Unique but Predatory Situation

[InaBind]

In order to appreciate the context I need to give some really quick background.

We have a special needs daughter who was born with a severe birth defect. The medical bills led to bankrupcy. Right after our discharge 2 years ago, we were put into a situation where we had to purchase the house we were renting in order to maintain a support system for our daughter.

The mortgage rate was 10.8% (fixed) through American Mortgage Express and was immediately sold to Countrywide.

We have attempted to refinance many times and were approved for rates as low as 7.6% but either 1) there was a technicality that failed in underwriting or 2) it required about $10,000 in principal to get our debt/principal ratio below 96%.

We have been paying $100 late fees each month for over a year now on top of 10.8%.

We went through the HOPE program and we were offered a reduction to 9.125% which reduces our payments by $300/month.

Here's the problem. 1) we still can't afford the payments at 9 1/8% and 2) they are incresing the loan amount for 3 months payments which would make future refinancing even more impossible for us 3) our neighbors just sold thier house deeply discounted for distress reasons and our appraisal is sure to go down.

There aren't many attractive options here. The principle I keep coming back to is that we have been making payements at a predatory rate of 10.8 for 2 years -- paying late fees but not being more than 30 days late until this Feb.

9% could still be considered predatory when we qualify for a fair market rate of 7.6% or less if we were to refinance.

Should we:

1) accept the modification to 9.125%, knowing that refinancing would be impossible?

2) not accept the modification, and face the next step in foreclosure proceedings and take what legal action is possible to find an arrangement that is affordable and does not include rates 2 more more points above fair market rates for us?

Thanks!

[Andrew]

How was your credit score when you took out the loan and how is it now?Do you have a steady income? Was the loan a stated income loan, if so rates would have been higher then Full Doc Loans. Getting a mortgage now a days is very hard, especially with a credit score below a 680.

[Andrew]

Also never heard of a fair market rate. Rates are based on a lot of different things involving the individual taking out the loan.

[InaBind]

Income is very stable and above average. The problem is that our uninsured expenses are also well above average.

I had gotton my score up to 660, but now is down to 580 becuase CountryWide told us to not make a payment while working with HOPE, but reported us 60 days late anyways.

Understood that there is no "fair" rate, but we were approved last year for rates between 7.6 and 7.8. We couldn't touch those because either Fannie Mae didn't like specific features of the property or we did not have the capital to get our principal below 96% of equity.

[InaBind]

I should also note that the primary reason our score was low in the first place was due to the bankruptcy. We NEVER engaged in reckless financial behavior. Everything (bankruptcy) is the result of uninsured medical expenses for our daughter. Mortage folks we have talked to agreed that our score is misleading and that our situation was taken into account.

[Andrew]

Poppy will be able to answer in better detail since she is a underwriter. She could give you more specifics on your situation. I'm very sorry to hear about your situation.

The problem with the BK issue is that we lenders look for a 36 to 48 month time out of BK prior to making a mortgage loan, that is in an A paper/FHA world...since you were 2 years out of a BK you were priced, i.e. the rate was higher due to the risk layering that was presented due to the 24 months seasoning of the BK....we price for risk....the more recent the adverse credit problem is the higher the risk, the higher the price....

Now, the present problem that you have if if the property does not conform to what the lender and Agencies, i.e. FNMA or FHA can accept and the DTI is to high, we again can not make the loan as the collateral or the DTI does not meet the guidelines...again our hands are tied, we can not make the loan.

Regardless of the "going" rate for conforming A paper product if the other pieces of the puzzle do not fit then we can not make an A paper loan and again have to price for risk. Rates are risk based, credit, DTI, Collateral (property) and so on. We can not fit the property, DTI, Credit into a program on the A paper side of the world, then the program/product will be an alternative product with higher pricing...rate.

So the "going" rate is a function of the norm...the Collateral (property), DTI and Credit have to fit into the guidelines that we are mandated to underwrite to and if they do not we have to decline the loan. At that point the programs that are available are the higher priced/rate loans for the higher risk category that the loan fits into.

Frankly last year a 7.50 FNMA loan was not a picnic or "going" rate Approve/Eligible loan..it was at least an EAI/Eligible or EAII/Eligible finding from DU as the Approve/Eligible was about 6.0% to 6.50%...so even last year you were returning an EAI or EAII finding and that is due to DTI, Credit and LTV combined with Reserves issues. That is how we rate these things.

So, the Modification dropped the rate, your choices are to take the modification and frankly get out of the double digits and wait until the property meets the criteria for FHA and get 12-24 months of clean mortgage payment history and try for an FHA loan. However the max DTI for FHA is 41% and the property must be standard, conforming and meet FHA property standards in order to be approved. 0X30 for 12 - 24 months will work. You will not be out of the refinance market for much more than 24 months with the FHA program....it depends on the case and what the underwriter is willing to stick her/his neck out on as to the mortgage payment seasoning..however if the property is unique or not to FHA standards and the DTI is over 41% or the LTV exceeds 95/97% (cash out/rate & term refi LTV's) you may not be able to make the refinance work regardless.

All of this is a function of the lending and underwriting process, as such we are not picking on people, we are trying to use standards that have work time in and time out and never created a mess like this before.

The problem is now that we are going to tighten the standards to avoid ever being here again.....we should never have made some of these loans in the first place....they were not doing anyone a favor, lender, investor and borrower. That is not a function of predatory, that is a function of imprudent lending guidelines that allowed for things that were not ever allowed for in the past.

[InaBind]

Thanks Poppy. I understand what you are saying but not sure that it fully applies to our case.

We were 2 months out of bankrupcy when we got the mortage at 10.8%. This rate can be understood given the circumstances.

We were told/advised several times that once we were two year out of bankruptcy we would no longer be considered sub-prime and could refinance then.

While from one perspective 9.125% may sound fair for someone 2 years out of BK, understand that we would have been able to get rates of 7.6 from both CW and other lenders, if only we were to pay off about $8,000 in principal first.

So we have been paying 10.8% all this time (mortage is 64% of net montly income) along with about $1,500 in late fees, despite having never been 30-days late until this year as we were told that this was a requirement for HOPE.

I'm just very fusterated because we didn't file BK because we were stupid with money -- we had a very special girl with extreme conditions born at the same time my employer went BK. We are being penalized with higher rates under the assumption that the BK says we can't be trusted with money. But we have great income, and the medical debts were covered under BK. Just getting the rate down from 9.125 to 8% would save us $300/mo. (we live in a very small cottage, but we are in Bergen County NJ where real estate is incedibly expensive).

The HOPE negotiators were quick to offer a reduction, and while it helps, we still can't afford what they are proposing and it's not clear to me why they can't come down to within 1 point of what rates we would have been approved for last year (rates are even lower now).

Thanks for the advice though. We signed the reduction but no we have no choice but to sell the house ASAP and take a huge loss on it and abandon the support system we have here. We made all these sacrifices for our daughter and now have to not only walk away from it, but also lose about $25K in the process.

If only they could come down to 8% we would have had a fighting chance.

The problem lies with the entire puzzle, the rate is predicated on the credit, collateral - i.e. loan to value which also if higher than the traditionally acceptable LTV's causes the higher pricing.....

I can put a 100% loan through DU and get an approve/eligible finding for one person and then the other one I get a Refer/Ineligible finding, forcing me to drop the LTV until I get the EAI or EAII....this is where all of this comes together, it is a combination of risk layer and risk evaluation.

The evaluation of risk is layered on Credit, DTI, LTV/CLTV, Collateral Issues -Condition and Type of Collateral, Reserves.....

All of this plays into the evaluation of the risk grade....as long as the requirement for the 8000.00 contribution to balance of the loan was required then they were pricing in the EAI and EAII levels....without that the risk layer increases for FNMA and they bounce to a Refer/Ineligible or Eligible status. We as underwriters will not overturn a Refer on FNMA or FHLMC as they are prone NOT to buy them.....so we have to tweak the system to obtain the EAI , EAII, EAIII or Approve status to make the loan acceptable for A paper or A- paper with FNMA or FHLMC.

My suggestion with this servicing/lending issue is to make another run at them, and try to get them to comprehend that if you short sale, they loose money, lots of money, but if you get the rate to the 8.00% position, then they have a Preforming Loan, which is the goal....always the goal.