Struggling homeowner’s across the United States have heard the many promises of reprieve coming from our elected officials yet have little to show for it. As a business owner in the lending industry I have been writing articles and sending letters to politicians about the persistent disconnect between well-intended legislation and real world results in the housing market; hoping to transcend the sound bites of glorifying rhetoric and achieve a solution that truly works for the American home owner. From failed programs such as FHA Secure to Hope for Homeowners to countless hours of discourse publicized over the last year, these solutions sound great in theory but have actually done very little to help the borrower. Examples I’ve provided in past articles about this dilemma are spot on, however, unless you are an industry insider they probably make little sense. For this reason I am extending a real life scenario to help elucidate why some of the current proposals and programs meant to fix the housing crisis continue to fail.
Levi and Doris Tyler of Westland, Michigan have lived in their home for over 15 years. Both in their mid-fifties, Doris is a school teacher and Levi receives a pension.
Like so many Americans, the Tyler’s home dropped in value to a point where they owed more than the house was worth and their interest rate was going up, 9% and climbing. They came to us for help. Luckily, the Tyler’s loan was serviced by Homecomings, a great company that works diligently with our bank to find suitable solutions for borrowers in distress. The cure for the Tyler’s dilemma? Homecomings agreed to reduce the balance of their mortgage by over 20% which allowed us to secure FHA financing for the couple—a routine service we provide if the lender agrees to a Write Down remedy. The new loan, a 30-year fixed mortgage with a 5.5% interest rate and a reduced principal balance, would have given the Tyler’s both the financial relief and security they so desperately sought.
Ultimately…the deal failed!
Why? A drop in credit score due to financial stresses halted the new loan. Specifically, it was the mid score of the co-borrower, all of the other scores remained in tact but that was all it took. Please keep in mind, FHA has no “real” credit score limit. Technically, having never been late on a mortgage payment, the Tyler’s should have been approvable regardless of the FICO drop. However, the major banks on which we all rely to sell our loans have imposed their own credit limit “overlay” on top of FHA requirements meaning…no loan for the Tyler’s.
Now, I am not saying the major banks are wrong in using their own restrictions for FHA. If you’ve ever looked at default statistics pertaining to lower credit score borrowers, you would be doing the same thing. What I am saying is, it is wrong for the government to suggest that they are doing something to help people when they don’t even take the time to clear away the obstacles. When I approached the Department of Housing and Urban Development to inform them of the limits being put in place that keep any of these programs from actually working, their response was always the same: “We can’t force the lenders to go along with what we want.” Why not? Doesn’t the government technically own a material percentage of these lenders? Haven’t the tax payers given them billions of dollars? Why invest the time and resources to come up with a plan like Hope for Homeowners without ensuring every necessary obstacle has been dealt with?
As for the Tylers, we are diligently working to find an alternative solution. A rate reduction might be possible in their case, but the ideal coupling of a lowered interest rate and reduced loan balance is, sadly, off the table.
Rick Arvielo
President
New American Funding