“The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments are listed at $820,000 to $3 million,” says Bloomberg. (See: Manhattan Luxury Condos Try FHA Backing in `Game Changer’, August 13, 2010)

Alas, the Bloomberg report seems to have set off some concern.

“Yes, ladies and gentlemen,” says Tyler Durden at ZeroHedge.com, “the FHA is now insuring purchases of ultra luxury appartment by the ultra rich, affording what is essentially a no money down ‘NINJA/subprime-like’ creep up into the most expensive properties in the world, entirely on the backs of the US middle class. If that ‘uber-wealthy’ don’t blow up the FHA, and the $7 trillion in GSE debt, nothing will.” (See: Rick Santelli Goes Nuts In A “Top 3″ Rant Protesting (What Else) Endless Subsidies And Fed Meddling, August 13, 2010)

The New York Post tells us “the development features an outdoor movie theater, panoramic city views, apartments valued between $820,000 and $3 million — and, thanks to the government, the ability to land a mortgage with less than a $100,000 deposit.” (See: Luxury ‘$uite’ deals, Feds back condo mortgages for wealthy, August 14, 2010)

Golly, FHA loans for the super-rich sure sound like a horrid bit of financing. Unless, after all, you consider the entire story.

Cash Up Front

It turns out that for 2010 the FHA higher cost loan limit in the continental United States is $729,750. That means if you have property in what is defined as a “higher cost” area of the contiguous 48 states you can get an FHA mortgage for the aforementioned $729,750.

For most of us $729,750 is a big number. For a property that sold for $729,750 a purchaser would need $25,541.25 at closing just for the 3.5 percent FHA down payment. Closing costs are extra.

But, you’ll notice that Bloomberg did not say any of the luxury units actually sell for $729,750. They sell for more, from $820,000 to $3 million.

This is where the FHA gets sticky. You see the FHA has a thing about real estate purchases which are above the loan limit. The deal is this: when you buy with FHA financing you’re not allowed to have a simultaneous second loan unless it comes from a governmental agency. You have to pay any additional value above the mortgage in cash.

One of the caveats here is that after the property has been settled the FHA buyer/borrower can then get a second loan such as a home equity line of credit (HELOC). This is usually not a consideration with a property where someone put down 3.5%, but it’s a real possibility when the cash down is significant. Of course, when there’s a second loan the FHA mortgage remains in first place which means if there’s a foreclosure the proceeds from the sale of the property must be used to completely satisfy the first loan holder before the second lender gets a dime.

Bundles of Money Down

So, let’s take a look at those luxury units in Manhattan — or anywhere else. Buy one for $820,000 with 3.5 percent down and you’ll need $28,700 at settlement plus closing costs. Oh, but wait, the FHA loan limit is $729,750 so you’ll actually need $90,250 in cash for the closing down payment. That’s 11 percent down — more than three times the usual FHA down payment requirement.

As to the $3,000,000 unit the math looks like this: $729,750 in financing means the buyer will need an additional $2,270,250 in cash at settlement — plus closing costs. That’s a deal with 76 percent down and virtually no risk for the lender.

Or the FHA.

Should The FHA Insure Luxury Condo Loans? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: cash, condo, down payment, FHA, HELOC, higer cost, home equity line of credit, lien, loan, loan limit, loan-to-value, LTV, mortgage, second, simultaneous, unit

But in this case, what’s happened is this: Out of the blue and without any other notice our lender has cut off our home equity line of credit (HELOC). Why? Nope, we haven’t missed a payment. It’s because our lender says the value of our property has fallen.

Committed Lender?

The letter was received yesterday, April 6th, explaining that our lender is “committed to helping customers achieve and sustain homeownership, and we’re doing everything we can to help homeowners ensure that they don’t borrow more than their home is worth.”

It should be fairly obvious that the party being helped here is the lender. If the borrower can make their payments — and we make ALL of our payments in full and on time — then just like a first mortgage there’s no issue for the lender. As the lender’s letter says, “we appreciate that you have handled your home equity loan account responsibly, and want to make sure you know that this change is occurring because of the significant decline in your property value.”

However, with a home equity line of credit the rules allow lenders to ignore payment patterns and block or reduce credit lines if there’s been a significant fall in property values. Given that home values nationwide are down 13.2 percent since April 2007 according to government figures, it’s easy for lenders to claim that equity has fallen enough to justify cutting off cheap financing.

Consumer Imbalances

So what’s wrong with this system?

First, the cut-off date was March 5th — and the letter was received April 6th. Potentially, all checks written against the account for the past month could bounce. In other words, notice arrived AFTER access to the account was cut off. You can guess how many attorneys represented borrowers when this rule was made up.

Second, you can appeal the lender’s decision by getting an appraisal at your cost from their appraiser. However, even if the property’s value is higher than the computer model used by the lender, the letter does not actually say how much equity you need to reinstate the loan. Do you need 20 percent? Thirty percent? Fifty percent? You need to know both the equity value of your home and the acceptable loan-to-value ratio. The second figure is not disclosed and can be whatever the lender wants.

Third, many people paid an up-front fee for their home equity loan based on the size of the line of credit. Obviously if the amount of credit has been reduced the cost for the line should also be lowered but you can bet that no check is in the mail.

Fourth, and lastly, you have to wonder how many lenders are reducing low-cost home equity lines of credit — while increasing limits for high-cost credit debt from the very same borrowers.

The whole point of a line of credit is to have funds instantly available in the case of an emergency and for other reasons. Otherwise, why bother? Is it any wonder that of the 10 most disliked companies in America, seven are financial giants?

The Mortgage Modification That Hurts Borrowers is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: appraisal, credit card, cut off, delayed notice, HELOC, home equity, line of credit, loan to value ratio, LTV, mortgage modification

Earlier this year the Federal Reserve explained that there were several conditions under which banks could reduce or freeze HELOC loan limits including a decline in the value of your home or a change in your financial circumstances.

The government says that “your lender must reinstate your credit privileges when the conditions permitting the freeze or reduction no longer exist. You may need to put in writing your request to have your line of credit reinstated. Once your lender receives your written request, they must promptly investigate and determine whether your HELOC can be reinstated.”

Of course, to get your HELOC loan limit back to where it was the lender has the right to charge you a fee. The Federal Reserve says “your lender may charge you fees to cover the costs for an appraisal and credit report when they consider your request for reinstating your HELOC. Your lender cannot, however, charge you a fee to reinstate your credit line once the condition that caused them to freeze or reduce your HELOC no longer exists.”

Why then would a lender restore any line of credit until a borrower makes a request for restoration? Once the request is made then the lender can change fees to consider the matter — and there is no requirement that the request will be granted.

The case was filed on behalf of Pascal Majon, 30, of Zion, Ill., who claims Chase denied him access to his HELOC account due to a purported substantial decline in the value of his home. In reality, alleges his law firm, KamberEdelson LLC, Majon’s home did not decline in value.

Mortgages: Lender Cut-Off Goes To Court is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: HELOC, home equity, JPMorgan Chase, line of credit, mortgage, Pascal

To be polite, not a damn thing.

The Board’s 5 Tips for Dealing with a Home Equity Line Freeze or Reduction first tells us the following:

Late Notice

Your home equity line of credit (HELOC) lender must provide you a written notice if they have frozen or reduced your HELOC. Your lender must send the notice to you no later than 3 business days after the freeze or reduction. The notice also must include information about any other changes to your HELOC.

I’m not kidding. This is really what it says. Your lender must notify you three days AFTER it has lowered or frozen your line of credit. In other words, no advance notice is required. This means your line could be reduced on a Monday, you could pay a bill on a Tuesday and then find out on a Wednesday that you did not actually have the credit which would allow you to write a check.

Of course, if you do have a check that bounces then you will naturally have to pay a bunch of fees and your credit score could be impacted. As it happens, a lower credit score can be used by lenders to justify reducing your line of credit.

Reasons

The Fed tells us lenders can reduce or freeze lines of credit for two reasons: a decline in the value of your home or a change in your financial circumstances. This means if the value of your home drops a dollar the lender has reasonable grounds blast your line of credit. As to changes in financial circumstances, they change every day. Notice that the “change” does not have to be negative, it merely has to be different.

Getting Back Your Line of Credit

The Fed explains that “your lender must reinstate your credit privileges when the conditions permitting the freeze or reduction no longer exist.” And who makes this determination? The lender?

And about those credit privileges? Does the Fed mean the line of credit for which you already paid? That’s not a privilege, that’s a purchase.

The Fed helpfully tells us “your lender can impose fees for reinstating your HELOC. Your lender may charge you fees to cover the costs for an appraisal and credit report when they consider your request for reinstating your HELOC. Your lender cannot, however, charge you a fee to reinstate your credit line once the condition that caused them to freeze or reduce your HELOC no longer exists.”

The bottom line is that if your lender can “justify” a credit line reduction or freeze then you’re stuck. Thank goodness the Fed exists to protect the public….

Mortgages: Can You Stop Line of Credit Freezes? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: credit, equity, Federal Reserve, freeze, HELOC, home, line, lower, notice, reduce

Unfortunately, HELOCs have been drying up across the country as lenders have put the brakes on withdrawals and reduced credit limits. The result is that access to home equity lines of credit is being denied to many homeowners, including some who need cash to stave off foreclosure.

Lenders argue that they have the right to limit HELOC withdrawals because declining home values have made such loans more risky. And while lenders have a point, the Federal Deposit Insurance Corporation has warned national lenders that they cannot cut-off HELOC access without following federal rules.

So what do the rules say?

First, the lender must show that there has been a “significant decline” in the value of the property, an expression which means that equity has fallen by 50 percent. “Equity,” of course, is not the same as overall value because you can reduce equity if home prices fall or if mortgage balances increase.

Second, lenders can limit HELOC access if the borrower is not making full and timely payments.

Third, if lenders do limit HELOC access they must give borrowers “the opportunity to seek a review of the institution’s decision to reduce or suspend a credit line based on a significant decline in a property’s value.”

What does it mean? If you get a letter from your lender which cuts off access to your line of credit, explain why the value may not have fallen as much as the lender believes. Ask the lender to review your situation and if the value has been reduced because of an automated computer model ask for a valuation of the property by a local appraiser.

————————
Published originally by Realty Times on July 9, 2008 and posted with permission.

Will Your Home Equity Line of Credit Be There When You Need It? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: credit, cut, equity, FDIC, HELOC, home, limit, line, loan, mortgage, off, withdraw