Financial Shock (Updated Edition), (Paperback): Global Panic and Government Bailouts--How We Got Here and What Must Be Done to Fix It

Update

When the original article was being written back in 2008 no one could have foreseen the severity of the disaster that would hit the real estate market and overall economy or the extent of damage that would be done. I certainly couldn't; but I remember a passage from that article relative to the 'safeguards that were built into the FHA mortgage program' and now, in the aftermath of the “Sub-Prime Mess” and having to deal with the present economic crises (disaster), I can't help but reflect back in disbelief at all that has happened to change the entire country and , indeed, the world as a result of recklessness and greed. I think we can safely state now that 'Sub-Prime' is over with. Gone! Done! Kaput!

Looking back

Although the events leading up to the crash of the financial markets - led by the risky sub-prime loans - were widely discussed, written about and aired on all the TV networks worldwide, I have to believe that the hard-working, every day, nine to fivers who went about doing their jobs and supporting their households probably have a lot more to say about what exactly caused the sub-prime mess and who is to blame, because it wasn't this group as some would have had you believe.

Oh yeah. The school teachers; bus drivers; train engineers and conductors; the police officers and firemen; the correction officers and all those who bought their homes by making the required down payment, providing required pay stubs, bank statements, W2 forms and tax returns as proof of their qualification to purchase the home of their choice or dream, if you will. Yeah, the group some said were the ones who didn't have enough down-payment money, good enough income or satisfactory enough credit to buy a home.

This group and many like them throughout the country must have felt a sense of vindication when the entire weight of the economic collapse was lifted off their shoulders with the collapse of the AIGs of the world. Most of this middle class group of people are probably still in those homes they purchased in 2006 and 2007 unless they fell victim to circumstances and were laid off from their jobs because of the crises, which they had no more large a role in bringing about than any other responsible homeowner, despite what others have asserted; others who insisted on looking for scapegoats in the wrong places and ended up blaming the wrong group of people. We now know they were not the reasons for the melt down.

Solid citizens

They are the true professionals. Those home buyers, now home owners, who purchased their homes by utilizing FHA financing were qualified for the homes they bought based upon documentation and verification of income, assets and credit. Here's a bit of information if you're unfamiliar with FHA financing. There is no such thing as a 'no-income/no-asset' mortgage program and there never was such a thing under FHA financing; there is no such thing as an 'investor' loan either; (that went the way of the 'pink-onion-paper-fax machine'); and there was certainly no such thing as a 'piggy-back' mortgage description in any FHA underwriting guideline manual until 2007 when, in an early effort to combat the impending crisis, the agency (FHA) provided as an option in the FHA Secure program, language that "...either the FHA-approved lender making the new mortgage or the existing note holder may take back a second lien that includes closing costs, arrearages or previous secondary financing if the indebtedness exceeds FHA prescribed LTV and maximum mortgage amount limits". That's why it was a solid program pre-Sub-prime-disaster and the it will continue to be a reliable source of financing for respectable, hard working, 'qualified' middle class folks for years to come.

This next statement may be a little tricky so please take your time and look just a little closer. Most people who were designated as sub-prime mortgage borrowers and those who purchased homes using "Sub-Prime" financing could not qualify for the FHA mortgage program, despite the flexibility in the program. The required down payment under FHA guidelines in 2006 and 2007 was a minimum of 3% (it was recently increased to 3.5%), the earnings qualification was 41% of gross monthly income for payment of total monthly debt and until early in '09 the minimum credit score was 580. There is now a 620 minimum score which could vary based on the other loan factors. So here's a mortgage financing observation...

Let's face it!

If a borrower couldn't qualify for FHA-Insured financing, there was definite reason for the lender to have a concern about approving another kind of mortgage for him/her. Here's the point. Those who didn't qualify for financing under the HUD-FHA mortgage program probably shouldn't have purchased homes. If this group of people was responsible for the sub-prime meltdown, then it's more understandable that they should bear the brunt of blame; But...

This raises some other questions: Who are they? What percentage of the buying marketing did they make up? Where did they buy? For what purpose did they buy? To occupy as Owners or to flip as an investment? These and many other questions could provide more in-depth look into how that crises started. That's a story for another time and one that will certainly be worth discussing; but for now, the FHA mortgage applicant, you know - that respectable middle-class I mentioned earlier - can breathe a big sigh of relief, because FHA is here to stay and they are solid citizens who deserve our respect and gratitude for the services they provide everyday.

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 It has occurred to me that in times of uncertainty people need a clear understanding of all available options so that their decisions are based on substantial information. It is always my preference to provide clarity on any issue I discuss or activities in which I participate whenever possible, thus the following article should serve to provide some answers to prospective purchasers of real estate. 


 Government Program Could Ease Sub-Prime Mess


Have you ever thought about alternative financing programs which may help to alleviate some of the problems that were created by the Sub-Prime dilemma? Utilizing a seldom-used, specialized government program could be the answer if the application is submitted properly.

The Section 203 (k) Rehabilitation Mortgage Insurance program was introduced by the FHA to enable homebuyers to finance the purchase of a house and the cost of rehabilitation with one mortgage only. For homeowners who have occupied their homes for at least one year and intend to continue occupancy, the program can be used to refinance the existing mortgage plus at least $5,000.00 in repair cost.

There are several other uses for the 203(k) program which will be covered later in this article, but right now the focus is on why it should be sought out and utilized in today's market. Make preparations to take advantage of this unique financing option that is seldom used or very often dismissed as being too complicated, too long-and-drawn-out, or too paper intensive.

The 203(k) program, one of many mortgage loans insured by the FHA (Federal Housing Administration) may be one of the best alternatives available to finance the purchase, refinance or rehabilitation of a home today because the risks associated with this loan are historically lower than those of a Sub-Prime (an unconventional reduced income/asset documentation and in many cases higher credit risk mortgage program) loan and the out-of-pocket costs are several thousand dollars lower than a FNMA (conventional) loan would be.

Start your search now for FHA-Approved lending institutions (this could include many banks, savings and loan associations or mortgage companies) in your area and inquire about their program requirements because different lenders may have slightly different underwriting criteria.

Although the program was originally designed to encourage lenders to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms (such as first-time home buyers and residents of disadvantaged neighborhoods where mortgages may be hard to get due to deteriorated values), present market conditions are indicative of the difficulties that existed in the early 90s when this program gained industry-wide popularity.

Learn about the many ways that the 203(k) program can be used to finance just about any property in today's market, especially with declining home values and the recently increased FHA loan limits. According to the “Eligible Activities” section of HUD's web page http://www.hud.gov/ the extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor to virtual reconstruction with a minimum repair cost requirement of $5,000.00.

A home that has been demolished or will be demolished for reconstruction is eligible as long as the existing foundation system remains in place.

 A residential property that also has non-residential uses (Mixed-use) is eligible as long as the non-residential portion does not exceed 25% of the overall structure; A multi-unit (Small apartment building with 5 or more units) is eligible as long as the building will be converted to a one-to four-unit structure.

Let your Realtor know exactly what kind of home you’re looking for just as you would have done if you were going to utilize a conventional or sub-prime loan program. Be confident that under the Section 203(k) program you have a much wider variety of housing options to choose from.

Here’s why: Providing you agree with the premise that most houses over one year old probably needs at least $5,000.00 worth of repairs pursuant to a contractor’s estimate, then 95% of one – to four – unit properties available for sale should qualify.

This means that if you decide on a specific home in a given area that you want to own, you should be able to aquire that home with Section 203(k) financing.

If however you cannot locate the right one or two unit home in the location of your choice and there is instead a three or four unit structure available, this program gives you the flexibility to go forward with the purchase and convert the three or four unit to a one or two unit and you'll have full supervisory powers over how your new home will be completed.

You control what your living quarters will look like. That’s one of the best features of this program. Any house can be made into your dream home. Literally!

Complete an application for a Section 203(k) loan when you're sufficiently satisfied that you have completed your own research because one of the great features about this program is that - in accordance with information published on the HUD page - “all persons who can make the monthly mortgage payments are eligible to apply” as long as that person intends to occupy the property as a primary residence.

Based upon this information one could conclude that borrowers who qualified for conventional mortgages would also qualify for Section 203(k) mortgage loans without the higher up-front costs, and those who qualified for sub-prime mortgages could simply gather up their earnings documents and apply, because the down-payment (3% minimum), although HUD did not cover this requirement on their page, and the credit issues - which may have been ligitimate reasons to seek sub-prime financing in the past - are quite manageable under this program.

When you consider the following improvements permitted with Section 203(k) financing, you can readily accept the premise that $5,000.00 in repairs should not be difficult to find in order to qualify the house for this program:

Structural alterations and reconstruction, modernization and improvements to the home’s functions elimination of health and safety hazards. Changes that improve appearance and eliminate obsolescence Reconditioning or replacing plumbing; installing a well and/or septic system

Adding or replacing roofing, gutters and downspouts, adding or replacing floors and/or floor treatments, major landscape work and site improvements, enhancing accessibility for a disabled person, making energy conservation improvements,

Notes:

HUD requires properties financed under this program to meet certain basic energy efficiency and structural standards.Applications must be submitted to the local HUD office through a FHA-approved lender
Repair costs estimates must be submitted by licensed, insured and – in some cases – bonded contractors unless the borrowers elect to complete the repairs by themselves. Special safeguards would be applied where borrower-completed repairs are concerned and HUD-Approved 203(k) Consultants must be engaged in order to complete the work write-up.

More onformation can be obtained at http://www.hud.gov/A HUD handbook, Rehab a Home with HUD’s 203(k), is available at website or by mail from HUD

This article was written by Tony "Javeton" Phillips. Tony is a mortgage professional specializing in commercial loans in the Northeast United States.

Next Post: Find out why the "Built-in" safeguards in the Section 203(k) program will work to prevent the kind of mortgage meltdown which we recently experienced.

Visit this www.c-loans.com for commercial mortgage info or email Tony at:  tony53p@hotmail.com or
highview22@comcast.net

 Javeton Tony