Boston Globe: State to Refinance Troubled Mortgages

The Boston Globe business section has a fascinating article on a foreclosure bailout plan the state of Massachusetts is sponsoring. Here are the key elements:

• A borrower must not be any more than 60 days delinquent on their mortgage.
• The loan offered will be a fixed rate refinance at approximately 7.75%.
• There are income limitations - the Boston area limit is 135% of the median income ($108K) while the rest of the state is 125% ($98K).
• The value of your home can be no more than $417K for a single family home, and $645,300 for a three family.
• Banks must share the pain. If a borrower purchased a house for $250K and borrowed $250K, and the value of the home has since declined to $230K, the state will only refinance $230K. The lender is expected to take a loss on the difference.

This is an incredibly intriguing proposal from where I stand. According to the article, there will be enough funds to help refinance approximately 1,000 mortgages. If you are facing a situation where the walls are closing in and you are struggling to make your mortgage payment, this could be the answer. Also, if you live in one of the neighborhoods where a house is facing a potential foreclosure, this can help the values in your area. It isn't a magic fix for values, but generally speaking distress sales (foreclosure, divorce, sudden relocation, etc) are more likely to sell below market value.

The major issue that is mentioned in the article (that I completely agree with) is that the lenders will be required to take a loss in many instances. I would think in a lot of cases it will be in the lender's best interest to accept a smaller loss in lieu of foreclosing. What happens if the lenders calculations tell them that they will be better off foreclosing than accepting what the state is offering? This is where it gets sticky. My guess is that a lot of lenders will go along with the program in order to avoid the bad press, which would not be soon forgotten in Massachusetts. People in MA tend to have good memories. Just ask someone about Bill Buckner or Bucky (bleeping) Dent. 

If you have found yourself in a tough situation, this option worth exploring even if you aren't sure if you qualify. Please call NeighborhoodWorks America at (888)995-4673 as they are the organization handling things for Massachusetts.

If all else fails, please give me a call and I will help you navigate the situation. If you are unable to keep your home I have a good network of Realtors that have experience in short sales and I would be happy to give you a qualified referral.

Comments

[Roy Porter]

You should have called the number. I was told the article was posted "prematurely."
Why wouldn't the lenders go along. They will have a chance to hang the Finance Charge of a 7.75 fixed rate mortgage around the necks of these people. In many cases those with a 2-28 just starting to adjust may not be paying as high as 7.75 yet.
The state might serve them better by subsidizing a heloc and setting up a Money Merge Account to help them recapture equity.

[Tim Abbott]

Thanks for stopping by and commenting, Roy, I appreciate it. There were a couple of things I wanted to follow up on. First, the existing lender or investor isn't necessarily going to have an opportunity to just increase the rate to 7.75%. The article says that MassHousing will offer this in conjunction with Fannie Mae. Since the loan is being paid off and the investor is being required to take a loss, the investor may feel they can execute a better (a nice way of saying more profitable) plan that what the state is offering.

Second, I would wager that 90% of the folks with a 2/28 didn't go with 100% financing (as in one mortgage) but rather an 80/20. When you look at the blended rate on the two mortgages I bet most of those scenarios will have a blended rate that exceeds 7.75%.

Lastly, I will admit that I am not, and likely will never be a fan of a Money Merge Account. It is not diversified or safe enough for me. That being said, the clients this bailout is aimed at are not good candidates AT ALL for this program. Often there is no excess income to work with, and we are right back to having to deal with an adjustable rate mortgage (the HELOC). The smallest bump in the road can throw off the simpliest strategy, let alone a strategy that employs the use of a MMA. Interesting idea, though.

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