A mortgage recast is an adjustment in the monthly payment that makes the payment fully amortizing. The recast will be a payment increase when the existing payment is less than fully amortizing, and a payment decrease when the existing payment is more than fully amortizing.
For example, let's say your home loan has a balance of $100,000 at 5 percent with 300 months to go and a payment of $450 that, if continued, will not pay off the balance. The payment recast is an increase to $584.60, which will fully amortize the balance over 300 months. However, if the current payment was $650, the recast would be a payment decrease to $584.60.
Payment-increase recasts occur on two kinds of mortgages. One carries an interest-only option, where the required payment for some initial period, often 10 years, covers only the interest. The payment-increase recast occurs at the end of the interest-only period.
The second type of mortgage open to a payment-increase recast is the adjustable-rate mortgage (ARM) that allows payments that are less than fully amortizing. These ARMs sometimes have recasts at specified intervals, often every five years, or the recast may be triggered by the loan balance reaching some limiting value, such as 110 percent of the original loan amount. This can happen at any time, or it may not happen at all.
Payment-increase recasts are designed to protect the interest of the lender by making sure that the loan will pay off as scheduled. All interest-only loans and all ARMs that allow payments that are less than fully amortizing have explicit provisions for recasts in the loan contract.
Provisions for payment-decrease recasts, in contrast, which are designed to meet the needs of borrowers, are not included in loan contracts. The lender can agree to a recast; can agree subject to a charge, which can range from nominal to extortionate; or can refuse it. I have encountered all three such responses.
The borrowers who request recasts usually have fixed-rate mortgages (FRMs) on which they have been making extra payments in order to pay off before term, and then unexpectedly encounter a financial reversal. With their income reduced, their objective shifts from paying off early to reducing the payment, for which purpose they need a recast. They deserve it, and the cost to the lender is nominal, but some lenders will take advantage of them just because they can.
The borrower's right to a payment-reducing recast ought to be mandatory for all home mortgage contracts. Borrowers should not have to grovel for what can be critically important to them and of little consequence to lenders. Making recasts into a right would have the side benefit of encouraging borrowers to make extra payments as a form of contingency insurance.
Note that payment-reducing recasts are needed for fixed-rate mortgages much more than for ARMs. The reason is that when the interest rate is adjusted on an ARM, the payment is automatically recast. On ARMs that reset the rate every year, no additional recasts are needed. On ARMs with initial rate periods of 5-10 years, however, the need for a recast can arise in the early years just as it does on FRMs.
Today, borrowers are motivated to make extra payments primarily by the hope of getting out of debt sooner. With a right of recast made explicit, they will also view extra payments as a worst-case backstop. The more you pay when you have the means, the larger the payment reduction you can command in an emergency. I can't think of an easier way to motivate consumers to save more.
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Thursday, March 31, 2011
Sunday, August 8, 2010
FHA Makes You Pay Up
The Federal Housing Administration released new rules on home purchases that ramp up how much home buyers will need to cough up for down payments along with closing costs.
As if banks and lenders weren’t tough enough on consumers looking to buy a new home, now the government is cracking down, too. Still, loose lending policies fueled the economic collapse, so any new restraints on new home purchases may help “protect” the housing market from another implosion.
The FHA needed to reduce its portfolio of bad debt – in May it reported 8.97% of all of its home loans were seriously delinquent. That number was up from 7.93% in May 2009 and from 6.5% in December 2008.
As more FHA loans become delinquent, it sets off a chain reaction that essentially dries up the agency’s cash reserve below the government mandated 2% minimum. That scenario could force the FHA to ask the federal government for a taxpayer bailout –something it has never done. (Historically, the FHA earned revenue from home loan borrower’s insurance premiums.)
Now, Congress has thrown a monkey wrench into any potential bailout scenario. According to Section 26 of the 2010 FHA Reform Act, Congress has placed a “Prohibition on Taxpayer Bailout of FHA Program.” So the FHA is on its own, and has now developed new rules to protect itself from delinquent loan scenarios.
Here’s a quick look at what’s going on with the FHA’s three new loan restrictions, which were announced on July 15:
•Updated combination credit and down payment requirements. New borrowers seeking FHA-insured financing will need to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5% down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10%. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.
•Reduced allowable seller concessions from 6% to 3%. Allowing sellers to contribute up to 6% of the home’s sale price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to 3% lets the FHA conform with industry standards.
•Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors that best predict loan performance, including the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio and cash reserves.
The FHA also announced a 30-day period for public comment, so expect the new rules to kick in by late 2010.
While most real estate professionals acknowledge the FHA had to put some new risk management protections in place, given the weakness in the real estate market, the changes will still have a big impact on home loan borrowers.
“These changes will reverberate throughout the entire housing market because the FHA insures approximately 30% of all home loans in the U.S. today,” says Gibran Nicholas, chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. “The required buyer contribution when buying a home will be nearly doubled to 6.5% from the current 3.5%. This will hurt the housing market by making it more difficult for qualified buyers with high credit scores to buy a home.
Nicholas urges any homebuyers in the market right now to speed things up before the new rules go into effect. “Homebuyers considering an FHA loan should get moving today in order to avoid getting blindsided by these new rules,” he adds.
As if banks and lenders weren’t tough enough on consumers looking to buy a new home, now the government is cracking down, too. Still, loose lending policies fueled the economic collapse, so any new restraints on new home purchases may help “protect” the housing market from another implosion.
The FHA needed to reduce its portfolio of bad debt – in May it reported 8.97% of all of its home loans were seriously delinquent. That number was up from 7.93% in May 2009 and from 6.5% in December 2008.
As more FHA loans become delinquent, it sets off a chain reaction that essentially dries up the agency’s cash reserve below the government mandated 2% minimum. That scenario could force the FHA to ask the federal government for a taxpayer bailout –something it has never done. (Historically, the FHA earned revenue from home loan borrower’s insurance premiums.)
Now, Congress has thrown a monkey wrench into any potential bailout scenario. According to Section 26 of the 2010 FHA Reform Act, Congress has placed a “Prohibition on Taxpayer Bailout of FHA Program.” So the FHA is on its own, and has now developed new rules to protect itself from delinquent loan scenarios.
Here’s a quick look at what’s going on with the FHA’s three new loan restrictions, which were announced on July 15:
•Updated combination credit and down payment requirements. New borrowers seeking FHA-insured financing will need to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5% down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10%. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.
•Reduced allowable seller concessions from 6% to 3%. Allowing sellers to contribute up to 6% of the home’s sale price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to 3% lets the FHA conform with industry standards.
•Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors that best predict loan performance, including the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio and cash reserves.
The FHA also announced a 30-day period for public comment, so expect the new rules to kick in by late 2010.
While most real estate professionals acknowledge the FHA had to put some new risk management protections in place, given the weakness in the real estate market, the changes will still have a big impact on home loan borrowers.
“These changes will reverberate throughout the entire housing market because the FHA insures approximately 30% of all home loans in the U.S. today,” says Gibran Nicholas, chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. “The required buyer contribution when buying a home will be nearly doubled to 6.5% from the current 3.5%. This will hurt the housing market by making it more difficult for qualified buyers with high credit scores to buy a home.
Nicholas urges any homebuyers in the market right now to speed things up before the new rules go into effect. “Homebuyers considering an FHA loan should get moving today in order to avoid getting blindsided by these new rules,” he adds.
Thursday, August 5, 2010
Ok Mr. & Mrs. Homeowner. Your house is on the market and has been for quite some time. You hired a real estate agent. You have held the open houses. You have had the home staged for optimum presentation. But it still will not sell. What’s the problem?
Well we have done the research for you and here are the Top 5 Reasons Your House Is Not Selling:
1. You Are Overpriced
The most famous words in real estate are Location, Location, Location. That may have been true some time back but in a Buyer’s eyes, the 3 most important words are Price, Price, Price. It may be hard to believe that you are overpriced but you are.
What you paid for your home is entirely irrelevant. Let’s talk basic economics. The Law of Supply and Demand most assuredly applies here. Don’t listen to any agent, advisor, friend, neighbor or family member who tells you otherwise. Learn and understand this basic fundamental of economics.
Simply put, the more supply there is of a product, the less the price must be. If there are a lot of houses available for Buyer’s to purchase, then you must be competitive in price.
Don’t let your home become an emotional albatross. Drop the price in line with similar, comparable homes and then drop it further to be the most appealing product. You know..actually have a sale!
When retailers have a sale, they don’t drop their prices just to be at the same price, they drop them further because they are having a sale and they are trying to get people to actually buy.
If you hire a Realtor, make sure you can get out of the listing agreement if they do not perform. Tie some kind of performance clause in their contract that gets them to price the property correctly at the outset.
Don’t rely on fancy CMA presentations to set your price. Most agents of course will tell you they can get you a very good price. They will tell you fanciful stats from the National Association of Realtors and their expert market analysis. Fine, then tell them to back it up!
Hey Mr. Super Realtor, for every 1 percent I drop the List Price, you agree to drop your commission the same amount. that will either get them to price the home correctly or you’ll scare off an agent that just wanted to tie you up.
Value is based upon what someone is willing to pay! Banks are tightening their standards and you had better be spot on in your pricing or your home will never sell.
2. You Are Not Truly Motivated
If you don’t NEED to sell then take your home off the market for now. Every Buyer thinks it’s Seller desperation time right now and if you don’t want to be lumped into the financially distressed, super motivated, “I’ll take anything” Seller category then take your home off of the market. If you want top dollar, now is not the time to be selling.
3. Nobody Knows It’s For Sale
Your property is not being marketed correctly. Listen up…an MLS listing, a yard sign and an open house is not marketing. While you may get some calls from Craigslist you need to be doing a lot more. Ask yourself a few questions.
When you go to the store, why are you buying the items you are putting in your shopping cart? When you go out to eat, how did you find out about that restaurant? When you go out to the movies, how did you know it was playing? Well if you and / or your agent are not executing a comprehensive marketing campaign, how do you expect anyone to know your home is for sale? You’re paying an agent big money. Get your money’s worth or fire him!
They are supposed to be marketing your home. If they aren’t, then get rid of them. Most agents think the sale is complete when they get you to list the home with them. Most agents are taught to get the listing and let someone else find the Buyer. So they put your home on the MLS and hopefully somebody else will have a Buyer in tow.
Find a professional agent who REALLY knows how to market your home. . There are some really good agents out there. However you have to know what questions to ask in order to find the right one.
Can’t find one..let us know and we’ll recommend someone in your area.
4.You’re Hung Up On What You Did To Improve The Property
So you remodeled your bathroom and kitchen and you think that matters. Well it might look nice but just as with everything else in this economy, it isn’t worth all that much either. In fact you will be lucky if you can expect to recoup even half of what you spent.
Have you seen the latest Cost vs. Value Report. it’s quite sobering to read. While you may have splurged and installed the finest granite counter-top or jacuzzi tub, right now it does not mean all that much. Sorry.
5. Neither You Nor Your Agent Understands Who Your Buyer Is
There are Buyers out there and they are indeed looking to buy now. But not every Buyer is right for your home…and believe it or not, your house is not right for every Buyer. Back to the restaurant analogy above, I hear monkey brains are a delicacy somewhere, but I don’t care. I am never putting monkey brains in my mouth. Not going to happen.
Marketing wasted on selling me monkey brains is never going to see any return. Just as there are some people that will NEVER buy your house. You and or your agent need to determine through demographic analysis who your target market is and concentrate your marketing efforts there. Just like the monkey brains salesman does.
As for Location, Location, Location….don’t worry about your location if you have the house priced correctly. There is the opportunistic Buyer out there that will buy just about anything if he can cash flow it. (i.e. Rent it out for a profit).
You must realize that you are looking to sell in an extremely competitive market right now. Everyone, it seems is looking to sell their home. You are competing with people who have to move their piece of the real estate pie. Give them a reason to buy your house…and by all means, if you don’t need to sell take it off of the market and wait for the real estate market to turn around.
Unfortunately you can not have it both ways.
Well we have done the research for you and here are the Top 5 Reasons Your House Is Not Selling:
1. You Are Overpriced
The most famous words in real estate are Location, Location, Location. That may have been true some time back but in a Buyer’s eyes, the 3 most important words are Price, Price, Price. It may be hard to believe that you are overpriced but you are.
What you paid for your home is entirely irrelevant. Let’s talk basic economics. The Law of Supply and Demand most assuredly applies here. Don’t listen to any agent, advisor, friend, neighbor or family member who tells you otherwise. Learn and understand this basic fundamental of economics.
Simply put, the more supply there is of a product, the less the price must be. If there are a lot of houses available for Buyer’s to purchase, then you must be competitive in price.
Don’t let your home become an emotional albatross. Drop the price in line with similar, comparable homes and then drop it further to be the most appealing product. You know..actually have a sale!
When retailers have a sale, they don’t drop their prices just to be at the same price, they drop them further because they are having a sale and they are trying to get people to actually buy.
If you hire a Realtor, make sure you can get out of the listing agreement if they do not perform. Tie some kind of performance clause in their contract that gets them to price the property correctly at the outset.
Don’t rely on fancy CMA presentations to set your price. Most agents of course will tell you they can get you a very good price. They will tell you fanciful stats from the National Association of Realtors and their expert market analysis. Fine, then tell them to back it up!
Hey Mr. Super Realtor, for every 1 percent I drop the List Price, you agree to drop your commission the same amount. that will either get them to price the home correctly or you’ll scare off an agent that just wanted to tie you up.
Value is based upon what someone is willing to pay! Banks are tightening their standards and you had better be spot on in your pricing or your home will never sell.
2. You Are Not Truly Motivated
If you don’t NEED to sell then take your home off the market for now. Every Buyer thinks it’s Seller desperation time right now and if you don’t want to be lumped into the financially distressed, super motivated, “I’ll take anything” Seller category then take your home off of the market. If you want top dollar, now is not the time to be selling.
3. Nobody Knows It’s For Sale
Your property is not being marketed correctly. Listen up…an MLS listing, a yard sign and an open house is not marketing. While you may get some calls from Craigslist you need to be doing a lot more. Ask yourself a few questions.
When you go to the store, why are you buying the items you are putting in your shopping cart? When you go out to eat, how did you find out about that restaurant? When you go out to the movies, how did you know it was playing? Well if you and / or your agent are not executing a comprehensive marketing campaign, how do you expect anyone to know your home is for sale? You’re paying an agent big money. Get your money’s worth or fire him!
They are supposed to be marketing your home. If they aren’t, then get rid of them. Most agents think the sale is complete when they get you to list the home with them. Most agents are taught to get the listing and let someone else find the Buyer. So they put your home on the MLS and hopefully somebody else will have a Buyer in tow.
Find a professional agent who REALLY knows how to market your home. . There are some really good agents out there. However you have to know what questions to ask in order to find the right one.
Can’t find one..let us know and we’ll recommend someone in your area.
4.You’re Hung Up On What You Did To Improve The Property
So you remodeled your bathroom and kitchen and you think that matters. Well it might look nice but just as with everything else in this economy, it isn’t worth all that much either. In fact you will be lucky if you can expect to recoup even half of what you spent.
Have you seen the latest Cost vs. Value Report. it’s quite sobering to read. While you may have splurged and installed the finest granite counter-top or jacuzzi tub, right now it does not mean all that much. Sorry.
5. Neither You Nor Your Agent Understands Who Your Buyer Is
There are Buyers out there and they are indeed looking to buy now. But not every Buyer is right for your home…and believe it or not, your house is not right for every Buyer. Back to the restaurant analogy above, I hear monkey brains are a delicacy somewhere, but I don’t care. I am never putting monkey brains in my mouth. Not going to happen.
Marketing wasted on selling me monkey brains is never going to see any return. Just as there are some people that will NEVER buy your house. You and or your agent need to determine through demographic analysis who your target market is and concentrate your marketing efforts there. Just like the monkey brains salesman does.
As for Location, Location, Location….don’t worry about your location if you have the house priced correctly. There is the opportunistic Buyer out there that will buy just about anything if he can cash flow it. (i.e. Rent it out for a profit).
You must realize that you are looking to sell in an extremely competitive market right now. Everyone, it seems is looking to sell their home. You are competing with people who have to move their piece of the real estate pie. Give them a reason to buy your house…and by all means, if you don’t need to sell take it off of the market and wait for the real estate market to turn around.
Unfortunately you can not have it both ways.
LETS HELP FARR GET THE WORD OUT!!
Spotsylvania County May Repeal Successful Energy-Efficiency Tax Credit
Posted: 04 Aug 2010 06:00 PM PDT
Attention REALTORS who sell homes in Spotsylvania County! A popular energy efficiency tax credit offered by the County may be abruptly cut short. Currently, Spotsylvania County offers a five-year real estate tax exemption for owners of energy-efficient buildings. To qualify, the structure can be either a home or a commercial building that’s either newly constructed or renovated and exceeds by 30% the energy-efficiency standards set in the Virginia Uniform Statewide Building Code and is certified by a licensed contractor.
It’s unclear how many homeowners have taken advantage of the tax credit, but anecdotal evidence is strong. Businesses have reportedly moved to Spotsylvania County for its progressive position on energy-efficiency and as a way to expand their business to offer services to property owners to increase energy efficiency. Many home and commercial building owners who were already approved for the tax credit recently received letters indicating that the program may be suspended.
As REALTORS know, things like the first-time homebuyer tax credit and this energy-efficiency tax credit have been the lifeline of the market during these hard times. The loss of this tax credit would have a ripple effect on the economy in Spotsylvania County.
A public hearing on the issue is scheduled for next Tuesday, August 10th at 6:30pm at the Courthouse in Spotsylvania County. The meeting will give citizens a chance to voice their opinion on this issue and let the Board of Supervisors know how important it really is to the market. It is vital that REALTORS turn out to share their support for this tax credit and support the health of the Spotsylvania County real estate market.
Spotsylvania County May Repeal Successful Energy-Efficiency Tax Credit
Posted: 04 Aug 2010 06:00 PM PDT
Attention REALTORS who sell homes in Spotsylvania County! A popular energy efficiency tax credit offered by the County may be abruptly cut short. Currently, Spotsylvania County offers a five-year real estate tax exemption for owners of energy-efficient buildings. To qualify, the structure can be either a home or a commercial building that’s either newly constructed or renovated and exceeds by 30% the energy-efficiency standards set in the Virginia Uniform Statewide Building Code and is certified by a licensed contractor.
It’s unclear how many homeowners have taken advantage of the tax credit, but anecdotal evidence is strong. Businesses have reportedly moved to Spotsylvania County for its progressive position on energy-efficiency and as a way to expand their business to offer services to property owners to increase energy efficiency. Many home and commercial building owners who were already approved for the tax credit recently received letters indicating that the program may be suspended.
As REALTORS know, things like the first-time homebuyer tax credit and this energy-efficiency tax credit have been the lifeline of the market during these hard times. The loss of this tax credit would have a ripple effect on the economy in Spotsylvania County.
A public hearing on the issue is scheduled for next Tuesday, August 10th at 6:30pm at the Courthouse in Spotsylvania County. The meeting will give citizens a chance to voice their opinion on this issue and let the Board of Supervisors know how important it really is to the market. It is vital that REALTORS turn out to share their support for this tax credit and support the health of the Spotsylvania County real estate market.
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