HR 5830- Short Refinances: Saving the US Mortgage Industry?
by: Brian.Brady on May 06, 2008 07:08:40 5 comments »
Ive been writing about the merits of H.R. 5830, The FHA ‘short refi’ program that will allow home owners to refinance their mortgage to 90% of the outstanding loan balance. While my tenuous support is being criticized by liberatians, Jamie Geiger, a real estate agent from Tempe, AZ asks me this, on Twitter:
Are you seeing any lenders doing ‘short’ refis?
Great question, Jamie. The answer is¦not really. Lets look at the lenders options:
1- Foreclose on a 2-year old, poorly collateralized loan, lose 20% to principal, and reinvest at 6%, on a well-collateralized loan. Over five years, they will recover their loss and eke out a net 2.5% annual return for the 7-year period. Foreclosing and reinvesting in a low LTV loan protects the principal.
eg- $100,000 loan made in 2006 at 7% interest. Foreclose, collect $80,000 and reinvest at 6%, for five years. Total interest collected is $14,000 (first two years) plus $24,000 (reinvested loan) for a total of $38,000. $80,000 principal balance paid back in five years. The lender invested $100,000 in 2006 and will receive a sum of $118,000, over 7 years; about 2.5% return.
2- ‘Short refi’ the original loan and take a 10% nick to principal. Collect 6% interest, on a still poorly collateralized loan, and net out a 4% return for the same 7-year period.
eg- $100,000 loan made in 2006 at 7% interest. ‘Short refi’ to a $90,000 loan and collect 6%, for five years. Total interest collected is $14,000 (first two years) plus $27,000 (short refi loan) for a total of $41,000. $90,000 principal paid back at the end of five years. The lender invested $100,000 in 2006 and will receive a sum of $131,000, over 7 years; about a 4.4% return.
Its a no brainer, right? A short refi is the answer! UNLESS¦
¦they think the new loan is still risky. Lenders can reinvest the money, from the first example, against a $100,000 home. In the second example, they will have a $90,000 lien against an $80,000 home. That tells me that the lenders dont believe the real estate market can recover at a 4% appreciation rate, over the next five years. It also tells me that lenders dont think were out of the woods, yet.
Wanna try and guess the bottom? Watch the lenders. When short refis are offered, en masse, they think a turnaround is near.
· http://www.RealEstateCactus.comThanks Brian, what is really scary in the Phoenix area (outlying cities), the lenders would have to take a 50% price hit, as many homes that people purchased for about 250k 18 months ago are selling now anywhere from 150-175K-with not clear end in sight.
Permalink May 06, 2008 09:58:27 · http://www.dallasloanguy.comVery interesting analysis. I like it!!!
Permalink May 07, 2008 11:40:41 · http://www.LydingRealEstateTeam.comVery good analysis, Brian! However, maybe I look at things a bit simpler. I don’t think the Banks are doing the short refis because they don’t have the staff to handle the short refi business. They don’t want to hire the staff (training them quickly is another problem) because the reo & short refi departments are not income departments. Consequentlly, the banks are overwhelmed, not to mention a bit incompetent. We agents in the Phoenix area can barely get them to respond in a timely manner on their reo inventory! On the new business side of the fence, they are suddenly putting up barriers to new loans (that they should have put up when the market was exploding) when THESE loans in THIS market are of almost no risk. As usual, they are doing business “assbakwards”. In the 23 years I’ve been a Realtor, I’ve seen a couple of these “down” markets. Remember the Resolution Trust Corp.? (What a joke!) The banks will get their act together only when they aren’t inundated anymore. In case they haven’t noticed, the market HAS bottomed. In the meantime, we need to make the best of it and have long memories as to who provides us Realtors with good service.
Permalink May 11, 2008 15:01:45 · http://www.jmaproperties.comThat’s exactly the trouble. I think that most lenders believe we have a ways to go before we have a broad upturn in the markets. So right now they are trying to stay ahead of the curve.
Permalink May 11, 2008 15:10:22 · http://www.statewideteam.comI have negototiated a short refinance with Loan Servicing but it was not easy and it took time.
We tried to refi these homeowners in January when there ARM adjusted and went up to 10.25%. The property appraised for $284K and the homeowner was going to have to bring 9k to closing. There property had declined in value and they did not have the funds to close. They decided to wait until the FHA limits would be increased. In March 2008 the nlimits in VOlusia county Florida went up to over 300k and NOw these homeowners should be able to get an FHA insured loan. However, the property values went down even further now. Their proerty now was valued at 239K! The payoff on the 1st and 2nd mortgage was $265K. We needed 55k principle reduction to make this happen. Loan servicing was not working with us and we soliticed the help of Congressman TOm Fenney. Congressman Fenney called HUD and we all contacted Loan Servicing. FINALLY Loan servicing approved the short refinance and we closed July 3, 2008.
YES WE CAN MAKE A DIFFERENCE!
These lenders need to work with distressed homeowners and keep them in their homes! Every time a lender forces a homeowner into the street with a short sale, we all lose.
Permalink July 06, 2008 12:07:33This post has no feedback awaiting moderation...