The current Social Security tax we pay on earnings is 4.2% of the first $110,100 (2012 amount) –reduced from the 6.2% charged previously.

The Medicare “fix” prevents a regulation from going into effect that reduced payments from the government Medicare program around 27% this year. These payment reductions have been “fixed” since 2003 through other legislation.

“Regular” Unemployment Insurance provides benefits for the first 26 weeks someone is out of work. “Emergency” benefits add 59 weeks, and “Extended” benefits add another 20 weeks for a total of 99 weeks. The Extended benefits would have expired 12/31/11 without this legislation.

The 33 Billion Dollar Question is: how is this paid for? It is paid for by a new mortgage “delivery fee”, tax, surcharge, or whatever you want to call it.

9 out of 10 mortgages in the U.S. are funded by 1 of 3 government agencies–Fannie Mae, Freddie Mac, and FHA. In order for banks to provide those mortgage loans going forward, this new fee will be collected from borrowers with higher closing and higher interest rates.

While Fannie Mae and Freddie Mac lose money continually, and FHA’s finances are questionnable from time to time, these extra mortgage fees will not be kept by those agencies. This doesn’t make sense that they wouldn’t keep the money they need badly, but officially the intent here is to steer potential borrowers toward mortgages provided by banks rather than toward those mortgages funded by the government. This seems like a good explanation, BUT this new fee is not nearly enough to make the agencies more viable and does not put them in the same league as what regular lenders charge. Again, it’s being used to pay for other government programs.

So for now the government will keep shuffling money around.

There is currently a refinance program available for certain borrowers that make it less expensive and often easier to refinance their mortgage. The new “plan” makes that current program even more lenient since many borrowers don’t currently qualify. Simply put, it has not solved the problem. This is obvious by the continued decline in home prices and glut of excess housing inventory, but on the surface this new plan should help more struggling borrowers.

Under the new plan the requirements of refinance will be that the borrower have a job or some source of income and that the last 6 mortgage payments were made on time. We don’t yet know whether the borrower will have to document the income or if there will even be any qualifying requirments of the income. There are two big difference this time though we do know of.

First, there will be no limit how far underwater the mortgage can be–it could be a mortgage of $300,000 on a house valued at $100,000. Great, right? The current program limits the mortgage to no more than 125% of the home value. The problem is, and I have seen this firsthand, it doesn’t matter how low the rate is on these properties. Nobody wants even a 0% loan on a home that’s worth $50,000 less than the mortgage! Many homes are in a much worse position, too. While it’s estimated that there are 11 million mortgages underwater, and this plan could only help up to 1 million of them, the past has shown that these government programs are not actually implemented according to plan because lenders are reluctant to do the loans. Banks just do not offer the refinance program the way (as leniently) as the government intended. And afterall, it will take the lenders getting on board to actually make the loans available to make any program work. Why haven’t banks been lending?

That’s where the 2nd big difference comes in. Lenders will no longer be required to “buy back”, or basically be responsible at all, for loans that go bad after the government buys them. This has been the sticking point in the past and the main reason for lenders’ reluctance to help people out. Until now just the people with good credit, enough income to afford payments, and (for the most part) some equity in the property can refinance. The result, then, is the government plan facilitating these loans is being paid for by taxpayers and redistributed to people who don’t truly need help.

This new plan provision will extend credit, from the federal government, to struggling borrowers who are underwater with no recourse on the lenders who make the new loans. This appears to be another bailout. Banks’ loans that are so far underwater and have little hope of being paid off are going to be paid off (refinanced) with new money from the federal govrenment while the lenders now have no vested interest in whether the new loans pay on time or not. Effectively, we’ve just bailed banks out of the underwater loans.

Oh yeah, and there’s profit on the new loans once closed, too!

This is actually a good strategy from both the perspective of a borrower and the lender. It’s true that if refinancing actually makes sense at this time, we should go ahead and refinance with certain assumptions of how long we expect to be in the home, our risk tolerance, future income increases, growing family needs, future planned expenses, etc. This strategy would offer savings in the event that rates go back up, and even more savings if rates go down further. Sounds great, right?

The truth is that lenders can refinance most mortgages with little or no closing costs anyway. It’s very simple. It’s so simple, it’s hard to believe that more lenders do NOT promote it. Here is an example: John and Mary Borrower have a $150,000 loan, they can refinance today on a 30 Year Fixed Rate mortgage at 4.625% with about $1500 in closing costs. If their current $150,000 mortgage is at 5.25%, it will take them about 19 months to recover the closing costs they spend now to refinance with their new lower interest rate. Now John and Mary plan to be in their home for at least 10 more years and don’t want to take any risk their payment could go up, so this makes a lot of sense for them refinance right now.

There is often a fear though that we might refinance now, spend $1500, and then see rates go down further and want to refinance again. It’s true this could happen. It’s just as likely though that rates go up wiping out the chance at any further refinance savings.

John and Mary do have another option though: They could refinance RIGHT NOW WITH NO CLOSING COSTS. John and Mary actually have the option of refinancing at 4.875% with NO CLOSING COSTS at all. They would immediately save almost $47 per month with no up-front costs.

It’s not as big of savings per month, but then again, if rates do go down further, they have spent nothing now. The point of this example is that this option is available whether it’s the first or the fifth time we refinance, and the advertising lender doesn’t explain this. They have conveniently made it look like they are going to “take a loss” for repeat customers.

We also don’t know how competitive their rates and fees are on this first refinance they’re offering, but given they’ve opted to advertise on the radio and online while supposedly risking “taking a loss” on future mortgages, yeah, I too am not falling for this one.

Here is an example of how it works with a $200,000 mortgage:

The upfront fee will remain $2000 (1%) which can be “financed”, or simply added to the loan balance. The annual fee will go up from $1800 per year to $2300 per year. The annual fee is paid monthly, so that makes the new monthly Mortgage Insurance fee $191.67 instead of $150.00.

This resulting increase in FHA fees could make conventional loans more competitive once these Mid-April FHA changes take effect. On the other hand, conventional loans secured by Fannie Mae and Freddie Mac will have their own fee increases about the same time. The main difference is that typically conventional loan fees are paid for through higher rates rather than higher Mortgage Insurance fees, so it will remain critical to carefully compare both the short- and long-term costs of all available options.

This action has contributed to positive sentiments on Wall Street and will likely cause the stock market to sustain its gains through the end of the year. This of course doesn’t bode well for mortgage rates, but we’ve enjoyed a sustained period of sub-4.5% rates on mortgages that many people capitalized on. For those who hadn’t locked in their interest rate yet, the boat for refinancing may have sailed.

At the same time, banks in general have earned record profits during 2010, so they’re not inclined to be as aggressive in offering mortgages making it even more unlikely that we will see rates as low in the near future as we have seen over the last 4 months or so. Add to this the fact that conventional lenders Freddie Mac and Fannie Mae will increase the rate hike penalties for borrowers with less than excellent credit and less than 25% equity or down payment, and you begin to get the picture that the party is about over.

There is still opportunity though for many to consider refinancing if they haven’t done so and would still benefit from an interest rate below 5%. There is still a lot of debt out there that is NOT tax-deductible, that IS at a higher interest rate, and that CAN and SHOULD be consolidated with a new mortgage. It still boils down to comparing the cost of the debt over the expected time frame for having a new loan.

If someone doesn’t plan to be in a home (or their loan) for too many years, they would be smart to look at a NO CLOSING cost refinance. The decreased interest rate may not be as attractive as what they thought it was going to be a month ago, but it may still make sense. No closing costs? Why not lower the interest rate at least a little bit. If they are going to be in the home a longer period of time, dropping their interest rate even .5% may still be enough to offset closing costs. The key is to compare options and as always to consult a Mortgage Planner for the total cost of each.

For example, if a borrower purchased a home for $200,000, they could borrow 97.5% of the purchase price for their “base” loan amount of $195,000. The UFMIP was $4387, and the monthly premium was $89.

Under the new guidelines, the UFMIP will go down to 1% (from 2.25%) but the annual premium (paid monthly) will go up to .90% (from .55%). So for the example the UFMIP will be $1950, and the monthly will be $146 ($57 more). This will make the annual (monthly) premium pretty much the same as a “conventional” loan with 5% down and average credit scores.

The main differences with FHA are that the borrower only needs 2.5% down payment instead of 5%, and the credit score doesn’t affect the interest rate like it does with conventional loans, but conventional loans have NO UFMIP. With this change, FHA will attract borrowers with below-average credit scores and less than 5% down payment more than conventional loans will. While the change is aimed at increasing the revenue FHA gets from loans, I’m afraid we’ll have to wait and see what actually happens.

The UFMIP does not have to be paid in cash but rather gets “financed”, or added, on top of the loan amount–$195,000 in the example. This results in borrowing an additional $4387 thereby increasing the monthly payment about $23/month over the base loan amount payment. With the new 1% UFMIP financed, the $1950 only increases the loan payment $10/month. On the other hand, the annual (monthly) premium just went up from $89 to $146/month. So the net change will result in a $34 ($57-$23) higher monthly payment for the same home. It is less upfront money, but more monthly premium.

So, like paying higher upfront fees (“Points”) for a lower interest rate, we compare for a breakeven point when we divide the upfront fee by the monthly payment savings. In this example, the lower upfront fee saves $4387-1950=$2437. The monthly payment increases $34, so the breakeven point is $2437/34=71 months. Bottom line, the new structure is better for the borrower up until month 72 (about the 6 year mark). After the 6th year, the higher monthly payment just plain costs more.

There are of course tax implications and cash-flow and down payment considerations when deciding which loan type to choose, but I like this new FHA structure. The odds of keeping an FHA loan longer than 72 months ( about the 6 year mark) are not that good, so this should save most borrowers money. This may present more problems for FHA in the near future because of this lowered revenue, but maybe FHA is counting on its borrowers staying in their loan longer than the average.

This change makes it more important than ever to compare options with an experience Mortgage Planner when buying or refinancing to see what’s best versus working with someone who is just trying to get the loan done and earn a quick commission.

Due to the frequency of loans defaulting as a result of differences between the application data and the final loan information, a new measure has been introduced called the Loan Quality Initiative (LQI). LQI has 4 major area of focus for borrowers to be aware of. These apply only to conventional loans like Fannie Mae but not to FHA or VA loans–yet.

(1) A direct verification with the Social Security Administration of an applicant’s Social Security number will now be required with all applicants. A simple photcopy of their card and tax returns will not be enough.

(2) Lenders will now require the credit report be updated just prior to closing. Issues will arise when there are new “inquiries”, new credit accounts, and/or higher monthly payments than what was found on the initial credit report. New inquiries will need to be fully explained to ensure that there are no new credit accounts that weren’t initially disclosed. Further, the monthly payments on existing accounts may have changed causing the debt payment total to be higher. And finally, if any new accounts were opened during the application process, the new monthly payments will need to be included in qualifying calculations. This credit report has the biggest potential to turn a loan that was approved into a loan that is later declined. It is also the area over which the borrower has the most control. An important thing to be preapred for is that if there is new information to be considered, the loan will need to be re-underwritten and may cause a delay in closing. For purchase transactions, this could potentially cause an inconvenience for the sellers as well.

(3) There are also several measures to confirm occupancy when an applicant applies for a loan for their “primary residence”. This has always been a concern in lending when someone applies for a mortgage. If any signs show the possibility the applicant will NOT occupy the home as his primary residence (such as buying two homes close to each other in a short time frame), the loan could also be declined or at least require more time and documentation to confirm occupancy.

(4) Finally, all parties to a transaction from the Realtors, to the borrowers, to the lender will be checked against two databases of “excluded parties” which contain names of people that have either committed fraud at some point or done something else wrong to raise suspicion in a transaction. This has always been required for government loans, so this requirement just seems obvious of other residential conventional loans.

The bottom line is this: lenders should be warning clients of these changes and potential delays they can cause while informing them what to-do and not-to-do during their application process.

But there may be some hope after all. Senator Harry Reid has proposed extending the tax credit deadline from June 30th to September 30th. Buyers are still required to have their accepted offer by April 30th, but would not need to close until September 30th.

This is a pretty big deal. There would, FOR SURE, be home buyers that miss out on the tax credit because of this deadline combined with a last minute problem that delays closing.

Not coincidentally, Harry Reid is a Senator from Nevada which has the largest foreclosure rate in the U.S. Many people are buying up these foreclosures at discounted prices and intend to receive the tax credit to boot. The common theme with buying a foreclosed home from a bank is that everything about the process from the initial offer right through closing is different than buying from a person.

It is common on the day of closing to hear from an attorney representing the bank who states the entire transaction cannot close that day because of something that is not in the bank’s best interest. This causes delays in closings often when purchasing foreclosures (and short sales), so it is likely an extension will have the greatest impact on that market–and Nevada in particular. Go Harry!

The other huge segment that will be helped is those waiting to buy a new home until their current home sells. If this gives them another 3 months to sell their current house, they could still buy the new home and receive the tax credit. This would be a win-win for everyone involved.

In essence, lender guidelines force appraisers to put a fair market value on a home based upon comparable sales in the area where the home is located, as the home must be “bracketed” according to size and value. For example, when valuing home A and comparing with homes B and C, homes and B and C should have square footage and sales prices higher and lower than home A in order to achieve a range, or “bracket” around home A to support the conclusion of value. At least 3 other sales, and up to 7, may be used to support the value conclusion of home A while making adjustments for differences among the properties such as size, view, location, condition, amenities, upgrades, etc.

Upgrades can usually be expressed at full value in newer homes since they required investing additional money into the cost of building the home. On the other hand, the amount invested in upgrading or remodeling an older home is rarely reflected in full in the final appraisal. The reason is the home had value in its original condition, and again, the value of the upgrades must be supported by comparable examples within the same marketplace.

These comparisons will be preferably drawn from current market activity within the last six months and one mile. Some lenders may want to look at both closed and pending sales to see if there is any room for negotiation. This is a safeguard to prevent appraisers from over-valuing the home in question. It is further stated in the guidelines that appraisers can only place a value on homes that have closed escrow. However, when property values rapidly increase within a marketplace, appraisers are generally permitted to make concessions and put more weight on the evidence provided by comparisons to pending sales and listings. This allows for a “real time” appraisal.

In order to preserve the objectivity of the appraisal process, lenders are prohibited from communicating with appraisers regarding value. While residential homes may have aesthetic appeal that can be observed by sellers, buyers, and Realtors, this is not always quantifiable for the appraiser in their appraisal. Further, the lack of similar homes that have closed recently and nearby presents another problem for appraisers in evaluating the sale. Appraisers often find themselves unable to satisfy all parties while the lender, and more specifically—the lender’s underwriter, is the one with the final say as to the acceptability of the appraisal and the property.

As a Mortgage Planner, I make it a point to follow lending laws and lender guidelines at all times, and work within the systems they provide. This promotes a smooth closure for my clients. As always, you are welcome to contact me if you have any questions.

♦ DO continue making your mortgage or rent payments
♦ DO stay current on all existing accounts
♦ DO keep working at your current employer
♦ DO keep your same insurance company (refinance)
♦ DO choose your new insurance company soon (purchase)
♦ DO continue living at your current residence
♦ DO continue to use your credit as normal
♦ DO call us if you have any questions

♦ DON’T make a major purchase (car, boat, fur, jewelry, etc.)
♦ DON’T apply for new credit (even if you seem pre-approved)
♦ DON’T open a new credit card account
♦ DON’T close any credit card accounts
♦ DON’T transfer or consolidate any credit card balances
♦ DON’T pay off charge-offs without a discussion with us first
♦ DON’T pay off collections without a discussion with us first
♦ DON’T pay off any loan or credit card without discussing it with us
♦ DON’T change bank accounts
♦ DON’T max-out or over-charge on your credit card accounts
♦ DON’T take out a new loan
♦ DON’T start any home improvement projects
♦ DON’T finance any elective medical procedure
♦ DON’T open a new cellular phone account
♦ DON’T join a new fitness club