SoCal Mortgage Blog

One of the major benefits of Chapter 13 Bankruptcy is the ability to avoid second mortgages that are not secured by any value in your home. By following standards outlined in the Banrkuptcy Code, you can reclassify that loan on your home into the same category as credit cards or other ordinary bills and discharge them at the end of your Chapter 13 payment plan. This is called lien stripping. You cannot do this to a mortgage in a Chapter 7 case.

However, if there is even a penny of value in the home that would go to a second mortgage when the property was sold, the loan cannot be valued as unsecured. That means it must be paid during the Chapter 13 case and it also survives the Chapter 13 as a lien on the property until it s paid off.

So where’s the Time Bomb? Let’s assume that you’ve been dealing with your lender trying to work out a modification of your first mortgage. Well, what if your lender were to give you a modification that reduces your principal balance? That modification now results in a little equity in your home. Sounds like good news, right? Nope. With the reduction in the principal balance gives your second mortgage a toe-hold onto your home. Once that happens, the Bankruptcy Code will not allow you to avoid that second mortgage and gain the benefit of a Chapter 13 case.

In a New York Times article, reporter Gretchen Morgenson criticized the terms of the “Great Mortgage Deal” with five major banks, Once of the points she brings out is that this “settlement” enhances the value of the second mortgage market. By creating equity in homes, the value is now exposed to claims by second mortgage holders in a Chapter 13 thus weighing down homeowners with yet another obligation that survives a bankruptcy. Once your first mortgage is reduced below the value of your home, the second mortgage will sink its claws into that home. KABOOM! Mortgage time bomb.

If there is any doubt that you should file a Chapter 13 Bankruptcy before you work our a debt reduction deal with your first mortgage, this should do it. File first, work out the modification later, before that second mortgage gets you.

By: Eugene S. Melchionne

Although the recently confirmed 3.875% Best-Execution level remains intact for 30yr fixed, conventional loans, Mortgages Rates moved slightly higher today in terms of the costs required to obtain those rates. Weakness in Treasuries today was more pronounced than MBS, the "mortgage-backed-securities most directly responsible for determining mortgage rates.

Initially driving today's market movements was news that political leaders would meet in Greece to vote on a soon-to-be-drafted bailout package. Greek officials have been reluctant to stand up in favor of creditor-imposed austerity. Even though they likely realize the dire implications of such reluctance, the political backlash from Greece's populace is pretty dire in it's own right. But that realization has been slow to work its way through markets, which seem to be willing to wait in upbeat anticipation for new developments in Greece that never seem to happen--at least not on time.

It was the same again today. Markets were initially upbeat on the promise of ongoing negotiations being concluded. When we say "markets" in this context, it's more to do with equities/stocks, whereas mortgage rates are part of bond markets. When markets are upbeat in this way, it decreases the demand for less risky investments such as Treasuries and MBS. When demand decreases for MBS, prices fall, and that means that lenders will earn less by selling pools of loans on the secondary market, and must raise rates to keep pace with their various cash-flow considerations.

Even after news came out that the meeting in Greece would not take place until tomorrow, stocks only faltered momentarily, deciding that the nature of the news (no material objections to the proposal on the table, simply a delay in getting it drafted) wasn't enough to reverse the current course. Bond markets, however, were able to put an end to a somewhat ugly slide weaker. The damage had already been done as far as mortgage rates would be concerned, but the silver lining is that it only amounted to minimal increases in borrowing costs while most scenarios will still be best-executed at the same rates today as yesterday's.

With the NEW potential resolution on Greek negotiations tomorrow as well as an important 10yr Treasury Auction, there are some sizable risks ahead for mortgage rates, which heretofore have done a good job of holding onto 3.875% Best-Execution through some rough waters. As always, markets and rates can move in either direction, but we would point out that those movements could be bigger-than-average tomorrow.

Today's BEST-EXECUTION Rates 

    -     30YR FIXED - 3.875% mostly, less 3.75 today, 4.0's getting closer 
    -     FHA/VA -3.75% 
    -     15 YEAR FIXED - 3.25% 
    -     5 YEAR ARMS - 2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations 

    -    Rates and costs continue to operate near all time best levels 
    -    Current levels have experienced increasing resistance in improving much from here 
    -    There are technical reasons for that as well as fundamental reasons
Lenders tend to get busier when rates are in this "high 3's" level and can throttle their inbound volume by raising rates or costs. 
    -    While we don't necessarily think rates are destined to go higher, given the above facts, there seems to be more risk than reward regarding floating
But that will always be the case when rates operating near historic lows 
    -    (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario. There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

Fannie Mae and Freddie Mac have been instructed to start collecting the new, higher guarantee fees effective April 1, 2012.  This is a result of the payroll tax cut extension bill passed by Congress on Dec. 23rd.

However, mortgage applicants will notice new fees appearing sooner than that. This is because loans that land with Fannie or Freddie can take 75 days or more to get there.

Here's why.

First, your loan is locked. Then, your loan is underwritten, closed, and funded. For a purchase or a refinance, this process can range from 10 days to 60 days or longer, depending on the traits of your particular transaction.  However our average transaction is 35 days.

Then, post-closing, your mortgage must be prepared for delivery to Fannie Mae or Freddie Mac, a process which typically requires a re-review of your complete loan file and a quality control audit to minimize long-term lender liability.

This post-closing/audit process can be a 1-day thing, or it can take weeks.

Only after the audit is complete will your loan be delivered to Fannie Mae or Freddie Mac, which is why mortgage applicants everywhere will start paying the new, 10 basis point guarantee fee well in advance of the April 1, 2012 deadline -- it takes time to get a loan to the secondary mortgage markets.

What does this mean in dollars to you?

For example on a $400,000.00 mortgage the cost will increase about $1,200.00.  This can be paid in for real dollars or in the forms of a higher interest rate.  So in short, interest rates will be going up as a new mortgage "payroll tax" fees will be levied on applicants starting no later than late-January.

Rates are already super-low. Get locked and exempt yourself from new fees. It's extra savings to your mortgage.

Home-insurance policies are pretty much the same, and carriers compete on the basis of price and service—right?

Believe those two myths and you might wind up paying dearly.

Homeowner policies have important differences that can affect whether claims are paid, according to a study scheduled to be published early next year in the University of Chicago Law Review. The problem is that those differences are poorly understood.

Home insurers historically relied on standard policy forms drafted by the Insurance Services Office, an industry group. But Daniel Schwarcz, a University of Minnesota Law School associate professor and the study's author, says he found instances where policies now differ "radically with respect to numerous important coverage provisions."

While some of these differences might work to homeowners' advantage, a substantial majority could hurt them, he says. Some policies provide $1,000 per item damaged by a sudden electrical current, and others pay an aggregate of $1,000. Some include mold and lead coverage, while others don't.

Many of the variations involve broader contract language, and it's unclear how they will ultimately affect consumers. Some of the biggest insurers "employ policy language that is systematically less generous than that provided" in the standard ISO policy, Mr. Schwarcz writes.

For example, a standard ISO policy insures against "risk of direct physical loss to property," according to the professor. But some carriers insure against what they call "risk of accidental direct physical loss" instead, and others against "sudden and accidental direct physical loss."

"You have a core provision of a policy and these really important adjectives being added," Mr. Schwarcz says, noting that they "could easily be used to justify expansive claims denials."

He also found policies that allow insurers not to cover loss "to the extent that the policyholder's negligence contributed to the loss."

That is an important provision, says Mr. Schwarcz, because many losses could be tied to alleged negligence. Say a homeowner is advised by a tree trimmer that a backyard tree is dying and needs to be chopped down. If it isn't cut down and eventually falls on the house, is the policyholder negligent?

Among changes that might work in consumers' favor are liability protection for certain claims and coverage for mold more generous than that of the typical ISO policy, says Mr. Schwarcz, who also serves as a consumer representative at the National Association of Insurance Commissioners, an organization of state regulators.

In an example of how such wording can hurt consumers, Mr. Schwarcz points to a 2007 ruling by a federal judge in Minneapolis in favor of a unit of Allstate. The insurer had denied a claim for water damage brought by a couple in Eden Prairie, Minn. They were selling their 15-year-old home and a presale inspection revealed moisture behind the home's stucco exterior.

Among other things, Allstate cited policy exclusions for wear and tear, and for losses arising from defective construction. The judge noted that the policy language specified coverage of "sudden and accidental direct physical loss," a phrase he said was "not ambiguous."

While the policyholders "considered their discovery of the water damage to be abrupt and unexpected, they have presented no evidence that the loss was sudden," the judge wrote. "Rather, all the evidence of record indicates that the water damage was caused by a variety of original construction defects present in the home since 1989."

Allstate spokeswoman Stephanie Sheppard says the company "agrees with the court's ruling that the language is clear." Speaking generally, she says the company's coverage is defined "to ensure we help keep costs down for all our customers by covering appropriate losses."

The insurer's contract language, she says, reflects that, "like most homeowner insurers, Allstate provides coverage against losses that occur only on a chance basis," or where the insured cannot control the loss.

Mr. Schwarcz is wrong to interpret such wording differences as efforts to reduce coverage, when some changes are efforts to clarify what the insurers have priced the policies to cover, says Alex Hageli, an official with the Property Casualty Insurers Association of America, a trade group with more than 1,000 member companies.

Mr. Hageli says the changes are often reactions by insurers to adverse judicial rulings, with insurers adjusting wording "to what they thought their contracts said before the judge ruled the way he did." He added that he doesn't "see the same kind of deliberate attempt to weaken consumer protection" that Mr. Schwarcz does.

For his study, Mr. Schwarcz collected policies from the top-10-selling insurance groups in six states: North Dakota, South Dakota, Pennsylvania, Illinois, California and Nevada. Insurers' forms can vary by state.

Mr. Schwarcz has been pushing state insurance departments to post policies online, so consumer groups and others comfortable with the dense language of contracts can work up comparisons to aid buyers.

At least one state recently took him up on the offer: Nevada, which began posting policy forms in October for its 10 largest home and auto insurers. Gennady Stolyarov, a Nevada insurance regulator, said in an email that officials "hope that this is just the beginning" of an effort to improve consumers' ability to comparison-shop for insurance.

For now, many consumers' best option is to seek out an experienced and reputable insurance agent to cut through all the confusing language, says Amy Bach, who runs United Policyholders, a consumer-advocacy group in San Francisco. The group has long sought to educate consumers on the importance of comparison-shopping "for quality, not just price."

By: Leslie Scism

Home prices and mortgage rates have fallen so far that the monthly cost of owning a home is more affordable than at any point in the past 15 years and is less expensive than renting in a growing number of cities.

The Wall Street Journal's third-quarter survey of housing-market conditions in 28 of the nation's largest metropolitan areas found that home values declined in all but five markets compared with the second quarter, according to data from Zillow Inc. Meanwhile, rent levels have risen briskly across the country and mortgage rates, hovering around 4%, are the lowest in six decades.

As a result, monthly mortgage payments on the median priced home—including taxes and insurance—are lower than the average rent levels in 12 metro areas, according to data compiled for The Wall Street Journal by Marcus & Millichap, a real-estate brokerage that tracked 27 metro areas. It remains less expensive to rent than to buy in 15 cities. But affordability hasn't done much to lift the sagging housing sector because many would-be buyers are unwilling to purchase a home or unable to qualify for a mortgage.

"It's one of the most striking developments of the housing downturn," said Paul Dales, an economist at Capital Economics. "The initial building blocks for a recovery are in place, but the legacy of the recession is really preventing households from taking advantage."

In Atlanta, which had the most favorable values for owning versus renting, the monthly payment on the average home was $539 assuming a 20% down payment during the third quarter. By contrast, the average asking rent stood at $840, according to the Marcus & Millichap data.

But real estate agents and economists say the trend hasn't boosted demand. That is because affordability alone hasn't been enough to overcome the obstacles in the way of a housing recovery. Some homeowners who would like to move up to larger properties are stuck because they can't sell their homes.

Also, while the monthly carrying costs on a mortgage are lower than average rents in some cities, home ownership carries other costs—including taxes, insurance, homeowner association dues and maintenance—which may dissuade some potential owners.

Other would-be buyers can't qualify for mortgages because lending conditions are tight or because they don't have enough equity in their current homes to use as a down payments. "The reality of coming up with the down payment and the loan-qualification standards makes things much different than the raw numbers suggest," says Hessam Nadji, managing director of Marcus & Millichap. And even those who may qualify remain skittish about buying property in a market where prices could fall amid foreclosures and weak job growth.

Ryan Young illustrates the point. He is under contract to buy a three-bedroom home in Washington Grove, Md., that will have monthly mortgage, tax, and insurance costs for around $150 less than the $1,900 he is paying to rent a slightly smaller house in Bethesda, Md. He qualified for a 30-year mortgage with a 3.95% fixed rate. Still, Mr. Young says he is cautious about owning his first home with the prospect of future price declines. "Buying a house is not a good financial decision, per se, but we needed a bigger place," said the 35-year-old scientist, "and we don't want to move every couple of years into a new rental."

Other cities where owning is now cheaper than renting include Detroit, Minneapolis, Orlando, Las Vegas, Miami, St. Louis, Chicago and Phoenix.

Home ownership is also looking more affordable because after several years of declines, apartment rents will rise by around 4% this year, says Mr. Nadji. He says rents are poised "to pick up even more momentum across the country next year."

Even cities where it is still cheaper to rent than own have seen big boosts in affordability. In San Diego, the monthly cost of owning a home has averaged around 83% more than renting over the past two decades. During the third quarter, owning was 22% more expensive than renting, according to John Burns Real Estate Consulting

Mortgage rates are a big reason why affordability continues to improve. In 1991, a $1,700 mortgage payment allowed a borrower to take out a $200,000 mortgage. Today, it gets that homeowner a $350,000 loan, a 77% increase in borrowing power, says Dan Green, a loan officer with Waterstone Mortgage, in Cincinnati. At the same time, low mortgage rates aren't spurring sales because few analysts expect rates to rise anytime soon. The Federal Reserve in August said it would keep rates at ultralow levels for two years. In a normal interest rate cycle, "when they go low, they don't stay for very long, and people jump in," said Mr. Dales. "This time, there is no urgency."

Affordability could continue to improve as prices slide even lower in coming months. Price declines are likely because the share of "distressed" sales, including bank-owned foreclosures, tend to rise in the winter, when traditional sales activity cools. Banks are often much quicker to cut prices to unload properties quickly, which means that the greater the share of "distressed" sales, the more prices tend to fall.

One hopeful sign is that inventories have fallen from their bloated levels of one year ago. All 28 cities in The Wall Street Journal's latest survey saw homes listed for sale fall from one year ago, when markets were reeling with a substantial overhang of properties amid a big drop in demand. Visible inventory was down sharply in several markets, including by almost half in Miami and 40% in Phoenix.

Low inventories have spurred more bidding wars at the low end of the market as investors compete for homes that they can convert into rentals. In Sacramento, it would take just 2.5 months to sell the listed inventory at the current sales pace. Las Vegas has a 4.3 month supply of inventory, according to John Burns Real Estate Consulting. But the potential supply of homes is much bigger because banks have yet to process hundreds of thousands of potential foreclosures.

By: Nick Timiraos