It’s Time to Refinance America and Time For Washington to Get Out of The Way

by Brian O’Reilly

In a recently published study by the Federal Reserve they confirm what millions of American homeowners know first hand and what most professionals in the housing finance industry have known for over a year: namely, that millions of American homes are unable to be refinanced – despite historically low interest rates – due largely to the fact that many of these homes are either underwater (meaning the current loans balance exceeds the current property value) or the home’s owners fail to qualify for refinance loans due to tighter credit standards. The Fed’s study would suggest that at least two million American homes are eligible for refinance but for these conditions.

Despite this reality, Washington seems unable to come up with a solution. Prior efforts such as HARP (Home Affordable Refinance Program), though well intentioned, quite frankly have failed. The failure is due in no small part to the fact that the eligibility criteria designed by regulators have been too narrowly defined to accommodate a housing market where values continue to decline and an economy that remains weak at best.

And though efforts are currently underway to design and implement a new refinance program, it is likely that this effort to will fail. Why? Because Washington wants to put strict conditions on who will qualify for a refinance loan for fear of being accused of encouraging “moral hazard” where certain unworthy home owners benefit from the redesigned refinance program. The details of the “new” refinance program have not yet been published and no deadlines have yet been set for its implementation. As a result, millions of American home owners – most of whom are current on their mortgages, by the way – continue to twist in the wind as interest rates hit new lows nearly every day.

By contrast, I believe it is possible to implement a meaningful refinance program by year-end that is simple to implement, rewards every American that remains current on their mortgage, poses very little risk to encouraging moral hazard, and, most importantly, will inject billions of dollars of free cash flow into our struggling economy.

Here’s how it would work:

* Mortgage borrowers current on their mortgage for the past 12 months and whose new payment would be at least $50 dollars per month less than their current payment qualify. Period!

* To be clear, this would apply to borrowers who are owner occupants and investors alike. Moreover, the program would apply to borrowers’ with first and second mortgages as well. If the new payment is less than the combined old payments, they get rolled up and refinanced into a new loan under this program. It’s that simple.

Detractors will surely say “… Oh my God, it can’t be that simple, what about loan-to-value ratios, what about credit scores, what about current employment and income, what about investors who lied on their prior loan applications, what about…, what about …” To those detractors I say, who cares? If the goal is to enable American homeowners to take advantage of current interest rates, reduce their current payments and therefore free up cash for use in other parts of the American economy, then why not let them refinance.

For God’s sake, let’s be honest, if someone is managing to make their mortgage payment today at a higher rate – regardless of loan to value, regardless of whether they are employed or have a nickel of savings – then the odds are pretty darn high that they will continue to make their payment if the payment drops.

Of course, nothing is ever this simple, and lenders in today’s business environment – where their business decisions are being scrutinized at every turn – likely would be very reluctant to originate loans under this limited guideline for fear that in the future some regulator or politician would challenge their lending decision as somehow imprudent. They also would likely reasonably fear holding these loans on their balance sheets given the implications of such loans to their future financial condition and regulatory capital requirements, among other things.

And undoubtedly, operational bottlenecks from overtaxed servicing and origination platforms will be an issue for the implementation of any sort of plan. However, innovative private sector service providers and solutions exist today to help unburden those organizations and streamline this proposed refinance process. In fact, under one such solution, the process could be as simple as to only require that borrowers execute a new note or a rider to their existing note.

Even under the most streamlined scenario, however, to make this work – and it can work, the following also would be required:

1. This limited guideline would need to be memorialized into a new loan program and published by FHA or Fannie and Freddie (or both);

2. The program should be available only for a limited period – say for the next twelve (12) months – in recognition of the fact that lenders are already backlogged with refinance requests;

3. The guideline would need to make clear that the lenders’ only repurchase – or rep and warrant obligation to FHA, Fannie or Freddie – would involve the determination of whether the borrower had been current the past 12 months and whether the new loan payment was lower than the old loan(s). Likewise, large lenders could not impose more onerous rep and warrant standards on smaller lenders originating these loans and from whom they might buy these refinance loans.

4. Regulators would need to affirm that lenders’ capital or reserve requirements would not need to be increased in any way to account for the unique underwriting characteristics of the loans originated under this program.

5. A new liquidity mechanism would need to be developed so these loans could be sold by the lenders originating them. For this, we believe that Ginnie Mae should create a new Ginnie III security designed specifically for these loans. By doing this, the securities would enjoy the full faith and credit of the US Government and would be readily purchased by investors, including foreign ones.

The benefits of such a program if successfully implemented could be significant both to the housing industry and the American economy:

First, for homeowners whose monthly payments would be reduced, that lower payment would function like an immediate tax cut – Americans’ spending power would improve immediately – but with no negative implications to the federal budget;

Second, investors (bondholders), who have interests in the loans being paid off by these refinance loans, would be satisfied at par (or 100%) – though perhaps earlier than they might have otherwise. However, that is a far better outcome than a situation involving government-sanctioned principal reductions – which in my opinion is nothing less than a government-sanctioned abrogation of contract – and the greatest example of moral hazard – and to be avoided at all costs.

And on that point, let me say, that there should be no government-sanctioned principal reductions under any circumstances. That should be avoided under all circumstances – even where a default and foreclosure would result.

Third, the cost to the government would be virtually zero. Costs would be conditional and would be recognized by the government if and only if borrowers whose loans were refinanced under the program defaulted. To be clear, that is a risk the government already has through its support of Fannie, Freddie, FHA and Ginnie Mae. Surely, it makes sense to reduce that risk by lowering millions of borrowers’ mortgage costs thereby reducing their likelihood of default.

Fourth, and most importantly, but perhaps most intangible, this program would revitalize consumer confidence at a time when it most needs encouragement. It would reward those homeowners who, despite all of their challenges and difficulties, have found a way to keep making their mortgage payments.

If these aren’t the people we should be helping, I don’t know who is.

The Aragone Team is committed to helping people stay in their homes.Feel free to visit our website to request a free market analysis or call us at 714-366-6117

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Extension of conforming loan limits fails in House

The elevated conforming loan limit for mortgages guaranteed or insured by the government will expire on Oct. 1, according to three congressional staffers, but another chance to extend them will come later this year.

Congress raised the limit to as high as $729,750 in 2008 as the private market froze and financing for larger mortgages became unavailable. On Oct. 1, the limits will expire and drop to $625,500 in the most expensive areas, mostly affecting the West and East Coasts. According to Standard & Poor’s, there are around 110,000 nonconforming mortgages in the nation between $625,000 and $729,000 — about 2% of total jumbos.

Two bills to extend the limits, one introduced in the House and another in the Senate, were never voted on. A spokesman for Rep. John Campbell (R-Calif.), who co-sponsored the House bill, said an extension did not make it into a short-term spending bill the House will vote on next week.

“We are focusing all of our effort and attention on making sure that a temporary extension of the current conforming loan limits is included in an omnibus spending bill that it appears the House and Senate will consider late this year,” Campbell’s spokesman said.

Another staffer confirmed top leadership in the House had been trying to work the conforming loan limits into the spending bill ahead of the Oct. 1 deadline. Such a route had to come from the House, the staffer said. Yet another told HousingWire the odds of getting an extension after the limits expire were very long.

Industry trade groups pushed hard this past week, urging lawmakers to extend the limits at a time when the housing market is still fragile.

The Obama administration said in its white paper released in February that the first step toward winding down Fannie Mae and Freddie Mac would be to allow the loan limits to expire in October, allowing private capital to move back in.

Jaret Seiberg, a research analyst at the Washington think tank MF Global, said in a note that the expiration allows the largest banks to restart their securitization businesses.

“The real issue is whether investor demand has returned for private-label RMBS. We believe regulators have some doubts, but would like banks to test the waters,” Seiberg said.

Seiberg did say many borrowers could be forced to come up with higher down payments, and smaller banks will shy away from originating jumbo loans. Some analysts expect house prices to fall even further without the government support at the highest end of the market.

“We expect to see significant negative consequences for the struggling housing market as a result of the limit drop after Oct. 1,” Campbell’s office said. “Therefore, it will be even more pressing and pertinent that Congress acts quickly to reverse the limit reduction at the next opportunity.”

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The Obama administration and the recovery of the housing market

The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery—and possibly the president’s re-election in 2012.

Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House.

Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. In certain markets, Fannie and Freddie could hold some foreclosed homes off the market and rent them out to ease the property glut.

Officials also could sweeten incentives for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth.

Home-buyer tax credits worth up to $8,000 in 2009 and 2010 gave a short-term boost to home sales, but demand plunged after they expired. Foreclosures have put pressure on prices and damped residential construction, traditionally an engine of job growth during economic expansions.Discussions are in early stages, and there isn’t consensus around particular ideas. A spokeswoman said the president and his advisers “are always looking at new ways” to strengthen the housing market but wouldn’t disclose details. “While we continue to consider the options available to us, it would be inaccurate to say we are proposing any of these particular ideas at this time,” White House spokeswoman Amy Brundage said.

“As conditions change, some options that were below the line the way the market was 18 months ago might be above the line today,” said Peter P. Swire, who teaches law at Ohio State University and until last year was a top housing adviser to the White House.

Most of the administration’s housing efforts have focused on helping borrowers refinance or modify their loans to avoid foreclosure. But some economists say too many borrowers won’t be saved through loan workouts and that the administration must do more to soak up the flood of foreclosures by boosting housing demand.

President Obama’s signature loan-modification program, announced during his first month in office, has lowered payments for around 600,000 borrowers. Meanwhile, around four million borrowers are in foreclosure or have missed three or more consecutive mortgage payments. While mortgage-delinquency rates have fallen, millions more remain at risk of defaulting if they experience a payment shock because they owe more than their homes are worth.

More recent housing relief has targeted unemployed borrowers. Last week, officials said unemployed borrowers with loans backed by the Federal Housing Administration could miss up to 12 months of payments while they look for new jobs. A separate $1 billion program is set to begin providing interest-free loans of up to $50,000 for temporarily jobless borrowers this month.

Unlikely to get Congress to provide additional funds, the administration is left to examine options that it can implement without congressional consent. Fannie and Freddie, the so-called government-sponsored enterprises or GSEs, could be one policy lever. “There are a number of things that we can look at on the GSE side,” said Austan Goolsbee, departing chairman of the Council of Economic Advisers.

Last year, officials considered a range of policies that included allowing borrowers with loans backed by Fannie and Freddie to refinance more easily by relaxing fees that lenders are charged for riskier borrowers.

Others outside the administration have pushed for federal entities to lend more freely to mom-and-pop investors or to create public-private initiatives that would allow institutional investors to buy more foreclosed properties. “Because we have limited credit availability, we need investors to help soak up the supply,” said Ivy Zelman, chief executive of housing-research firm Zelman & Associates.

Fannie and Freddie also could rent, instead of sell, some of their huge inventory of foreclosed homes, which could take some pressure off prices. The firms owned about 218,000 properties at the end of March, and sold around 100,000 during the first quarter, or more than one-third of all foreclosed property sales, according to analysts at Barclays Capital. The firms could take back as many as 700,000 homes over the next year, according to estimates by economists at Goldman Sachs.

That idea has generated interest among some housing officials but could meet resistance from Fannie and Freddie’s independent federal regulator. Renting out homes hasn’t been tried on a wide scale and is “riddled with risk,” said Ed Delgado, a former Wells Fargo executive who leads the Five Star Institute, a mortgage-industry group. “Essentially you’re converting the [firms] from providing liquidity to a glorified national landlord for distressed assets.”

All these options could boost lending and attack the overhang of foreclosures, but would put more risk on federal agencies and Fannie and Freddie. The mortgage giants have cost taxpayers $138 billion and counting.

They also would require the blessing of the Federal Housing Finance Agency, which is charged with limiting losses at Fannie and Freddie. The FHFA last year refused to go along with an Obama administration initiative to reduce loan balances for certain borrowers who were current on their mortgages but heavily underwater. The agency has typically resisted programs which produce substantial, upfront losses designed to offset potentially larger but harder to quantify long-term losses.

The same skepticism that prompted advisers last year to push for giving the market room to heal on its own could prevail once again. Simply focusing on the broader economy is “one of the best things we can do for the housing market,” Mr. Goolsbee said.

Still, the high-level housing discussions are significant because Mr. Obama hasn’t put much emphasis on his housing policies over the past year. The administration has taken fire from both sides over its housing-relief plans, with Democrats saying the administration has let banks off too easily while Republicans have said the programs wasted money. The housing market could be a top election issue for voters in swing states such as Florida, Ohio, and Nevada.

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At a fundraising dinner for a school that serves children with learning disabilities, the father of one of the students delivered a speech that would never be forgotten by all who attended. After extolling the school and its dedicated staff, he offered a question:

‘When not interfered with by outside influences, everything nature does, is done with perfection.

Yet my son, Shay, cannot learn things as other children do. He cannot understand things as other children do.

Where is the natural order of things in my son?’

The audience was stilled by the query.

The father continued. ‘I believe that when a child like Shay, who was mentally and physically disabled

comes into the world, an opportunity to realize true human nature presents itself, and it comes in the way other people treat that child.’

Then he told the following story:

Shay and I had walked past a park where some boys Shay knew were playing baseball. Shay asked, ‘Do

you think they’ll let me play?’ I knew that most of the boys would not want someone like Shay on their

team, but as a father I also understood that if my son were allowed to play, it would give him a much needed sense of belonging and some confidence to be accepted by others in spite of his handicaps.

I approached one of the boys on the field and asked (not expecting much) if Shay could play. The boy

looked around for guidance and said, ‘We’re losing by six runs and the game is in the eighth inning. I guess he can be on our team and we’ll try to put him in to bat in the ninth inning..’

Shay struggled over to the team’s bench and, with a broad smile, put on a team shirt.. I watched with a

small tear in my eye and warmth in my heart. The boys saw my joy at my son being accepted.

In the bottom of the eighth inning, Shay’s team scored a few runs but was still behind by three.

In the top of the ninth inning, Shay put on a glove and played in the right field. Even though no hits came

his way, he was obviously ecstatic just to be in the game and on the field, grinning from ear to ear as I

waved to him from the stands.

In the bottom of the ninth inning, Shay’s team scored again.

Now, with two outs and the bases loaded, the potential winning run was on base and Shay was scheduled to be next at bat.

At this juncture, do they let Shay bat and give away their chance to win the game?

Surprisingly, Shay was given the bat. Everyone knew that a hit was all but impossible because Shay didn’t even know how to hold the bat properly, much less connect with the ball.

However, as Shay stepped up to the plate, the pitcher, recognizing that the other team was putting winning aside for this moment in Shay’s life, moved in a few steps to lob the ball in softly so Shay could at least make contact.

The first pitch came and Shay swung clumsily and missed.

The pitcher again took a few steps forward to toss the ball softly towards Shay.

As the pitch came in, Shay swung at the ball and hit a slow ground ball right back to the pitcher.

The game would now be over.

The pitcher picked up the soft grounder and could have easily thrown the ball to the first baseman.

Shay would have been out and that would have been the end of the game.

Instead, the pitcher threw the ball right over the first baseman’s head, out of reach of all team mates.

Everyone from the stands and both teams started yelling, ‘Shay, run to first!

Run to first!’

Never in his life had Shay ever run that far, but he made it to first base.

He scampered down the baseline, wide-eyed and startled.

Everyone yelled, ‘Run to second, run to second!’

Catching his breath, Shay awkwardly ran towards second, gleaming and struggling to make it to the base.

By the time Shay rounded towards second base, the right fielder had the ball. The smallest guy on their

team who now had his first chance to be the hero for his team.

He could have thrown the ball to the second-baseman for the tag, but he understood the pitchers

intentions so he, too, intentionally threw the ball high and far over the third-baseman’s head.

Shay ran toward third base deliriously as the runners ahead of him circled the bases toward home.

All were screaming, ‘Shay, Shay, Shay, all the Way Shay’

Shay reached third base because the opposing shortstop ran to help him by turning him in the direction of third base, and shouted, ‘Run to third! Shay, run to third!’

As Shay rounded third, the boys from both teams, and the spectators, were on their feet screaming, ‘Shay, run home! Run home!’

Shay ran to home, stepped on the plate, and was cheered as the hero who hit the grand slam and won the game for his team ‘that day’, said the father softly, with tears now rolling down his face, ‘the boys from both teams helped bring a piece of true love and humanity into this world’.

Shay didn’t make it to another summer. He died that winter, having never forgotten being the hero and

making me so happy, and coming home and seeing his Mother tearfully embrace her little hero of the day!

When we are feeling down, it is often small random acts of kindness and love that make all the difference in the world.  I hope this story had an impact on you, as it did me.

I would like to post more examples that show how we can all make a difference in people’s life!

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@b Carbon Monoxide Detectors Required in California Houses & Dwelling Units

^Carbon monoxide is a gas produced whenever any fuel, such as gas, oil, kerosene, wood, or charcoal, is burned. A person can’t see or smell carbon monoxide.

The California Carbon Monoxide Poisoning Prevention Act of 2010 (Cal. Health & Safety Code §§ 13260 et seq) is now law requiring carbon monoxide detectors to be installed in every “dwelling unit intended for human occupancy.”

A carbon monoxide detector is a device similar to a smoke detector that signals detection of carbon monoxide in the air.

This carbon monoxide detection device must be:

Designed to detect carbon monoxide and produce a distinct audible alarm. It can be battery powered, a plug-in device with battery backup, or a device either wired into the alternating current power line of the dwelling unit with a secondary battery backup or connected to a system via a panel.
If this device is combined with a smoke detector, it must emit an alarm or voice warning in a manner that clearly differentiates between a carbon monoxide alarm warning and a smoke detector warning.
Each owner of a “dwelling unit intended for human occupancy” must:

Install an approved carbon monoxide device in each existing dwelling unit having a fossil fuel burning heater or appliance, fireplace, or an attached garage. The applicable time periods are: (1) For all existing single-family dwelling units on or before July 1, 2011. (2) For all other existing dwelling units on or before Jan. 1, 2013. (Cal. Health & Safety Code § 17926(a).)
A carbon monoxide alarm should be:

Centrally located outside of each separate sleeping area in the immediate vicinity of the bedrooms. The Alarm should be located at least 6 inches (152mm) from all exterior walls and at least 3 feet (0.9 meters) from supply or return vents.
Installed outside of each separate sleeping area in the immediate vicinity of the bedroom(s) in dwelling units and on every level including basements within which fuel-fired appliances are installed and in dwelling units that have attached garages.
Sellers carbon monoxide disclosure obligations:

Would be satisfied when providing a buyer with the Transfer Disclosure Statement or the MHTDS. If the seller is exempt from giving a TDS, the law doesn’t require any specific disclosures regarding carbon monoxide detector devices. (California Civil Code §§ 1102.6, 1102.6d.)
Homeowners’ Guide to Environmental Hazards also will include information regarding carbon monoxide.
Landlords have special obligations regarding carbon monoxide detectors:

All landlords of dwelling units must install carbon monoxide detectors.
Landlords in CA have authority to enter the dwelling unit for purpose of installing, repairing, testing, and maintaining carbon monoxide devices “pursuant to the authority and requirements of Section 1954 of the Civil Code [entry by landlord].”
The detection device must be operable at the time that a tenant takes possession.
The tenant has responsibility of notifying the owner or owner’s agent if the tenant becomes aware of an inoperable or deficient carbon monoxide device. However, the landlord is not in violation of this law for a deficient or inoperable carbon monoxide device if he/she has not received notice of the problem from the tenant. (CA Health & Safety Code § 17926.1.)

Source: California Association of Realtors

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Beautiful Testimonial from client

I’d like to share my recent experience working with Paula Aragone. Paula is a consummate professional and a truly kind and generous person. She takes the time to understand her client’s needs and circumstances, and does everything in her power to ease their anxieties despite the uncertain conditions of the current market. My husband and I made the difficult decision to sell our home after enduring 2 years of financial hardship. I firmly believe that had it not been for Paula, our home would be sitting on the market and we would be facing foreclosure. Thanks to Paula’s tireless efforts, our home was in escrow in less than 6 weeks. Paula provided me with sound advice, firm guidance, and solid market research from the very beginning of the process. She priced our home to sell, presented an aggressive marketing strategy, and ensured that our escrow was as smooth and uneventful as possible. She’s an incredibly savvy negotiator who works to build relationships with other agents and industry professionals, from which her clients benefit greatly. She is available and responsive, and makes a point of answering every question. For every panicked phone call she received from me, Paula had a patient and reassuring response. I bet she’s never had to say “it’s going to be ok” to a client so many times! Paula helped to make one of the toughest periods of my life a lot easier. And when I’m ready to buy a property in the future, there’s no other realtor I’ll call.
Cynthia Jansen

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