I have been working with several clients who are looking to refinance their Adjustable Rate Mortgages as those mortgages are scheduled to reset upwards this coming year. In prior years with an appreciating market a new appraisal was likely to be higher, enough to make the refinance feasible and enough to even cover the refinance costs so there would be no out-of-pocket expense to the homeowner. Currently the challenge is that all over the country there are geographical areas designated as declining in value. Link In such areas, lenders apply a rule of thumb of downrating appraisals by 5% to give themselves a buffer. Clients who have loan amounts with loan to value ratios that are at the limit of lenders’ ranges have been aware that appraisals may not come in with adequate value to enable the refinance to pencil out. And with a declining market designation for their locale the problem is even worse. So what is a homeowner in such a situation to do?
The Wall Street Journal, Friday Jan 11, 2008, wrote about Countrywide, the country’s largest mortgage issuer, being potentially acquired by Bank of America. BofA had made a $2 billion (16%) investment in Countrywide earlier in 2007 and now is seeking to become a dominant mortgage lender by taking on $30 billion in Countrywide home equity loans to add to its own $100 billion in home equity second mortgages. Of the $30 billion, there are “$26.84 billion of option ARMs which allow borrowers to start with minimal payments and face far higher ones later.” The article further states that “Bank of America will have strong incentive to work with Countrywide borrowers to minimize delinquencies and other problems.”
Thus home owners with Countrywide mortgages should inquire if Countrywide will work with them to rework their mortgages to be a win-win situation in this market. It is far better for Countrywide and Bank America to work with reliable clients who may be able to continue making payments even if less than full amortization level than to reset payments to the point where the homeowner falls behind and is unable to catch up. In a normal market, the inability to make full amortization payments indicates an occasional problem on the part of just a few borrowers. But in this market it is expected that there is a large number of homeowners that will be reset into ”payment distress”. This situation was caused by lending standards in the past five years being overly liberal. Borrowers were not always qualified by lending underwriters at the full loan amortization level and homeowners using the new “convenience” stated income loans may have overstated their true incomes, anticipating raises by the time the rates would reset, raises that may not have materialized. So rather than reset these many homeowners into foreclosure the bank is likely to work with the homeowners on some win-win basis covering several years.
Likewise, other mortgage lenders like Washington Mutual are also likely to be looking to “partner” with a larger bank or other financial institution and so WaMu offices are also likely to want to work with its homeowner borrowers. Expect if you are a borrower in good standing that WaMu will be willing to work with you so its accounts look as good as possible for an acquirer or other investor.
If your Option ARM mortgage is coming up for reset and you have an appraisal and loan-to-value challenge, open a dialog with your current lender to explore win-win solutions. If you’d like a free consultation on this matter contact me. If your best solution is to work with your current lender and not refinance with me, I’ll tell you so. By building your trust I hope to do business with you in the future.
You may be in a position to significantly improve your mortgage situation. If you have equity of 20% or more and strong income and desire to stop treading water with your mortgage, get out of the Option ARM mortgage altogether and into a better mortgage solution, such as a Home Ownership Accelerator. This product is an innovative home finance solution that maximizes your return on savings. You will be able to pay off in half the time without changing spending habits and you may be able to tap into your home equity to make sound investments that leverage your net worth. For more information on the benefits of the HOA, see other posts in this BLOG. Link
