NMLS#325759

HOW CAN I BENEFIT FROM TODAYS LOW INTEREST RATES?

Todays home owners are seeing 4% interest rates being publicized with a constant barrage of news articles and mortgage advertisements. Lenders are urging people to purchase homes at historically low interest rates. And yet, current home owners whose homes are worth less than their mortgage balances are being denied the ability to refinance at these incredibly low rates. It brings to mind the buggy driver who uses a long stick to dangle a carrot just out of reach of his horse. No matter how fast the horse runs, the carrot is still out of reach. Frustrated home owners ask the question in various ways, the gist of which is: I have faithfully made my mortgage payments on time at 6% since the day I financed my house. I have demonstrated my ability and willingness to make payments. I still have a job and make my mortgage payments. Why cant my bank see the wisdom in dropping my rate to 4%? Wouldnt I be even more likely to continue making payments if they took action to help me? The answer to this very legitimate question comes in several forms. FIRST, YOUR BANK DID NOT LOAN YOU THE MONEY One has to understand that your bank or mortgage company does not always use its own funds to loan you the money. The bank/mortgage company was the conduit through which you got your mortgage money. In most cases, the bank originates the loan, then sells it to a government-owned agency and is now being paid a servicing fee. The agencies are comprised of Fannie Mae or Freddie Mac, both of which have been recently taken over by the government (you and me!). In other cases, the bank loans the money, but the loan is guaranteed by another government agency such as FHA, VA or USDA (also owned by you and me!). This latter category, referred to as government loans, receive partial guarantees from the government agencies. In isolated cases, the banks may make mortgage loans through their own portfolio funds. These portfolio loans are much less common than in earlier years.

Banks make their money by servicing loans. Your bank is being paid to send mortgage billing statements and collect your payments. Your bank deals with your questions regarding your account status, modification requests and foreclosure actions. Your bank cannot arbitrarily grant you a refinance. SO, WHERE DID THE MONEY COME FROM? The funding for most mortgage loans comes from one of the agencies mentioned above. The agencies get the money by selling bundles of mortgages (mortgage-backed securities) to very large institutional investors. These investors could be the central banks of countries around the globe. They could be wealthy oil sheiks from the Middle East. They could be university trust funds or teacher retirement funds from the various states. They could be pension funds from large corporations. They could even be individual investors. The investors who buy these securities do so with a certain expectation of a return based on the fixed interest rate you are paying on your loan. Investors purchase these mortgage bonds with the knowledge that their primary risk lies in mortgages that go into foreclosure or mortgages that are redeemed early through sales of the homes or refinances. Either of these occurrences interrupts the flow of income from the mortgage bonds. So, why would it benefit one of these investors to encourage a properly performing mortgage to refinance? The answer is, it does not benefit them, at all! Bond holders are interested in keeping you so that they continue to earn the interest. You, the home owner who has faithfully paid your 6% interest rate for the last five (or twentyfive) years, are the very borrower the investor wants to retain in the portfolio. There is very little risk of foreclosure from a borrower like you and the 6% interest rate is better than the investor can obtain elsewhere in todays market. OK, BUT HOW CAN THEY STOP ME FROM PAYING OFF MY LOAN WITH A REFINANCE? Bond holders cannot stop you from paying off your loan with a refinance. Even if they wanted to stop you from paying the loan off early, they cannot do so. Your old bond holder is not stopping you from refinancing. Your servicing bank is not stopping you from refinancing. It is a potential new lenders inability to sell the new mortgage in the secondary market that is making it difficult for you to refinance. The problem with new refinances is finding investors who will buy new bonds at 4% knowing that the bonds are secured by homes worth less than the loan amounts.

Ask yourself what investor is excited about buying a basket of mortgages when it is understood that every house (the collateral!) in the new basket of loans will be under water. The new investors are being asked to buy mortgages with the sure knowledge that any foreclosures will result in ownership of houses whose values will not cover the money loaned. What sane person wants to loan money for anything that is not worth the value being loaned. Where is the protection for the lender? The laymans answer is that the risk of foreclosure is dramatically reduced by the history of on-time mortgage payments. This is a very valid argument. However, even some well-intentioned borrowers suffer financial disasters. Some will get sick and be unable to work, eventually depleting their savings and losing their homes. Others will lose their jobs and be unable to make payments. Still others will simply decide to stop making payments, so-called strategic foreclosures. These are very real threats in todays economy. Potential investors know that some houses will go into foreclosure, even in good times. They are understandably reluctant to finance these new loans. SO, WHAT ARE MY OPTIONS? The good news is that there are existing options and more options are under development. Clearly, many of todays home owners are frustrated with their inability to refinance. The banks, Congress and the administration are also frustrated that home owners cannot refinance. A massive wave of refinances resulting in millions of Americans saving $200 to $1,000 per month on their housing expense would create a tremendous increase in consumer spending and/or reductions in consumer debt. Either of these positive outcomes would dramatically increase the probability of an economic recovery. Practically all parties would welcome an increase in refinance activity. The only dissidents would be the owners of the higher interest rate mortgages that are being paid off. The current administration has instituted several plans designed to encourage the refinancing of Americas homes. Some of these plans have been dismal failures; others have resulted in limited success. None have helped the most deeply-underwater homeowners in the sand states (FL, CA, AZ, NV). Perhaps the most successful, thus far, has been the HARP program. The acronym stands for Home Affordable Refinance Program. The program began in March 2009 as a means by which home owners could refinance up to 105% of their homes current value. Realizing that many homes were more deeply underwater, the program was revised to a tolerance of 125% of the homes value in September 2009. Still, many (most) home owners in deeply troubled states (like Florida!) have been unable to take advantage of the program because they owe even more than 125% of their homes value. The latest revision, HARP 2.0, intends to remove the loan-to-value limitation entirely. Keep in mind that these are guidelines created for Fannie Mae or Freddie Mac Seller/Servicers that are intended to make it easier for lenders to refinance the mortgages of eligible borrowers. No one can force the banks to lend. Remember that the agencies

(Fannie, Freddie and others) must have willing investors to purchase the refinanced mortgages. Without a secondary market, the banks will be either unwilling or unable to originate loans regardless of the level of interest rates. Please note the very brief descriptions of refinance options that might be available to you: You have a home that is worth more than you owe or wish to finance: Fannie Mae, Freddie Mac, FHA and VA have money readily available to home owners whose home values exceed the proposed loan amount. You must qualify with respect to employment, income and assets. You must show a solid history of on-time mortgage payments. This option has always been available. You have a government mortgage (FHA or VA), the balance of which exceeds the value of your home: You may qualify for a streamline refinance without verifying the property value. In other words, you do not need an appraisal and will not be asked about the current value of the property. The problem, for some people, is that the homeowner may not have sufficient cash to pay the closing costs and prepaid expenses. The borrower cannot finance the closing costs and prepaid expenses unless an appraisal is obtained. Since most of todays homes cannot withstand the scrutiny of an appraisal, this means that the borrower must bring closing costs and prepaid expenses to the table. If you have an FHA or VA loan and cash for closing cost is available, you may be able to refinance immediately. You have a conventional mortgage, the balance of which exceeds the value of your home, which is owned by either Fannie Mae or Freddie Mac: The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009. The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009. HARP 2.0 suggests that you will be able to refinance your loan without regard to your homes current value. The programs official start date was December 1, 2011. However, any loans currently being originated under HARP 2.0 after the December 1 start date must be manually underwritten. Banks are no longer manually underwriting loans so the program has not actually been instituted in a way that can be utilized. The estimated date that computer underwriting will be available is April 1, 2012. It appears that the program will be operative on or around April Fools Day. All parties (except the bondholders who own your 6% loan!) are hoping that this will not be some cruel April Fools joke. Keep in mind the need for willing investors to buy the newly-created mortgages even though the collateral is worth less than the amount being borrowed. The administration, or the agencies who package the mortgages, must afford some degree of guarantee to induce investors to buy these loans. Fannie Mae and Freddie Mac are now owned by the

US government; i.e. the taxpaying publicyou and me. So, for this program to be effective and successful, taxpayers, in some form or other, may be guaranteeing these bond issues. Congratulations, you and I may have just agreed to underwrite each others new mortgages, as well as those of everyone else in the country! IF ALL THAT COMES TO PASS HOW DO I PREPARE? Let us presume a target date of April 1, 2012. Presume that interest rates remain constant. Refinance applications can be submitted under the revised rules when the computer software becomes available. There are several qualifiers that must be satisfied for usage of the revised refinance program (HARP 2.0). Some of the qualifiers include: Evidence that the loan is owned by Fannie Mae or Freddie Mac. You can determine whether your loan is owned by one of these agencies by visiting http://www.fanniemae.com/loanlookup/ or http://www.freddiemac.com/mymortgage. If your loan is owned or guaranteed by one of these agencies you may be eligible to take advantage of the recent changes and refinance your mortgage under the enhanced and expanded provisions of HARP. No more than one thirty-day late payment in previous twelve months. No thirtyday late payments within the last six months. Sufficient income and assets to meet debt-to-income requirements. Second mortgage debt (whether equity line or fixed) cannot be rolled into the new first mortgage. It must be retained. There will be no cash out; this plan only includes the refinance of the existing first mortgage. Closing costs and prepaid expenses can be financed, within certain limits.

Borrowers who currently have second mortgages (whether equity lines or fixed rate seconds) must obtain a new subordination agreement from their second mortgage holder. This has the potential for creating delays, depending upon the speed with which the second mortgage holder responds. We will guide and direct with respect to requesting the new subordination agreement. We must all be aware of the massive numbers of applicants that will be seeking to take advantage of this program. When the gates open, there will be millions of underwater home owners who are attempting to refinance. It will be like midnight at the mall on Black Friday. Under normal circumstances, these refinances can be processed in as little as thirty days if they are very simplistic and no delays are involved. The timeline is likely to be stretched this spring when one considers the number of applicants who will wish to take advantage of the plan as soon as it is approved.

HOW DO I ASSESS MY PERSONAL SITUATION? Practically all involved parties, not to mention the housing situation and the overall economy, will benefit greatly with the refinancing of America. Understand the problems involved and be aware that policy makers, banks and mortgage companies are working toward the goal of providing low-interest rate loans to all responsible home owners. Please begin to collect and retain verifications of employment, income and assets. We will need these items to complete a file. Obviously, the quicker we obtain the items and the more complete the package, the sooner we can complete the refinance. Quick thinkers will offer to send the information immediately. This will not help since verification documents expire within certain time limits. The documents must be recent at time of submission to underwriting. Specific documents will include W-2 and 1099 statements, pay stubs and statements verifying liquid assets. We will need tax returns, both individual and corporate, from selfemployed borrowers. ALL PAGES of any financial asset statement submitted to underwriting should be provided. The biggest single problem we encounter with routine verification documents is the receipt of partial statements. Account holders commonly discard reconciliation pages of statements, thinking that they are immaterial. They are material to underwriters because underwriters are trying to verify that no derogatory information appears. They need ALL PAGES in order to prove the absence of negative information. Please begin the practice of retaining complete bank statements so that we can process your file quickly when the opportunity presents itself. Self-employed borrowers should retain all pages to tax returns, both personal and corporate, including K-1 statements of Sub-S corporations. In short, if you receive a piece of paper that contains your name and a dollar sign, you should retain it. We may need it. We are all striving to accomplish a common goal. Thomas Mortgage would like to be the conduit through which our loyal friends and their acquaintances are rewarded for their excellent mortgage payment history. We are monitoring the situation very closely and will advise as information is received. Mickey Carlton Executive Vice President NMLS #273726 January 18, 2012 1180 Spring Centre S, Ste 223 Altamonte Springs, FL 32714 407-788-5100 m.carlton@thomasmortgage.com s.wenrich@thomasmortgage.com