Rates turned north at the end of this week as the government converted its Citibank preferred shares into common stock bolstering the “book” equity of the bank but stoking fears about  nationalization.  The benchmark 30 yr fixed rate stands this afternoon at around 5.25% with 1 point, up from Freddie Mac’s posted average during the prior week of 5.06% with 0.9 points

The $94 billion of Treasuries auctioned this week by the government, plummeting GDP and consumer sentiment,  and speculation about next week’s House vote on “cramdown” legislation–the proposal to allow bankrupcty judges to write down principal balances for trouble homeowers–combined to push mortgage rates higher.  If the legislature votes next week to allow “judicial modifications”, investors will likely price in even more risk and lift rates a bit more.

There seems to be no gas left in the flight-to-quality tank.  All the ugly news is, as we say, already baked in to the cake.

As consumers are swept into the foreclosure vortex, questions arise about whether to attempt a short sale or let the home go to foreclosure.  Which will damage credit less and allow the homeowner to more quickly reenter the market?

Many real estate professionals have promoted the idea that a short sale will be less damaging, and some have gone so far as to predict the number of points your score will drop on a short short vs. the point drop on a foreclosure.  This is like predicting how hot it will be on July 4th.  As I have disagreed in several posts including Short Sales vs. Foreclosures, Your Credit Will Suck Either Way,  one may be no better than another.

Here is an update from Old Republic Credit Services:

Recently, several alternatives to foreclosures have become popular. Some of these include “short sales” and “deed-in-lieu of foreclosure”. It is important to know that as far as the FICO score is concerned, there is no difference between foreclosures and these other options. Each is considered and an account that was “not paid as agreed” will have the same negative impact on the score. However, the account status reported is ultimately the decision of the creditor.

Lenders may state that the minimum time frame for securing a new loan is less for a short sale than for a foreclosure, but keep in mind that these are just the minimum time frames.  After that is satisfied, you’ll still need to have good credit scores in order to get a new loan.

The second part of the plan announced last week to help troubled homeowners gets at the core of the problem:  how to help “at risk” homeowners who are struggling to keep their homes.  The key objective of the “Stability” piece of the plan is to reduce monthly mortgage payments to sustainable levels for those committed to keeping the homes in which they live.  If you’re a flipper, an investor, or worried about your vacation home, you can stop reading here.

We’re still waiting for March 4th and more detail, but here’s what we know so far:

• Do I have to be behind on my payments?  No, this is a big improvement over previous efforts.  You qualify without falling behind on payments if you can show that you are “at risk of imminent default” due to loss of income or employment, a big increase in your expenses, or a bad loan that is resetting to an unaffordable level.  Following the FDIC’s model of their IndyMac bank takeover, the government wants lenders to pro-actively send letters to those who appear to meet the eligibility requirements.  That will take a few weeks after the March 4th announcement, and the phones lines will be busy, so patience may be needed.
• Will this reduce my principal balance?  It could.  Unlike Part I, this part of the plan offers incentives to lenders to reduce principal balances if other measures fail to bring payments down to 31% of your monthly income. Principal reduction is  still voluntary and will be the last resort for lenders, but at least there are now financial incentives in place to encourage lenders and servicers to consider this.   Furthermore, if you exhaust all other options and are forced to seek protection under the bankrupcty laws, it looks like the courts will have the ability to  “cram down” the principal balance, allowing you to keep the home with a lower payment.
• Will all lenders be doing this?  No–and this is sort of a weak spot–it remains a voluntary program, but the government has placed substantial incentives on the table and expects most major lenders to participate.
• What incentives will lenders have to participate?  The government is going to pay loan servicers (the bank who sends your monthly statement but may not actually own the loan) $1,000 upfront for each loan they successfully modify plus an additional $1,000 per year for three years if the borrower stays current on the loan.  To encourage lenders to work with borrowers who are not yet in default, additional incentives are paid to banks and servicers who modify loans before the borrower falls behind.  Finally, a $1,000 per year (up to five years) is actually offered to the borrower who stays current on the modified loan for the ensuing five years.  This goes toward reducing principal even further.  Pretty good stuff.
• How do I qualify?  The home must be your primary residence, the payments must exceed 31% of your current income, and your loan must not exceed the current Fannie Mae/Freddie Mac loan limits for your area.  The standard national limit has been $417,000, however there were higher limits imposed in some areas for 2008, and the Plan reestablishes those for the rest of 2009.
• What do I do between now and March 4th?  If you think you may qualify, then get ready by organizing your current income: pay stubs, tax returns, and anything else; your expenses for your mortgage, property taxes, car payments, student loans, credit cards; and documenting and explaining any hardships that have contributed to your current inability to make your mortgage payments.

So, we wait for March 4th to know the rest of the story, but to summarize, Part I offers a little bit of help to “responsible” homeowners who can currently afford their payments.  Part II creates incentives that encourage banks and servicers to work with “at risk” homeowners before they get behind and damage their credit; offers the possibility of principal reduction to create a livable payment;  and will pro-actively contact homeowners who may be eligible.

All in all, this is an improvement over the litany of half-hearted, watered-down efforts previously made.  Let’s hope it has the desired effect.

There are two parts to the plan announced last week to help troubled homeowners. To clarify what we know so far, I’m going to focus on Part I:  the “Affordability” part of the plan.  This section addresses homeowners who can still afford their mortgages but who have been unable to refinance to lower rates because of falling home values.

Full eligibility details will be announced by the Obama administration on March 4, but we do know a few things now:

• Does this apply to all loans?   No, only to loans owned or securitized by Fannie Mae or Freddie Mac (after March 4, you can call your lender and ask if this is true in your case)
•  Does this apply to rental property loans and 2nd homes?  No, it only applies to primary residences
• What if I owe more than my home is worth?   This is one of the plan limitations for Californians.  Under the plan, you will still be allowed to refinance, but only if you owe a little more than the home is worth.  Specificially, your loan cannot exceed 105% of the home’s current value
• Will my payments go down? Not necessarily.  You’ll merely have access to current market rates without any special pricing or government subsidy.  Furthermore, if you have an interest-only loan now, your payment could actually increase if you refinance into a normally amortizing 30 yr fixed rate loan
• Will mortgage insurance be required?   We’ll have to wait until March 4th to find out.  Since first mortgages that exceed 80% of a home’s values are typically required to have mortgage insurance, this would be a reasonable assumption.  However, since it offsets the benefit of lower rates for those who previously did not have to have it, maybe the plan will address this another way
• Will my principal balance be reduced?   No, the primary benefit to homeowners is to provide access to today’s lower rates for those whose declining home values might prevent refinancing.  It is not the intent of this section of the plan to reduce the amount owed.

That’s my summary of Part I.  Stay tuned for an analysis of Part II:  the “Stability” piece…

With the plan just signed into law, homeowners are eager to understand the details and know how the plan might help them.  The administration has promised more details in March, but for now, here’s a link to the Treasury’s Executive Summary, a fact sheet, and three case studies that demonstrate how the plan might work.   More to come…

With the US Senate finally passing the Stimulus package late Friday, the bill goes to the President for signature today.  The competing versions of the First Time Buyer Tax Credit have been reconciled by the two houses of Congress into their final form. Here are the key terms:

• $8,000 max credit
• First time buyers, principal residence only
• For homes purchased between Jan. 1 and Nov. 30, 2009
• Repayment is waived for buyers who live in the property for 3 years
• $75k income limit for an individual; $150k for a couple

With April 15th fast approaching, home buyers are curious about how the new stimulus package will impact the recently enacted $7500 First-Time Home Buyer tax credit.  That credit–essentially an interest free 15 year loan–gets an important revision in the House version and an upgrade in the Senate.

For folks buying homes between January and July of 2009, the House bill would eliminate the repayment previously requirement for the credit, as long as the home is retained and occupied for 3 years.  Prior to this change, home buyers taking the credit would start paying it back after year two at the rate of $500 per year–still a good deal, but even sweeter now.

By contrast, the Senate version would pump up the one-time credit to $15,000 on the purchase of a principal residence.  To make the credit more valuable to low income taxpayers who might not have a $15k tax bill, the credit could be spread over two tax years.  Like the House bill, this credit would not be recaptured provided that the home is owned for at least 24 months. The Senate’s credit also expands the eligibility period to one year from the date the bill becomes law.

The differences will be reconciled before any change becomes law, and the final version will surely be some compromise between the two.  However, it appears that substantial new incentives will be offered–on top of decade-low home prices and 40-year-low mortgage rates–to get first time home buyers to put their toes in the water.   There haven’t been this many great reason to buy in a long time!