The new law directly addresses the current subprime crisis, weeding out questionable business practices on mortgage financing that are driving massive subprime foreclosures. A key provision in the law requires lenders to verify that their customers have the ability to repay the loans they are offered. This is particularly important for subprime mortgages with adjustable interest rates, since lenders must consider future rate increases before approving loans.

“North Carolina is simply saying that lenders must return to common-sense underwriting practices,” said Michael Calhoun, President of the Center for Responsible Lending. “Until the subprime market veered out of control, all reputable lenders documented income and verified a home buyer’s ability to repay the mortgage.”

Susanne Robicsek, Charlotte NC Bankruptcy Lawyer

For the second time in a week, Connecticut’s Attorney General has taken a pro-consumer case to court. Earlier this week, the state moved to shut down an unlicensed collection agency. The state has now filed suit against Countrywide Financial Corp. alleging that the company made inappropriate and unaffordable mortgage loans to borrowers and then collected excessive fees in bankruptcy cases from borrowers who had defaulted on loans.

Connecticut has now joined the states of Florida, California and Illinois as well as numerous other municipalities, government agencies, and investors in laying blame for the current credit crisis at Countrywide’s feet. Under Connecticut law, the state could recover as much as $5,000.00 for each violation of consumer protection statutes and $100.000.00 for each violation of the state’s banking regulations. The total recovery could amount to hundreds of millions of dollars.

Countrywide is no stranger to Connecticut as it was recently revealed that Senator Chris Dodd who is chairman of the Senate Banking Committee received a favorable loan from Countrywide as one of the “Friends of Angelo“, Countrywide’s chief executive officer, Angelo Mozillo.

The new legislation, or now, as it is more appropriately called, the new law aims to help distressed homeowners; however, it has no teeth. The “Hope for Homeowners Act” creates a new program within the Federal Housing Administration (FHA). The new program is temporary and its purely voluntary. In other words, the Banks do not have to participate.

As you will see, many banks will not participate or will make it very difficult for individuals to qualify. The Act contemplates that new mortgages will replace old ones. The new mortgages, which the FHA will supposedly offer through approved lenders, will refinance homeowners existing loans. These new loans will be deeply discounted depending on the current market value of the home.

Before we look at the guidelines for these new loans, let’s think about something else for a minute: What government program has ever really worked like it was supposed to?

Immediately after President Bush signed the legislation, my phone began ringing with clients who wanted me to use the new law to save their homes and the media who wanted to know what the new law meant and how it could be used to save homes in Southwest Florida. Both groups of people were sad to learn that the new law wouldn’t be of much use in Southwest Florida.

The first part of this blog will give a good indicator of why the new law will not have much impact on the residents of Cape Coral and Lehigh Acres, where the foreclosures just keep adding up. We were all hoping that our elected leaders would do something to change the outlook for the rest of 2008 and beyond.

Who Is Eligible:

1. The individual must be the Homeowner who actually lives in the house, and not be an investor. In other words, no rental properties are eligible to receive a new mortgage.

2. Homeowners must certify that they have not intentionally defaulted.

3. Homeowners must have a mortgage debt of more than 31% of their monthly incomes as of March 1, 2008.

4. Homeowners incomes must be verified.

5. The troubled loan must have been no later than January 1, 2008.

Here is the sad part and it is all opinion on my behalf. I can see our elected officials sitting in their cushy offices in Washington saying to each other that something has to be done to stem the tidal wave of foreclosures. So, they call the mortgage lenders and say what are you going to do about this.

The mortgage lenders have already crunched the numbers and know how to exclude the maximum amount of homeowners and how to exclude the worst loans out there. Then they calculate in some wiggle room by putting eligibility requirements on it. then they slap a name on it that shows they really care about their constituents who are losing their homes on a daily basis. I am willing to bet that more thought went into naming this piece of trash than actually thinking about how it would really help the people that need it the most.

C’mon guys and gals, they are handing us this piece of legislation which is nothing more than trash, and they expect us to sit back and take it. If you don’t think this will be abused, you must have voted for it.

In many cases, they benefit others, and can leave you and your credit worse off than filing for bankruptcy.

Here’s the inside scoop on Short Sales.A short sale happens when your mortgage lender agrees to release its lien on property when it hasn’t been paid in full.

Who does a short sale benefit? As discussed below, you may not be the major beneficiary.

• The lender gets most of its money without having to spend the time and go through the expense of a foreclosure.
• The person buying your house gets a deal–a lower price then the debt on the property.
• And, perhaps most important, short sales have been latched upon by many Realtors as a way of generating income when the housing market is in the dumps, since they earn commissions on the (lower) purchase price. Be sure to look at who benefits from the short sale: in many cases, it’s everyone but you.

This is because unless the lender agrees, a short sale doesn’t eliminate your obligations under the mortgage, it merely releases the lien from the property. If you do not negotiate otherwise and your state law allows it, you may remain liable for any deficiency that results from the ultimate sale of the property.

A short sale will seriously damage your credit, typically to the tune of about 200 points (the same as a foreclosure, and the same as a bankruptcy).

Finally, many lenders will issue a 1099-C for any forgiven debt resulting from the short sale. Unless you qualify and file special forms with the IRS and state taxing authorities, you can owe taxes on this forgiven amount. The lender can also agree not to file a 1099-C as part of the negotiations over the short sale.

I have negotiated short sales for many clients over the years. There are circumstances when they are the best option. But be wary–there are many situations where they are far more beneficial for everybody else than they are for you.

I generally will not recommend that a client agree to a short sale unless all lenders agree to accept the short sale as payment in full, agree not to issue a 1099-C, and agree not to file a negative credit report as part of the transaction.

Be sure to check with an experienced lawyer who can properly advise you before doing anything.

Here’s the inside scoop on Deeds in Lieu of Foreclosure.A deed in lieu of foreclosure is when you transfer the title to your house back to the lender through a quitclaim deed. This lets the lender obtain title to the property without having to spend the time and go through the expense of a foreclosure. You can’t do this without the lender’s consent, however, and it can be difficult to get the lender to agree.

This is because if there are second mortgages, tax liens, judgment liens, mechanics’ liens, or other liens or claims against the property, they remain following a deed in lieu, and the lender may have trouble selling the property with these liens outstanding. A foreclosure wipes them out. Many lenders therefore prefer to foreclose and get clean, marketable, title without any unforseen problems.

Even if the lender agrees, a deed in lieu doesn’t eliminate your obligations under the mortgage (unless the lender agrees to do this), it merely transfers title from you to the lender. if you do not negotiate otherwise and your state law allows it, you may remain liable for any deficiency that results from the ultimate sale of the property.

A deed in lieu will seriously damage your credit, typically to the tune of about 200 points (the same as a foreclosure, and the same as a bankruptcy).

Finally, many lenders will issue a 1099-C for any forgiven debt resulting from the deed in lieu. Unless you qualify and file special forms with the IRS and state taxing authorities, you can owe taxes on this forgiven amount. The lender can also agree not to file a 1099-C as part of the negotiations over the deed in lieu.

I have negotiated deeds in lieu for many clients over the years. There are circumstances when they are the best option. But be wary–there are many situations where they are far more beneficial for the lender than they are for you. Check with an experienced lawyer who can properly advise you before doing anything.

[B]ehind the big increase in consumer debt is a major shift in the way lenders approach their business. In earlier years, actually being repaid by borrowers was crucial to lenders. Now, because so much consumer debt is packaged into securities and sold to investors, repayment of the loans takes on less importance to those lenders than the fees and charges generated when loans are made.

…

Mortgage lenders similarly added or raised fees associated with borrowing to buy a home — like $75 e-mail charges, $100 document preparation costs and $70 courier fees — bringing the average to $700 a mortgage, according to the Department of Housing and Urban Development. These “junk fees” have risen 50 percent in recent years, said Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on mortgages.

The problem is not only the disconnect between those making the loans and those relying on the loans being repaid, but on the profit incentive built into the mortgage servicing industry, which makes more money on bad loans than on good ones.

If you’ve missed a mortgage payment or two, you don’t need me to tell you about junk fees. If you’re trying to minimize those charges, I can offer no better advice than to be vigilant. I don’t mean just making your payments on time, either, though that is certainly the place to start. You may also need to follow up and make sure those payments are posted on time.

Review your statements for fees, and question any that don’t seem appropriate to you. And review your escrow statements, too. Don’t assume that it’s correct just because they say it is. Your mortgage company, and their mortgage servicer, are in it for the money. Don’t give them any more of yours than they deserve.

Stock values for these two, key lenders, have dropped by 80% from their value just a year ago. There is a serious question about liquidity for these privately held businesses. While there is no guarantee of these organizations by the government, they may be simply to big and too important to be allowed to fail. On the other hand, the financial obligations involved are astronomical; equal to the entire national debt of the United States.

If Fannie Mae and Freddie Mac fail, who will lend money to American home buyers? As a key element of pending plans for prevention of the cascading home loan default crisis, they are essential to a recovery for the housing market.

As the lenders threw money out the window the early part of this decade, they had to lower their standards to keep the gravy train going. So, most of the mortgages in 2006 and 2007 were “no doc” loans, in which tens of millions of dollars were lent to people without proof that they had any income with which to repay the loans.

Now the Fed is acting to protect the lenders from themselves, imposing underwriting standards where none have existed.

Protecting the homeowner would seem to be a better course of action than bailing out the sub-prime mortgage lenders. Rather than subsidizing the money people who bet wrong, and letting foreclosures increase, further depressing home prices, as we bloggers have said before, let Congress make a simple reform to Chapter 13 bankruptcy law, and the credit crisis can be at least partly addressed without cost to the taxpayer.

But no, the big boys, having been led by greed, instant gratification, short term gain, now want the taxpayer to let them off the hook.

And the Fed is shoveling money out the door to keep them afloat, and only now getting around to regulations that would have avoided much of the sub-prime crisis.

Such sales are often good deals for buyers because there is little competition for the purchase of so many foreclosed homes. Lower auction prices result in mortgage companies incurring greater losses, which are passed on to the homeowner in the form of a deficiency judgment.

In what appears to be a brilliant move, Duval County Clerk Jim Fuller has announced that foreclosure sales will now take place online, in an eBay-style auction.

In an interview with First Coast News, Fuller states, “It’s like eBay or one of the other online type biddings. You can bid on something from eBay in Canada if you wanted it.”

Fuller predicts that the technology will benefit both plaintiff and defendant by enlarging the pool of potential buyers.

The First Coast News interview does not address one practical problem. According to the Duval County Clerk’s website, Chapter 45 of the Florida Statutes requires bidders, upon making a bid, to immediately produce for the Clerk’s view the required deposit equal to 5% of the final bid, in cash or cashier’s check or money order.

How will the new on-line procedure comply with this statutory requirement?

No, I’m not overextended, but I utilize a home equity line on occasion to float larger purchases like a car. In the wake of massive foreclosure rates, banks are pulling back from their best customers as part of an overall credit squeeze. In the case of home equity lines, the pullback is even more pronounced because of dropping home values. The unintended result is that, if my bank decides to reduce the available balance on my HELOC, my credit score will drop. 

One major factor in determining a FICO score is the “credit utilization rate.” This is calculated by dividing outstanding balance by available credit limit. The higher the CUR the lower the FICO score.

For example, if a borrower owes $40,000 on a HELOC with a $100,000 limit, the CUR is 40%. However, if her bank decides to reduce the available credit limit to $80,000, despite never being late on a single payment, the borrower’s CUR rises to 50%. The result is a lower FICO score, and the borrower may not even realize the damage until she applies for a loan.

Bankrate.com recently reported a case of a borrower’s $100k HELOC being reduced to just $12k, the outstanding balance. The CUR on the loan exploded from 12% to 100%, thereby crushing the borrower’s credit!

Of even greater impact than lowering HELOC credit limit is the recent widespread move by banks to lower credit card limits. Large credit card issuers, such as HSBC, Wells Fargo and Washington Mutual have just begun systematically lowering credit limits.

Even though banks must notify borrowers of a drop in available credit, they have no obligation to disclose the negative impact the move has on credit scores.

While the tightening of credit is probably not a bad thing, the short term ramifications to consumers could mean not qualifying for the lowest possible rates.