03/26/2009
Help for Homeowners with Distressed Mortgages
Part of President Obama’s stimulus package provides assistance to homeowners with mortgages that are in trouble. This initiative is The Making Home Affordable (MHA) Plan and is made up of two separate plans:
- The Home Affordable Refinance Plan provides access to low-cost refinancing for responsible homeowners suffering from falling home prices.
- The Home Affordable Modification Plan will assist homeowners in danger of losing their homes to foreclosure.
The Refinance Plan helps homeowners with high mortgage rates to refinance even though their house has lost value and their equity has disappeared. Under current rules, Fannie Mae and Freddie Mac cannot guarantee a mortgage that exceeds 80 percent of the home's value. The Refinance plan removes this restriction until Jun1 1, 2010, allowing qualified homeowners to refinance their mortgages if:
- The property is owner-occupied and the existing mortgage is current
- The existing mortgage is owned by Fannie Mae or Freddie Mac
- The new mortgage balance will not exceed 105 percent of the home’s current value
- The mortgage balance must not exceed $729,750 for single-family homes
The Modification Plan will assist responsible homeowners who are now struggling to afford their mortgage payments and who cannot sell their homes because prices have fallen. The intent of the program, which is available until December 31, 2012, is to offer loan modifications that will make homeowner's monthly payments more affordable. To qualify, a homeowner must:
- Be an owner-occupant
- Have a mortgage created on or before January 1, 2009
- Be in financial hardship or in immediate danger of financial hardship
- Have a current mortgage payment (including taxes and insurance) that exceeds 31 percent of monthly gross income
- Have a loan amount that does not exceed $729,750 for a single-family home
Homeowners with total debt including housing, car loans/leases, and credit cards equal to or greater than 55 percent of their gross income must enter a HUD-certified credit counseling program as a condition for loan modification.
Lenders must reduce the borrower's monthly mortgage payment to not more than 38 percent of monthly gross income. The U.S. Treasury will then share the costs of reducing the payment dollar-for-dollar to a debt-to-income ratio of 31 percent. This may be accomplished by adding past due payments back to the loan balance, dropping the interest rate to as low as 2 percent, or extending the loan term to up to 40 years. The modified payments must be kept in place for five years, and then the interest rate can be stepped up only one percent per year to the 30-year fixed conforming loan rate in place at the time of the modification. No modification fees may be charged to the borrower and unpaid late fees to the borrower will be waived. Certain tests may be performed to determine if modification is likely to prevent foreclosure.
Incentives are offered to mortgage lenders and servicers to accomplish modifications:
- Mortgage servicers are offered an up-front fee of $1,000 for each delinquent loan modification meeting the guidelines. As long as the borrower stays current on the loan, the servicer will also receive a Pay for Success payment of up to $1,000 annually for 3 years.
- Mortgage servicers will be paid $500, and mortgage holders will be paid $1,500, for each at-risk loan modified before the borrower falls behind on payments.
- Borrowers who make timely mortgage payments will receive Pay for Performance principal balance reduction payments equivalent to $1,000 a year for up to 5 years.
- To encourage lenders to modify more mortgages, cash payments to partially offset probable losses from home price declines will be made on each modified loan that remains active in the program.
Consult your friendly home town banker if you need help applying for either of these MHA programs.
03/19/2009
All Banks Are Not the Same
Over the last 18 months, the national news media has intensely focused on the perils of the banking and financial industries and the impending doom of our national economy. Make no mistake, the crisis has been severe and governmental intervention has been necessary in order to bring stabilization to these industries. But we’re not there yet. Almost daily we read about another super-bank getting more government money to aid in this stabilization process. Why? The most consistent answer I hear is that these super-banks are so tied and integrated in national and international financial markets that a decision to not help them might signal a global financial meltdown. Public outcry has been enormous on this topic and scrutiny from government regulators and the news media has basically labeled the institutions getting federal aid as ‘bad’ banks. Well, I’ve had more than a gut full of this ‘bad’ banks talk, and my message to you in this column is that all banks are not the same!
Let’s look at the big picture of this financial crisis. In early 2008, mortgage loan foreclosures began to spike because rate increases made payments too high for borrowers to pay. Large mortgage banks ended up with non-performing loans on their books that they had to ditch at fire sale prices. Profits at these banks began to plummet. Mortgage lenders scaled back on lending money and the construction industry began to suffer. With foreclosures selling for pennies on the dollar, new house inventories were not selling for projected market prices and real estate values also began to plummet. The large insurance companies that provided mortgage insurance to lenders in case of borrowers’ default ran out of reserves and could no longer pay the claims on policies to the lenders. Wall Street was heavily invested in these large mortgage banks and insurance companies, so when the mortgage banks recorded losses and the insurance companies couldn’t pay the claims, the stock of the Wall Street firms also began to plummet. Investor fear was rampant on Wall Street and the stocks of the banking and financial services industries that were traded on Wall Street dropped like a rock.
Now, let’s look at the local picture of this financial crisis. Local banks feel the pinch of a strained economy too. When loan rates are so close to deposit rates, there’s not much room for profit for banks. But for the most part, local banks did not take the risks that large banks took a few years ago in making mortgage loans that borrowers couldn’t afford to pay down the road when rates would adjust higher. In most cases, local banks are in business for the greater good of their customers and not just the commission to be gained from the next ‘no-faced’ transaction. Local banks are opened to serve the communities where they’re located by providing deposit products and services to customers and lending a percentage of these deposits back to their communities in the forms of consumer and business loans. Frankly, most local banks don’t have the appetite to take the amount of risk that many large banks have taken.
I guess by now you’ve gathered that I’m an advocate of local banks. And I’m definitely not enamored with the idea of being lumped into the ‘bad’ banks bucket alongside the super banks that are getting the national media’s attention of late.
In 1997, I visited with over 300 prospects to sell stock to open Covenant Bank. I had 97 of those 300 prospects to write checks totaling over $4.2 million in opening capital. Covenant Bank opened on 12/30/97. We ended 2008 with over $107 million in total assets and we’ve done most of this business within the communities that we serve. Sure, we take risks every day. All banks do. But we try to operate our bank within the levels of products and services that we understand. If I can’t explain to my customers how a product or service works, then I have no business offering it because I don’t fully know the depths of risk associated with it. If I can’t measure the risk, I can’t know all of the downside consequences. So, at Covenant Bank, we stick to the old-fashioned ideals of banking by offering products and services that we understand, while offering the latest in innovative technologies to make these products and services more convenient for our customers. Customers we know by name and see in our communities every week.
It’s that simple. All banks are not the same. And Covenant Bank is safe, growing, and here to serve you. Have questions? Come sit down with me to discuss them. I’m here for you.
03/12/2009
Key Benefits of the 2009 Stimulus Act
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. With a projected cost of $787 billion, some key provisions include:
New Making Work Pay Tax Credit--This is a new refundable income tax credit for 2009 and 2010 equal to 6.2% of earned income, up to $400, or $800 in the case of a married couple filing jointly.
Earned Income Tax Credit--The earned income tax credit for families with three or more qualifying children increases to 45% for 2009 and 2010.
Child Tax Credit--For 2009 and 2010, the refundable portion of the child tax credit increases to 15% of earned income in excess of $3,000.
Hope Credit--For 2009 and 2010, the Hope credit is renamed the American Opportunity Tax Credit. The annual limit per eligible student increases to $2,500 and the credit is now available for the first four years of post-secondary education.
Tax Credit for First-Time Homebuyers--The existing first-time homebuyer credit now applies to qualifying home purchases made before December 1, 2009. The maximum credit amount is now $8,000. In addition, the recapture rules that require that the credit be paid back are waived for qualifying homes purchased after December 31, 2008, and before December 1, 2009, provided that the home continues to be the taxpayer's principal residence for 36 months.
Deduction for Qualified Motor Vehicles--State sales tax and excise tax related to the purchase of a qualified motor vehicle after February 17, 2009 and before January 1, 2010 can be deducted as part of the deduction for state and local taxes paid on Form 1040, Schedule A, or as part of the standard deduction. The deduction is capped at the tax attributable to a maximum $49,500 purchase price, and is phased out for individuals with modified adjusted gross income exceeding $125,000 or $250,000 for married couples filing joint returns.
Alternative Minimum Tax (AMT)--2008 temporary AMT provisions are extended to 2009; AMT exemption amounts are increased, and nonrefundable personal credits will continue to offset regular tax liability and alternative minimum tax liability.
Bonus Depreciation--The additional 50% first-year depreciation deduction applies for an extra year, through 2009 and through 2010 for certain longer-lived and transportation property.
IRC Section 179 Expensing--The increased limits relating to IRC Section 179 expensing now apply through 2009. As in 2008, the maximum amount that a taxpayer may expense is $250,000 of the cost of qualifying property placed in service for the taxable year. This amount is reduced by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $800,000.
Net Operating Loss (NOL) Carry-backs--Small businesses with average gross receipts of $15 million or less can elect to extend the existing two-year carry-back period for 2008 NOLs to 3, 4, or 5 years.
Unemployment Compensation--Up to $2,400 of unemployment compensation benefits received in 2009 are excluded from gross income for federal income tax purposes.
Economic Recovery Payments--Individuals who are eligible for Social Security benefits, Railroad Retirement benefits, Veteran's compensation or pension benefits, or Supplemental Security Income (SSI) benefits will generally receive a one-time Economic Recovery Payment of $250.
COBRA--For involuntary terminations that occur on or after September 1, 2008 and before January 1, 2010, individuals who qualify will only need to pay 35% of COBRA premiums for a period of up to 9 months. The remaining 65% of COBRA premiums will be subsidized.
Consult your friendly home town banker for assistance in putting the provisions of the 2009 stimulus package to work for your best advantage.
03/09/2009
Is it time to refi?
I am often asked when would be a good time to refinance a home mortgage. A good answer to this question can change daily. There are many variables that must be considered when analyzing this situation. Let’s look at a few situations that could lead you to a refinancing decision soon.
Did you buy your home within the last two years? If so, check the market values in your area to see if your home’s value has survived the recent stagnation or decline in the real estate market. Unless you bought in a coastal area or where market values have spiked the most, your home’s value probably maintained average market appreciation values. If this is the case and current mortgage rate shopping reveals you might improve your situation, go for it!
Did you finance your home with an exotic mortgage product? I’m specifically speaking of interest only mortgages or pay-option mortgages. If this is your situation, you need to first evaluate your home’s current market value and compare this to your mortgage loan balance. Even though your monthly payments may be low, your mortgage balance could be increasing if the minimum payments you’re making don’t cover the monthly interest due. If this is the case, the unpaid monthly interest adds to your mortgage balance, which is called negative amortization. Does this sound familiar? If so, you’re feeling the pinch of an upcoming interest rate change—definitely a payment increase—coupled with a mortgage balance that might be higher than when you purchased your home. Check with a Covenant Bank Residential Mortgage Lending specialist to determine your refinancing options as soon as possible. And stay away from exotic mortgage products! They help people buy houses now that they cannot afford later.
Did you finance your home with a long-term fixed rate mortgage and now find that you will be moving within the next 5 years? If so, consider a 5/1 adjustable rate mortgage (ARM). I define this as a flexible mortgage product and not an exotic mortgage product. You might possibly refinance to a lower fixed rate for the next 5 years and avoid payment increases from rising adjustable rates because you sell you’re house before then.
A final word: Commissions can influence advice. Always consult a trusted source for mortgage financing options. At Covenant Bank, our Residential Mortgage Lending specialists are here to help you!
Back to President's Articles
03/26/2009
Help for Homeowners with Distressed Mortgages
Part of President Obama’s stimulus package provides assistance to homeowners with mortgages that are in trouble. This initiative is The Making Home Affordable (MHA) Plan and is made up of two separate plans:
- The Home Affordable Refinance Plan provides access to low-cost refinancing for responsible homeowners suffering from falling home prices.
- The Home Affordable Modification Plan will assist homeowners in danger of losing their homes to foreclosure.
The Refinance Plan helps homeowners with high mortgage rates to refinance even though their house has lost value and their equity has disappeared. Under current rules, Fannie Mae and Freddie Mac cannot guarantee a mortgage that exceeds 80 percent of the home's value. The Refinance plan removes this restriction until Jun1 1, 2010, allowing qualified homeowners to refinance their mortgages if:
- The property is owner-occupied and the existing mortgage is current
- The existing mortgage is owned by Fannie Mae or Freddie Mac
- The new mortgage balance will not exceed 105 percent of the home’s current value
- The mortgage balance must not exceed $729,750 for single-family homes
The Modification Plan will assist responsible homeowners who are now struggling to afford their mortgage payments and who cannot sell their homes because prices have fallen. The intent of the program, which is available until December 31, 2012, is to offer loan modifications that will make homeowner's monthly payments more affordable. To qualify, a homeowner must:
- Be an owner-occupant
- Have a mortgage created on or before January 1, 2009
- Be in financial hardship or in immediate danger of financial hardship
- Have a current mortgage payment (including taxes and insurance) that exceeds 31 percent of monthly gross income
- Have a loan amount that does not exceed $729,750 for a single-family home
Homeowners with total debt including housing, car loans/leases, and credit cards equal to or greater than 55 percent of their gross income must enter a HUD-certified credit counseling program as a condition for loan modification.
Lenders must reduce the borrower's monthly mortgage payment to not more than 38 percent of monthly gross income. The U.S. Treasury will then share the costs of reducing the payment dollar-for-dollar to a debt-to-income ratio of 31 percent. This may be accomplished by adding past due payments back to the loan balance, dropping the interest rate to as low as 2 percent, or extending the loan term to up to 40 years. The modified payments must be kept in place for five years, and then the interest rate can be stepped up only one percent per year to the 30-year fixed conforming loan rate in place at the time of the modification. No modification fees may be charged to the borrower and unpaid late fees to the borrower will be waived. Certain tests may be performed to determine if modification is likely to prevent foreclosure.
Incentives are offered to mortgage lenders and servicers to accomplish modifications:
- Mortgage servicers are offered an up-front fee of $1,000 for each delinquent loan modification meeting the guidelines. As long as the borrower stays current on the loan, the servicer will also receive a Pay for Success payment of up to $1,000 annually for 3 years.
- Mortgage servicers will be paid $500, and mortgage holders will be paid $1,500, for each at-risk loan modified before the borrower falls behind on payments.
- Borrowers who make timely mortgage payments will receive Pay for Performance principal balance reduction payments equivalent to $1,000 a year for up to 5 years.
- To encourage lenders to modify more mortgages, cash payments to partially offset probable losses from home price declines will be made on each modified loan that remains active in the program.
Consult your friendly home town banker if you need help applying for either of these MHA programs.
03/19/2009
All Banks Are Not the Same
Over the last 18 months, the national news media has intensely focused on the perils of the banking and financial industries and the impending doom of our national economy. Make no mistake, the crisis has been severe and governmental intervention has been necessary in order to bring stabilization to these industries. But we’re not there yet. Almost daily we read about another super-bank getting more government money to aid in this stabilization process. Why? The most consistent answer I hear is that these super-banks are so tied and integrated in national and international financial markets that a decision to not help them might signal a global financial meltdown. Public outcry has been enormous on this topic and scrutiny from government regulators and the news media has basically labeled the institutions getting federal aid as ‘bad’ banks. Well, I’ve had more than a gut full of this ‘bad’ banks talk, and my message to you in this column is that all banks are not the same!
Let’s look at the big picture of this financial crisis. In early 2008, mortgage loan foreclosures began to spike because rate increases made payments too high for borrowers to pay. Large mortgage banks ended up with non-performing loans on their books that they had to ditch at fire sale prices. Profits at these banks began to plummet. Mortgage lenders scaled back on lending money and the construction industry began to suffer. With foreclosures selling for pennies on the dollar, new house inventories were not selling for projected market prices and real estate values also began to plummet. The large insurance companies that provided mortgage insurance to lenders in case of borrowers’ default ran out of reserves and could no longer pay the claims on policies to the lenders. Wall Street was heavily invested in these large mortgage banks and insurance companies, so when the mortgage banks recorded losses and the insurance companies couldn’t pay the claims, the stock of the Wall Street firms also began to plummet. Investor fear was rampant on Wall Street and the stocks of the banking and financial services industries that were traded on Wall Street dropped like a rock.
Now, let’s look at the local picture of this financial crisis. Local banks feel the pinch of a strained economy too. When loan rates are so close to deposit rates, there’s not much room for profit for banks. But for the most part, local banks did not take the risks that large banks took a few years ago in making mortgage loans that borrowers couldn’t afford to pay down the road when rates would adjust higher. In most cases, local banks are in business for the greater good of their customers and not just the commission to be gained from the next ‘no-faced’ transaction. Local banks are opened to serve the communities where they’re located by providing deposit products and services to customers and lending a percentage of these deposits back to their communities in the forms of consumer and business loans. Frankly, most local banks don’t have the appetite to take the amount of risk that many large banks have taken.
I guess by now you’ve gathered that I’m an advocate of local banks. And I’m definitely not enamored with the idea of being lumped into the ‘bad’ banks bucket alongside the super banks that are getting the national media’s attention of late.
In 1997, I visited with over 300 prospects to sell stock to open Covenant Bank. I had 97 of those 300 prospects to write checks totaling over $4.2 million in opening capital. Covenant Bank opened on 12/30/97. We ended 2008 with over $107 million in total assets and we’ve done most of this business within the communities that we serve. Sure, we take risks every day. All banks do. But we try to operate our bank within the levels of products and services that we understand. If I can’t explain to my customers how a product or service works, then I have no business offering it because I don’t fully know the depths of risk associated with it. If I can’t measure the risk, I can’t know all of the downside consequences. So, at Covenant Bank, we stick to the old-fashioned ideals of banking by offering products and services that we understand, while offering the latest in innovative technologies to make these products and services more convenient for our customers. Customers we know by name and see in our communities every week.
It’s that simple. All banks are not the same. And Covenant Bank is safe, growing, and here to serve you. Have questions? Come sit down with me to discuss them. I’m here for you.
03/12/2009
Key Benefits of the 2009 Stimulus Act
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. With a projected cost of $787 billion, some key provisions include:
New Making Work Pay Tax Credit--This is a new refundable income tax credit for 2009 and 2010 equal to 6.2% of earned income, up to $400, or $800 in the case of a married couple filing jointly.
Earned Income Tax Credit--The earned income tax credit for families with three or more qualifying children increases to 45% for 2009 and 2010.
Child Tax Credit--For 2009 and 2010, the refundable portion of the child tax credit increases to 15% of earned income in excess of $3,000.
Hope Credit--For 2009 and 2010, the Hope credit is renamed the American Opportunity Tax Credit. The annual limit per eligible student increases to $2,500 and the credit is now available for the first four years of post-secondary education.
Tax Credit for First-Time Homebuyers--The existing first-time homebuyer credit now applies to qualifying home purchases made before December 1, 2009. The maximum credit amount is now $8,000. In addition, the recapture rules that require that the credit be paid back are waived for qualifying homes purchased after December 31, 2008, and before December 1, 2009, provided that the home continues to be the taxpayer's principal residence for 36 months.
Deduction for Qualified Motor Vehicles--State sales tax and excise tax related to the purchase of a qualified motor vehicle after February 17, 2009 and before January 1, 2010 can be deducted as part of the deduction for state and local taxes paid on Form 1040, Schedule A, or as part of the standard deduction. The deduction is capped at the tax attributable to a maximum $49,500 purchase price, and is phased out for individuals with modified adjusted gross income exceeding $125,000 or $250,000 for married couples filing joint returns.
Alternative Minimum Tax (AMT)--2008 temporary AMT provisions are extended to 2009; AMT exemption amounts are increased, and nonrefundable personal credits will continue to offset regular tax liability and alternative minimum tax liability.
Bonus Depreciation--The additional 50% first-year depreciation deduction applies for an extra year, through 2009 and through 2010 for certain longer-lived and transportation property.
IRC Section 179 Expensing--The increased limits relating to IRC Section 179 expensing now apply through 2009. As in 2008, the maximum amount that a taxpayer may expense is $250,000 of the cost of qualifying property placed in service for the taxable year. This amount is reduced by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $800,000.
Net Operating Loss (NOL) Carry-backs--Small businesses with average gross receipts of $15 million or less can elect to extend the existing two-year carry-back period for 2008 NOLs to 3, 4, or 5 years.
Unemployment Compensation--Up to $2,400 of unemployment compensation benefits received in 2009 are excluded from gross income for federal income tax purposes.
Economic Recovery Payments--Individuals who are eligible for Social Security benefits, Railroad Retirement benefits, Veteran's compensation or pension benefits, or Supplemental Security Income (SSI) benefits will generally receive a one-time Economic Recovery Payment of $250.
COBRA--For involuntary terminations that occur on or after September 1, 2008 and before January 1, 2010, individuals who qualify will only need to pay 35% of COBRA premiums for a period of up to 9 months. The remaining 65% of COBRA premiums will be subsidized.
Consult your friendly home town banker for assistance in putting the provisions of the 2009 stimulus package to work for your best advantage.
03/09/2009
Is it time to refi?
I am often asked when would be a good time to refinance a home mortgage. A good answer to this question can change daily. There are many variables that must be considered when analyzing this situation. Let’s look at a few situations that could lead you to a refinancing decision soon.
Did you buy your home within the last two years? If so, check the market values in your area to see if your home’s value has survived the recent stagnation or decline in the real estate market. Unless you bought in a coastal area or where market values have spiked the most, your home’s value probably maintained average market appreciation values. If this is the case and current mortgage rate shopping reveals you might improve your situation, go for it!
Did you finance your home with an exotic mortgage product? I’m specifically speaking of interest only mortgages or pay-option mortgages. If this is your situation, you need to first evaluate your home’s current market value and compare this to your mortgage loan balance. Even though your monthly payments may be low, your mortgage balance could be increasing if the minimum payments you’re making don’t cover the monthly interest due. If this is the case, the unpaid monthly interest adds to your mortgage balance, which is called negative amortization. Does this sound familiar? If so, you’re feeling the pinch of an upcoming interest rate change—definitely a payment increase—coupled with a mortgage balance that might be higher than when you purchased your home. Check with a Covenant Bank Residential Mortgage Lending specialist to determine your refinancing options as soon as possible. And stay away from exotic mortgage products! They help people buy houses now that they cannot afford later.
Did you finance your home with a long-term fixed rate mortgage and now find that you will be moving within the next 5 years? If so, consider a 5/1 adjustable rate mortgage (ARM). I define this as a flexible mortgage product and not an exotic mortgage product. You might possibly refinance to a lower fixed rate for the next 5 years and avoid payment increases from rising adjustable rates because you sell you’re house before then.
A final word: Commissions can influence advice. Always consult a trusted source for mortgage financing options. At Covenant Bank, our Residential Mortgage Lending specialists are here to help you!
Back to President's Articles