~ Central Florida Real Estate News ~

Supporters say the proposal will help rescue more home owners faster than Hope Now, a rescue coalition that some critics say hasn't done enough.

A bold new proposal to combat foreclosures was unveiled in Washington on Thursday.

The plan, dubbed "Help Now," was floated by the National Community Reinvestment Coalition (NCRC), a nonprofit community advocacy group. It calls for the government to buy up at-risk loans, restructure the terms to make them affordable and sell the reworked loans back into the secondary market.

"I think the plan is commendable. It doesn't let the home owner off the hook," said economist Mark Zandi of Moody's Economy.com. "They still have to pay at least part of the debt."

Help Now aims to improve upon the efforts of Hope Now, the alliance of lenders, mortgage servicers, non-profit community advocacy groups and investors led by the Bush administration to help troubled borrowers stay in their homes.

The Help Now approach will be more effective because, according to NCRC CEO John Taylor, it will make it easier for lenders to rework the terms of troubled mortgages.

Even servicers that are already participating in Hope Now are afraid to rework loans, because doing so effectively violates the contract that lenders have with the investors who own their loan portfolios - often pension and hedge funds, as well as foreign investors.

Lenders remain reluctant to offer workouts despite the fact that the American Securitization Forum (ASF), which is a member of the Hope Now alliance and represents the investors, recently authorized lenders to do so, as long as it is in the best interests of the investors.

"Servicers are accountable to the investors, not the ASF," said Taylor. "But once the government owns the loans and tells them it's okay, then that clears the obstacle."

Under this proposal, the government would allocate as much as $20 billion up front. It would use those funds to buy up mortgages from investors in a reverse-auction process, at prices below the face value of the loans. In a reverse auction, sellers compete against one another, slashing prices until a buyer - in this case the government - says yes to a deal.

Since the government would buy the mortgages at a discount, it can pass the savings on to the borrowers by reducing the mortgage balances by the same percentage as the discount.

So if a batch of loans was bought at a 30% discount, the government would be paying $70,000 for a $100,000 mortgage. The government would then modify the mortgage, reducing the outstanding balance to $70,000. That would mean a big drop in the monthly payments, which would help many borrowers keep their homes.

The new, reworked mortgages will be underwritten conservatively, with loan-to-value ratios of no more than 90%, said Taylor. And no loans would be made unless borrowers were judged capable of keeping up payments based on their credit score, income and other underwriting criteria. Default rates should be reasonably low.

There would undoubtedly still be some at-risk borrowers who cannot afford even the discounted mortgages.

In those cases, the loan balances would be reduced even more, to $50,000 perhaps, from $70,000. In return, the government would obtain a second lien, said Taylor, representing the difference between what the government paid for the loan and what it further reduced the balance to. These liens would only be repaid to the government when the home is sold or the borrower refinances the mortgage.

It will be an uphill battle for Help Now to win backing from policy makers. "The one who has to take this plan and run with it is [Treasury Secretary Hank] Paulson," said Taylor.

Paulson, however, has been an enthusiastic supporter of Hope Now, nearly to the exclusion of other proposals. And he has adamantly opposed spending government money on any "bail-out" plans. The NCRC idea would involve at least some seed money, and the second liens may not get repaid for years - if ever. That could add up to big bucks.

Still, after another 10 or 12 weeks of economic turmoil, this new plan may start to attract support, said Economy.com's Zandi. Compared to the hundreds of billions on the price tag of the recently passed economic stimulus plan, the NCRC proposal looks cheap.

"Besides," he said, "the cost of doing nothing is worse."

Home values have declined across the country, giving homebuyers the best buys they've had since 2004.

Home prices have dropped so quickly and so far that valuations - the difference between what a home should cost and its actual price - are the lowest they've been since 2004, according to a report.

The Cleveland-based bank National City Corp., together with financial analysis firm Global Insight, revealed Tuesday that more than 88% of the 330 housing markets surveyed showed price declines and improved affordability during the last three months of 2007.

"Housing valuations are almost back to long-term norms," said National City's chief economist, Richard DeKaser. He called current affordability "the best in the past four years."

But DeKaser cautioned that home prices could fall even further.

"This isn't to say home price declines are over," he said. "We could move below historic norms. By the end of 2008, housing markets could be broadly under valued."

There are still 21 housing markets, or 6% of those surveyed, that are severely over valued, including Atlantic City and Madera, Calif. That's down from 56 overvalued markets at the peak of the housing bubble in 2006.

The report compares actual median home prices with what the authors determine are proper home values based on population density, relative income levels and interest rates, as well as historically observed market premiums or discounts, to determine whether markets are over or under valued.

The report also factors in market intangibles that make some areas more desirable places to live, and more expensive.

"Declines are no longer confined to once-frothy markets," said DeKaser.

The survey covered home valuations during the last three months of 2007, but DeKaser pointed out there's reason to believe that valuations are even more favorable for buyers today.

Price declines have continued into 2008 and interest rates, although they have inched up lately, have been steady or lower compared to late last year. There have even been wage gains; personal income rose 0.5% in December. Soaring foreclosure rates have added inventory to many housing markets, depressing home prices further.

The biggest gains in affordability occurred in California, Michigan and Florida, which are areas that have also been some of the hardest hit by foreclosures. Those states registered 43 of the 50 biggest price declines.

Bend, Ore. currently tops the overvaluation list. Home prices there were judged to be about 59% higher than their fair-market value. Miami, despite a median home price decline of 5.7% last year, is the most overvalued big city, by 44%.

All the best bargains were found in Louisiana and Texas. Houses in Houma, La. were under valued by 31.2%, according to the report. Dallas was the most undervalued big city, by 30%.

Have you lost your job, your business or your home? Are you raiding retirement accounts to pay the bills? We want to hear from you. Tell us how you're being affected by the weakening economy and you could be profiled in an upcoming story.

The story is much different for well-to-do homebuyers - and not in a good way. These are dark times for jumbo mortgages - home loans of more than $417,000 - which federally chartered mortgage guarantors Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) are not permitted to purchase. Spooked investors have stopped buying bonds created from bundles of jumbos or, for that matter, from pools of any other type of mortgage not guaranteed by Fannie or Freddie.

Consequently, banks have cut way back on lending, tightened standards, and hiked rates on jumbos, all of which they now must hold on their own balance sheets. Even for wealthy borrowers with sterling credit and enough cash for a 20% down payment, the cost of fixed-rate jumbo mortgages is now upwards of 7% for a 30-year loan.

The positive news - at least for those seeking a smaller jumbo mortgage - is that Congress feels your pain. As part of the economic stimulus bill signed by President Bush last week, the limit for Fannie and Freddie mortgages will be temporarily raised from $417,000 to $729,750.

In the meantime, there are some things you can do to reduce your mortgage costs without any help from Congress.

Consider a 7/1 jumbo ARM

You can cut your monthly payment by choosing a hybrid loan. Today you can get a "7/1" mortgage, which offers a fixed rate of 5.9% for seven years, then adjusts annually. Why are these loans cheaper than 30-year fixed mortgages? Michelle Ashworth, a top mortgage executive with Wachovia, says that banks prefer to hold ARMs because the interest rate risk is easier to hedge. Some lenders are so eager to sell ARMs that they're now charging regular rates on smaller jumbos. At ING Direct, for example, the lowest rates apply to all 5/1 or 7/1 ARMs less than $500,000.

Take out a second mortgage

Say you need to borrow $800,000 to finance the purchase of your new home but intend to repay $400,000 when the sale of your old home goes through. You'd be best off taking out two home loans - a $417,000 30-year fixed-rate mortgage at the lower conforming rate and a home equity line of credit for the balance. Consult a mortgage broker to help you mix and match. Better yet, see whether you can establish a relationship with your bank's private-banking department - that usually requires $1 million in assets, but the amount may be lowered for someone with big earnings potential (a newly minted partner at a law firm, for instance). "Private bankers usually have amazing deals, especially in this market," says mortgage broker Christopher Minardi of New York-based Manhattan Mortgage.

Hit up Mom and Dad for a small loan

Let's say you're buying a home for $550,000. You've made a 20% down payment, which leaves you with $440,000 to finance. Basically, $23,000 is all that stands in the way of getting a 30-year conforming mortgage at 5.9% instead of a jumbo at 7%. The rate gap is so large it may be worth swallowing your pride and hitting up your relatives for a modest loan - especially if you can pay it back quickly. Pitch it as a win-win: With one-year CD rates down to an average of 3.5%, you could pay them 5% and still beat their bank.