscano/

As you can see from the graph, the housing boom peaked at 2006 and started free falling after that. The surge in prices from 2001-2006 was horrendous, to say the least. Well, it depends on where you are coming from. If you bought in the early 2000s, you would be laughing all the way to the bank if you sold it at the peak. However, for those poor unfortunate souls, like (yours truly) who bought at the peak, we are feeling the pain as we watch the graph drops lower and lower. What does this mean for us? It means that we have negative equity on our homes. Negative equities! Now, you don't normally hear of negative equity in homes but that's the stage where we are at right now.

Now, the situation gets worse from there. Not only are the prices dropping, the interest rates are going higher. Double wham for these people who bought homes in the past few years. Due to this situation, there are a lot of homes going into foreclosures and a lot more are in default.

Source from: http://www.voiceofsandiego.org/toscano/

The downturn in the housing industry is doing a lot of damage to the US economy. Therefore, the US government has been trying to help people out of foreclosures as much as they can. Here are just a few of them.

1) The Mortgage Forgiveness Debt Relief Act of 2007

This act was recently signed by President George Bush in October 2007. This act is useful for people who want to short sell their houses, meaning you sell your house at a price lower than you bought it. The debt incurred here is normally taxable as income. However, this bill gives the lender a partial or total forgiveness of their debt to not be taxed on the amount forgiven over the next 3 years.

Another aspect of this bill is it will allow families to deduct partial or all of the mortgage insurance premium payments from their taxable income. Before this, Private Mortgage Insurance or PMI are non-tax deductible. In layman terms, PMI is a one time insurance fee one has to pay if you made less than 20% down payment on your purchase. To read more, click here.

2) FHA Secure Program
The Federal Housing Association (FHA) Secure program allows homeowners who have non-FHA adjustable rate mortgage which has reset to a higher rate to refinance to a prime-rate FHA insured mortgage.
The program extends eligibility to borrowers who became delinquent under their current mortgage following the reset of the interest rate. However, homeowners has to demonstrate, previous to their reset, an ability to meet their mortgage obligations. You can refer here for more information. Read more about FHA Secure Program here.

3) Property tax Reassessment

Homeowner's property tax is calculated using the assessed value of the home. Normally, the tax automatically increases 2% every year. This is in line with an increase in home values every year. However, now we are facing a decrease in home value and therefore, if homeowners feel that the assessed value of their homes are inaccurate, you can appeal for tax relief. Refer here for the instructions to submit your appeal for reassessment.

So, for those in this housing dilemma, do not fret. There are a lot of options out there now which were not available to us homeowners previously. It is a good idea to talk to your lender early before your payments become defaulted. If your lender says he cannot do anything, ask him/her to refer you to their FHA Secure department which should be set up by banks by now.

I know of a friend that had problems removing a co-loan's name from the mortgage without having to refinance. Of course, to refinance now would be a really bad idea as there is no equity in the home and the interest rate is higher. They talked to their mortgage manager at the bank and he couldn't do anything except recommend refinancing. However, when we talked to the FHA Secure department, they allowed us to remove the name without having to refinance. Some of the mortgage managers are not even aware of the options that we have in facing these mortgage problems. Therefore, if we don't keep ourselves informed and insist on pushing further, it is only our loss.

To avoid foreclosure on your homes, talk early to your lender about the options available to you and keep yourself inform on the changes that have been taking place in the mortgage business, and there will be more changes coming along in favor of us, the homeowners.