Millions of Homeowners Have Only Three Choices

September 30, 2007

I believe millions of homeowners that purchased with little or nothing down and folks who accessed the ATM machine one too many times via HELOCs and serial refis with unaffordable payments only have three choices. The first option is to consider refinancing now into an ARM or a fixed mortgage rate to avoid the rate resets that they may be facing in coming months. Most resetting ARM's both prime and subprime are looking at a first adjustment of 2-2.5% from the rate that they were accustomed to paying. This is only an option if their is equity, the client can afford the payment, fully document income and has a decent FICO score. Stated income is still available although the rates are healthy and are only available if their is 10-15% equity in the property.

The second option is to sell. Many people were severely stretching to pay the interest only or even the teaser rate on a pick-a-pay loan. Struggling to pay a mortgage is a bit more satisfying in a stable to rising environment as you get the benefits of home ownership and an investment vehicle. Buying in bubble markets was "worth" it for many people because the rising values allowed them to install an ATM and access money in amounts they had never had access to. The ATM is broken and cashout activity has slowed dramatically in the last year. (See chart below.)

Hundreds of thousands of homeowners have no equity or are upside down. This is especially true in Southern California as we had the largest percentage of exotic loan products and a cashout mania. The 2003-06 zero down purchasing frenzy is coming to haunt folks who bought too much home or who are just now experiencing their first rate adjustment. They are waking up to the fact that it wasn't worth it to pay 50% of their income just for housing. They should consider downgrading or renting. Most rents in Socal are $2000 for a standard single family home in a decent middle class neighborhood. This contrasts sharply with a 4k payment on the same home.

The third option is to conduct a short sale to avoid foreclosure. A foreclosure will destroy a FICO score like nothing else. They will be locked out of buying a new home for years. Folks should try to work out arrangements with their lender for a more affordable mortgage assuming that the late payments are because of a rate reset. If that isn't possible then a listing or a short sale should be explored with the lender and a competent realtor.

A short sale is a fire sale of the house to rapidly sell the home to pay off the lender(s). You don't fool around in this situation and list the home with a hope and pray price. This is where a realtor comes in and lists the home at TODAY'S market price to make a rapid sale. Don't be fooled by the housing inventory numbers, homes will and can sell if people drop prices to meet the available buyers. Home builders are doing this daily with crazy car dealer style weekend sales advertised on AM radio and by holding auctions. Someone will buy anything at the right price. If the home can't be sold or people ignore the reality of the market many will make out an envelope and mail the keys to the lender. That jingle is the last thing a bank wants to hear when they go to the payment P.O. Box. It is happening a lot more often than you would imagine.

If you or someone you know is facing these choices I would strongly advise speaking to a qualified professional about the options available. Consider yourself fortunate if none of this applies to you. Do you have any other ideas for homeowners facing these tough choices? Post your thoughts.

FAP635: Student loan legislation impact, Free Stuff Friday, Douglas Spotted Eagle

September 28, 2007

FAP635: Student loan legislation impact, Free Stuff Friday, Douglas Spotted Eagle

Student Financial Aid News
+ Chronicle: With a flourish of his pen, President Bush signed into law on Thursday legislation that will provide the largest increase in federal student aid since the GI Bill, while sharply cutting government subsidies to student-loan providers.
+ The new law, which goes into effect on Monday, the first day of the 2008 fiscal year, will slash government subsidies to student-loan companies and use the savings to reduce the federal deficit, raise the maximum Pell Grant to $5,400 over five years, and halve the interest rate on subsidized student loans.
+ Nelnet (ticker: NNI) a major national student-loan company based in Nebraska, was one of the first to react. Three weeks ago, it announced it would lay off 400 employees and close five small loan-origination offices to make up for lost revenue. Then, on Thursday, it confirmed rumors that it will no longer pay loan origination fees for students who take out Stafford Loans, which are need-based federal loans. The change means that, starting Monday, borrowers will have to pay up to 2.5 percent of their loan balance in origination fees.
+ Another lender, U.S. Education Finance Group, said on Wednesday that it had laid off 25 of its 45 employees and would stop offering borrower benefits on new Stafford Loans starting October 1. The combined cuts will shrink the lender’s annual budget from $8-million to $3.5-million.
+ The Pennsylvania Higher Education Assistance Agency, which stands to lose $44-million under the bill, is also weighing cutbacks. Scott E. Miller, a lobbyist for the agency, said it had imposed a freeze on hiring and on new contracts, but was not planning layoffs and will maintain its loan-forgiveness programs for public servants. All other borrower benefits, he said “are being looked at with a very serious eye.”
+ And earlier this week, the GCO Education Loan Funding Corporation announced that it would temporarily stop purchasing federal consolidation loans. In a statement, GCO’s chief executive, Ron Page, said that “given current market conditions and legislative changes … we cannot offer a price for consolidation loans that is high enough for clients to recover their origination costs.”
+ So far, we’re good.

Scholarship Update
+ Allogan Slagle Memorial Scholarship
+ The Association on American Indian Affairs offers Allogan Slagle Memorial Scholarships in the amount of $1,500 to students who are members of tribes that are not recognized by the federal government. Disbursement in the amount of $750 is made directly to the college fall and spring semesters pending satisfactory progress. Spring disbursement requires a copy of the fall semester’s grades and a spring semester class schedule. This scholarship does not automatically renew. Students are eligible to apply on a yearly basis. Due to the nature of tribal status, a Certificate of Indian Blood is requested and helpful, but not required. Documents showing lineal descent are acceptable.
+ Deadline July of each year
+ Details at our free college scholarship search site

Free Stuff Friday
+ Windows Screenshot Captor
+ FastCall 411
+ Cat Calendar for TV
+ Flickr Folder Monitor for Windows
+ Ken Rockwell’s Nikon site
+ jZip for Windows
+ Xee for the Mac
+ More iPod Touch stuff
+ Mobile Facebook
+ Mobile CNN
+ Mobile Gmail

Podsafe Music
+ Douglas Spotted Eagle, Summer Morn

Reminders
+ Add the show to your iTunes by visiting http://www.FinancialAidPodcast.com/itunes/
+ Register for PodCamp Boston for free
+ Private student loans available at any time - visit AlternativeStudentLoan.com
+ Stafford federal student loans at StaffordLoan.com
+ Student loan consolidation at StudentLoanConsolidator.com
+ FAFSA form tutorials and free help at FAFSAonline.com
+ Financial Aid Podcast Show Notes at FinancialAidPodcast.com.
+ The Financial Aid Podcast is a publication of the Student Loan Network.

I want to hear from you! Email me at financialaidpodcast {at} gmail {dot} com, visit http://www.FinancialAidPodcast.com, or call 206-350-1208.

Direct MP3 file download: MP3 file

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FAP634: Sallie Mae Deal Falls Apart, Mail Bag, Rich Palmer

September 27, 2007

FAP634: Sallie Mae Deal Falls Apart, Mail Bag, Rich Palmer

Student Financial Aid News
+ From the Chronicle of Higher Education and virtually every other business wire: A $25-billion takeover of Sallie Mae that was announced in April was called off on Wednesday, the victim of a new law that will cut federal subsidies to student-loan providers.
+ President Bush is planing to sign the law, the College Cost Reduction and Access Act of 2007 (HR 2669), today. Among other things, the law will cut subsidies to for-profit lenders by 0.55 percent (The Chronicle, September 10). It is the second cut in federal subsidies to student lenders in the last two years.
+ The buyers said in a written statement on Wednesday that “the conditions to closing under the merger agreement, if the closing were to occur today, would not be satisfied as a result of changes in the legislative and economic environment.”
+ “We have told representatives of the Sallie Mae Board,” it continued, “that we are open to discussing a revision of the transaction that reflects this new environment.”
+ The April purchase agreement included a penalty of $900-million if either side pulled out of the deal. Sallie Mae officials did not return phone messages or respond to e-mail queries on Wednesday asking if they would pursue collecting the penalty.
+ SLM Corporation, the parent company of Sallie Mae, had warned in previous filings with the U.S. Securities and Exchange Commission that if HR 2669 was passed, it would hurt the lender’s profitability. In its announcement on Wednesday, Sallie Mae put numbers to those statements. The changes in the law will reduce “core-earnings net income between 1.8 percent and 2.1 percent annually for the next five years,” it said.
+ What does this mean for you? If you have Sallie Mae student loans, chances are that Sallie Mae will need to find ways to increase profitability of its loan portfolio - as will everyone in the student loan industry - in order to make mega-deals like this go through
+ Rates and fees for federal student loans are set by legislation, so lenders can make up the difference in places like late fees, penalties, removal of borrower benefits, shortening of the payment grace window, collections fees, etc.
+ The downside is that the new legislation and the breakup of the mega-merger incentivizes lenders to encourage late payments and defaults by students - just basic economics
+ It’s more important than ever to make your student loan payments exactly on time
+ Consider student loan consolidation if you need to reduce your monthly payments

Scholarship Update
+ The 2007 Blogging Scholarship Award
+ Application Deadline: October 6, 2007
* Student blog must contain unique and interesting information (no spam bloggers)
* Student blogger must maintain their own individual blog or blog on a community blog
* Student blogger must currently attending full-time in post-secondary education in the United States
* Student blogger must maintain a 3.0 GPA
* Student blogger must be U.S. citizen or permanent resident
+ Students with the drive, devotion, and passion, to put their individual voice into a blog satisfy many of the mainstream scholarship criteria attached to other more traditional awards, including creativity and imagination, motivation and passion, and technical savvy.
+ Details at our free college scholarship search site

Mail Bag
+ Stephen wrote in: I need a help with scholarship and grant to support my 2 children into private school, 9yrs and 11 yrs. Please and thanks
+ Check out our scholarship search secrets e-book
+ Brad writes in: As parents, our EFC far-exceeds the annual cost of our daughter’s education. We want her to be responsible for some of her education cost, but she doesn’t qualify for any grants or federal aid. Instead, we were offered a PLUS loan. Unless she takes out a private loan, are we out of luck on lower-interest financial aid?
+ Should have been offered an unsubsidized Stafford loan
+ Brad also writes in: A few weeks ago, you had Dr. Paul Wrubel on (which was an excellent interview by the way). He mentioned that for each child you have attending college at the same time, you could save a year’s worth of college. Did I hear that right? Was he talking about time or money?
+ Money - two kids in school at the same time can drastically change EFC calculations

Podsafe Music
+ Rich Palmer, Future Retrospect

I want to hear from you! Email me at financialaidpodcast {at} gmail {dot} com, visit http://www.FinancialAidPodcast.com, or call 206-350-1208.

Direct MP3 file download: MP3 file

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Get Out of That Adjustable Rate Mortgage

September 26, 2007

There are a lot of people throughout the country and especially in the Inland Empire that have adjustable rate mortgages. Adjustable Rate Mortgages, Option ARMS, and short term fixed loans that are fixed for just 2, 3, or 5 years were very popular because at the time people were able to get those loans and save some money every month over a fixed loan. Why? Well, rates for ARMS have been better than fixed for the last few years and people wanted to have as low a payment as possible. Payment is king...most people don't care about purchase price, can I afford the monthly payment. This is the reason for so many foreclosures.

When a short term fixed loan adjusts, the payment JUMPS. When you make the minimum payment on an option arm, your loan balance jumps! When you don't have a 30 year fixed loan, you take a risk. I had been advising my past clients since last year to get out of their short term fixed loan and to get into a nice safe 30 year fixed. Some listened, some did not. Those who didn't are sweating a little today because the values are dropping, the guidelines are tightening and now they can't refinance and their loan is adjusting.

It's important that if you are in an adjustable mortgage that you get out into a fixed loan. Those who don't might find that they are "stuck" with a payment that is adjusting upwards out of their control.

Remember that when foreclosures hit the market and sell...comparable values fall for properties around them. Lower values, tightening lending guidelines can combine to form the "perfect storm" where people simply can't even refinance in an effort to get out of that adjustable rate mortgage. The last thing you want to be in this market is adjustable.

There are a lot of programs coming out to help homeowners like FHA Secure, FHA Access, and standard FHA. VA loans are coming back too and are very competitive because they are all 1 loan with no mortgage insurance.

If you are an agent, call all your past clients and educate them about how important having a fixed loan is right now. If you are a borrower, it's time to refinance into a fixed loan.

Questions or comments?

951-515-2120

Get Out of That Adjustable Rate Mortgage

September 26, 2007

There are a lot of people throughout the country and especially in the Inland Empire that have adjustable rate mortgages. Adjustable Rate Mortgages, Option ARMS, and short term fixed loans that are fixed for just 2, 3, or 5 years were very popular because at the time people were able to get those loans and save some money every month over a fixed loan. Why? Well, rates for ARMS have been better than fixed for the last few years and people wanted to have as low a payment as possible. Payment is king…most people don’t care about purchase price, can I afford the monthly payment. This is the reason for so many foreclosures.

When a short term fixed loan adjusts, the payment JUMPS. When you make the minimum payment on an option arm, your loan balance jumps! When you don’t have a 30 year fixed loan, you take a risk. I had been advising my past clients since last year to get out of their short term fixed loan and to get into a nice safe 30 year fixed. Some listened, some did not. Those who didn’t are sweating a little today because the values are dropping, the guidelines are tightening and now they can’t refinance and their loan is adjusting.

It’s important that if you are in an adjustable mortgage that you get out into a fixed loan. Those who don’t might find that they are “stuck” with a payment that is adjusting upwards out of their control.

Remember that when foreclosures hit the market and sell…comparable values fall for properties around them. Lower values, tightening lending guidelines can combine to form the “perfect storm” where people simply can’t even refinance in an effort to get out of that adjustable rate mortgage. The last thing you want to be in this market is adjustable.

There are a lot of programs coming out to help homeowners like FHA Secure, FHA Access, and standard FHA. VA loans are coming back too and are very competitive because they are all 1 loan with no mortgage insurance.

If you are an agent, call all your past clients and educate them about how important having a fixed loan is right now. If you are a borrower, it’s time to refinance into a fixed loan.

Questions or comments?

951-515-2120

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Loan Topics

Millions of Homeowners Have Only Three Choices

FAP635: Student loan legislation impact, Free Stuff Friday, Douglas Spotted Eagle

FAP634: Sallie Mae Deal Falls Apart, Mail Bag, Rich Palmer

Get Out of That Adjustable Rate Mortgage

Get Out of That Adjustable Rate Mortgage

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