Re-fi offer from our lender (Wachovia)

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Re-fi offer from our lender (Wachovia)

Dave W.
Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes

We currently have a pick-a-payment ARM. We're not behind in the payments, but are paying the minimum pymt, resulting in about $1k/mo being tacked onto our outstanding loan amount each month in deferred interest.
Our lender contacted us w/ an offer. They will have the property appraised (the loan amount is up to $409K, the rep on the phone guesstimated the value to be around $241K--not sure how she arrived at that), and give us a 1st mtg (FHA) at 97% LTV, with the remaining amount up to what we currently owe put into a second mtg w/ 0% int for 3 yrs.
As of 11/6/08, the estimated loan amt would be $241,530.00, at an int rate of 5.75%, w/ an APR of 6.155%. Lender would pay $6,411.00 in settlement charges, & we would pay $1,532.00 (interest for 9 days, hazard insurance, & recording fees) .
We've heard a lot of info on the news about banks not wanting to work w/ homeowners, or not taking the first offer the bank comes up with, etc. We live in Lodi, CA, so I don't know if the market's hit bottom yet, or when it might start going back up. Of course, if I knew that, I could be a rich man!
I'm wondering if we should take this offer, or tell them we want the FHA loan at 80% LTV, with the remainder on the 2nd so we don't have to pay PMI? We don't want to stay in this house, so we're also thinking of renting it out & keeping it, or renting it for a while until the market picks up & then selling, or ??? Even though we're not behind in the pymts now, if the mtg goes to 125% of the original loan amt, they can recast the loan immediately.
Hope my explanation was clear, & included enough details.
Any suggestions?
Dave.

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  • Account Closed
    CA · Member since 2008 · 277 posts · 11 votes
    17y

    Dave Witt wrote: I'm wondering if we should take this offer, or tell them we want the FHA loan at 80% LTV, with the remainder on the 2nd so we don't have to pay PMI?

    Every FHA loan is subject to an upfront MIP premium of 1.5% of the loan amount. 15 year loans are not subject to monthly MIP premiums if the loan to value is less than 90%. Otherwise, monthly MIP payments are required until the LTV is less than 78%.

    See Mortgagee Letter 08-16

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  • Jack Ryan
    CA · Member since 2008 · 34 posts · 0 votes
    17y

    Supposedly mortgage refis are down because a lot of consumers are anticipating the FED buying GSE debt and trying to push mortgage rates down to the 4.5% target. Personally I think there's still so room to drop I would wait for a few months to refi.

    That said it is important to watch the economy very carefully - if we enter Japan 1990 scenario (and it looks like we are) things will change. In Japan housing did not recover for 15+ years (and has never recovered) and mortgage rates were 3%

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  • Account Closed
    CA · Member since 2008 · 277 posts · 11 votes
    17y

    The National Association of Realtors is lobbying hard for lower rates for homebuyers only. They want to see refinancers shut out.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Hmmm, I wonder why that is? Oh! they only get paid when a house is SOLD.

    Arguably, if the idea is to reduce the inventory of unsold homes, it makes sense to subsidize purchases. OTOH, if you're struggling to make the payments on an underwater house at a higher interest rate when the house next door was just purchased for much less and at a much lower interest rate, what incentive do you have to make the payments?

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  • Dave W.
    OP
    Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes
    17y

    That's a very good question. And you pretty much hit the nail on the head--the house immediately next door to ours just sold in the last 6 mo, & it was a short sale. We orig purchased our house for $289K, then refied at around $350K, when it appraised for $425-450. It probably peaked out at $550K. Our loan amt is up to approx $409K, but our house would probably appraise around $250-280 (???). So, what's our incentive to keep paying on it? I struggle w/ the ethics of walking away. On the one hand, we entered into an agreement to pay $X amount of money to the bank. OTOH, we put up our house as collateral (or, more accurately the bank owns the house), which the bank agreed to. So, if we walk away, the bank is getting what they agreed to take if we didn't pay them.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Unless its an unusual situation, specifically, a contract for deed (aka land contract, installment land contract), you do really own the house. The bank just has a claim against it.

    When you took the loan, you agreed to pay it back in full. The collateral (your house) was intended to help ensure you did. But, regardless of the value of the collateral, you still owe the full amount.

    Ethically, I personally believe there's little choice but to pay it in full. What you could get away with in the current environment is a different question.

    These pick-a-payment loans were really, really bad idea. I don't really see how a situation like yours could ever have a positive outcome. Given you refi-ed for $350K, and now you owe $409K, you must have been paying a grand a month less than the interest owed. Even if values kept going up, and you did refi, your payment would have still been much higher than what you were previously paying. Unless, you got a new pick-a-payment loan, and continued to under pay it. At some point, this merry go round just had to come crashing down. After 10 years, you'd have a million dollar plus debt. A $298K house in Lodi sounds like a run of the mill house. Even if you managed to sell it after 10 years and settle the debt, people would need $500K annual incomes to buy that house. Our incomes just aren't rising that fast.

    To go back to your question about taking their deal or not... Sounds like they're offing you a pair of loans. One fully amortized for 97% of about $241K or $233K. In addition, you have another loan for $409K-$233K=$176K. The first has payments (just P&I) of $1359. You say the seconds at 0% for three years. Are there payments on that? What happens after three years? You're still stuck owning that $176K.

    Even if you sell right now, you're going to have pay that $176K (roughly, actually maybe more after all the closing costs on a sale), take a deficiency judgment for that amount, take a 1099 for the phantom income on that amount (i.e., pay taxes on $176K of income you didn't actually get), declare bankruptcy of some combination. That sounds painful no matter how you slice it.

    I don't see prices going up enough to cover your debt anytime soon. Even if we're right at the bottom (don't think so), and prices begin appreciation 5% annually, you'll need 11 years to get back to break even. So, you'll need to get at least an interest only loan on $409K, and manage to make the payments for 11+ years before you could sell without taking some kind of hit. I think its more likely we still have some additional price declines, and I'm not sure we'll see 5% appreciation. So, could easily be 20 years, IMHO, before you home's value is up to $409K plus sales costs. Keep in mind, though, that making predictions is hard. Especially about the future.

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  • Dave W.
    OP
    Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes
    17y

    Well, here's the latest (good news, imo!). I called Wachovia back to get clarification on what the rate would be on the 2nd after 3 yrs. I misunderstood her the first time. This time she told me that the 2nd will be a 0% interest loan! With no pymts for the 1st 3 yrs, & then the balance being paid over 27 yrs at 0% interest. So, we'd have a first in the low 5's, maybe even in the 4% range (depending on what we qualify for), for 97% of the current appraised value, & the rest at 0%. We're going to go for it. Worst case scenario, even if we walk away in 3 yrs, we're saving $$$. What I'd really like to do is re-fi, rent it out, & have this learning experience as our first rental and purchase another home to either live in long-term, or turn around into another rental in a couple/3 yrs.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    That seems like quite a deal. You'll have a $1359 payment on the first (plus taxes and insurance) and $543 on the second when that kicks in.

    Doing a refi is essentially impossible unless you can bring a big stack of cash to the refi. The best you'll manage on a refi is 90% of the current value. Plus, on this deal you're paying an aggregrate rate under 4% with having that big chunk at 0%.

    If you want to rent this, you'll need to get $2700 a month to be break even now, and $3800 once the new payment kicks in. Read in the landlording forum about this.

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  • Dave W.
    OP
    Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes
    17y

    Jon, is that based on the 50% rule?
    It's almost sounding like we should just walk away from this house. We could stay here 8-9 months while putting our house pymt into a savings account instead for a down pymt on another house, then rent for a couple yrs until we'd qualify to buy another house. I doubt the market would turn around that fast, so we'd probably be able to get a decent deal on our next house. Then WE'D be the neighbors who paid less for our house, w/ better rates.
    How long, & how bad would it ding our credit if we walked away?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Yes, based on the 50% rule. You know what your taxes are. Landlord insurnace will be more than homeowners, so add that in. Don't rely on your old homeowners policy if you put a tenant in there. The company will deny claims on that basis. So, you should be able to figure out your absolute lowest rent in the best case scenario. Then, start calling other rental listings and see if you can get that. Even then, you'll be out of pocket when you have a vacancy, or need to fiix up anything between tenants, or to get a tenant in there to start.

    I'm no credit expert. Other posters have said a foreclosure will prevent you from getting a new loan for five years. A short sale, if you can manage that, is two years.

    You don't really say, but if you have other assets or don't really have some hardship (e.g., job loss, medical issues, forced relocation, death in family) the bank will be less willing to work with you.

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  • Account Closed
    CA · Member since 2008 · 277 posts · 11 votes
    17y

    Dave wrote: So, what's our incentive to keep paying on it? I struggle w/ the ethics of walking away.

    You juiced the property for $61K (350 - 289) and now you're struggling with the ethics of the situation. I can understand why. On what did you spend the money when you cashed out via refinance? Had you not cashed out, you wouldn't be upside down now. (Homeowners sometimes forget this.) Did you make a down payment when you purchased the property? In TX, the law won't let you cash out more than 80% LTV. Maybe that's not such a bad idea.

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  • Account Closed
    Real Estate Investor · CA · Member since 2008 · 20 posts · 4 votes
    17y

    Dave:

    I'm heartened to see Wachovia pro-actively working with their upside down but performing borrowers. It means the banks and the investors holding the paper are finally being realistic and working through their problems. Once this process is in place, the market value of all that paper floating around will become easier to determine and the banking system can finally begin to recover.

    How I would value what the bank is offering you is to do a discounted cash flow analysis on the payments the bank will receive on the second. They will receive no payments for the first three years, and then they will receive monthly payments of $176,000/(27x12), or $543.21. Discounting that flat revenue over the 27 years at a market rate of 6 percent (0.5 percent per month) gives a value of $87,055. Discounting that lump sum for three years on an annual basis gives a current value of $73,093. Someone out there may have a different opinion of the appropriate discount rate, but the principle is the same.

    From a financial analysis viewpoint, the bank and investor are willing to accept the principal on the new market rate first at $241,600 plus the discounted value of the second at $73,093, or $314,693 instead of the $409,000 you owe. That's a better deal for them than foreclosing and getting $250,000 and paying all the costs of a foreclosure.

    In your shoes, if I felt I could manage these payments and the house would likely be worth at least $314,693 plus selling expenses at the end of my projected holding period, I would seriously consider the offer. It beats the alternative of a short sale or a foreclosure. I would also try to negotiate the rate on the first before I agreed, as rates continue to drop. If the offer was made back in early November, you should get a better rate today.

    Good luck, and be sure to apply the lesson about the plusses and minuses of leverage from this experience in the future!

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  • Dave W.
    OP
    Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes
    17y

    Thanks for that advice. Very helpful. Yes, I see this as a potentially win/win situation. Like you said, Another Investor, the bank will be getting what the house is worth, plus the add'l we owe (w/o interest), but it's better than having to deal w/ a foreclosure. It's almost like they're "reselling" it to us for current market value, plus the add'l amount we owe (which, in fact, does include the interest we haven't paid for the last 3 yrs from the time we re-fi'd). In return, we don't end up losing the house (in part, due to our ignorance/stupidity, & in part due to the mortgage broker who sold us on it), our credit doesn't get screwed up, etc. Yes, big lesson here.

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  • Account Closed
    Real Estate Investor · CA · Member since 2008 · 20 posts · 4 votes
    17y

    Hi Dave:

    The bank is not really getting back the additional amount you owe. They are taking the additional amount you owe and stretching out that number out over time at a zero percent interest rate. When you discount that income stream back to present worth at a market interest rate, the value of that income stream is less than half of the additional amount owed. They are accepting the equivalent of $314,693 today in future payments on both mortgages

    Also, a mortgage broker is not a fiduciary. It's not their job to fully understand your financial position and make recommendations about which mortgage is best for you. You need to understand and look out for your interests in any mortgage transaction. As an inexperienced borrower, that's tough to do.

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  • Dave W.
    OP
    Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes
    17y

    Now that the Feds dropped the interest rate to between 0-2.5%, how long will it take to affect mortgage rates? Should I wait on Wachovia's offer & see if they offer something better? Or should I try to negotiate a better rate? If so, how would I do that--ask for a specific rate, or just ask if they can do better & see what they say?

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  • Mike Henderson
    Residential Lender · Littleton, CO · Member since 2008 · 128 posts · 16 votes
    17y

    I've been browsing a lot tonight. Sleep schedule is all messed up. I'll reply because your a BP Donor :D :D :D

    This was a negotiating tip I got from the Carei convention from Donald Trumps right hand guy.

    Always ask
    1) Is that the best you can do?

    Wait until they counter

    Then say we are getting closer.

    As far as your interest rate and deal. It is not really based on those rates. Wachovia / Well Fargo now is just trying to get those loans off their books.

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  • Account Closed
    Real Estate Investor · Beijing, CA · Member since 2008 · 32 posts · 0 votes
    17y

    Looking at this straight on it looks like you are getting a deal here but there are some things with this Wanchovia loan program that are not quite right. Some of these incentives sound very similar to the incentives that got us into this mess in the first place and I suggest you think this over again. I could write a lot more on this but I'm heading off on holiday. I do remember that Mr. Mortgage wrote specifically about this Wanchovia refi deal on his blog just in the last week or so. I suggest you check it out. Just google "Mr. Mortgage"

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  • Dave W.
    OP
    Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes
    17y

    Thanks, Mike! I've heard the line "Is that the best you can do" before, & have actually used it successfully, but I also like the "We're getting closer" line. I'll try it out!
    Thanks for that info, Kurt. I'll look for that info on the Mr. Mortgage website.
    I also heard on GMA this am that the feds are NOT considering write-offs, or advantages from a re-fi as taxable, or "ghost income" at this time, which is good news.

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  • Dave W.
    OP
    Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes
    17y

    I can't seem to find anything on Mr. Mortgage about any Wachovia re-fi offers. If anyone can find it, will you please send me the link? Thanks!

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  • Shari Posey
    Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes
    17y

    Dave,
    Consider yourself VERY lucky that your lender is trying to work with you to reduce your payment. MOST are not. This is one of the sweatest deals I have seen a borrower offered.

    Where are you going to live if you don't do the deal and live in the house?? You want to rent your house out and then you would rent some other place?? That doesn't make sense to me. Besides, lots of landlords aren't interested in renting to people who foreclosed. (If you didn't pay your mortgage, why would you pay mine??)

    Why did you buy the house in the first place? Why would you want to pay taxes on your cash-out refi? Remember that EVERYONE that bought since 2005 is sitting in a house worth less than what they bought it for.

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  • Dave W.
    OP
    Homeowner · Lodi, CA · Member since 2008 · 49 posts · 0 votes
    17y

    I do think it's a good offer--it's definitely better than what we have now. I'm kindof thinking out loud here--even if we take the offer, we still owe a lot more on the house than it's worth, & my guess it won't get back to a value equal to what we owe on it for another 7-10 yrs. If they don't reduce the mortgage amount, & all these foreclosed houses around us are selling for $150-200K less than ours is, we won't be able to sell our house for what we owe. From strictly a financial standpoint, why shouldn't we walk away from it, rent for a couple years until the banks will allow us to purchase another home, & then buy something else for the current market value? Then, it 7-10 yrs, we'll have a home that we bought for, say $200K, that's worth $250-300K, instead of still paying a mortgage of $400K for a home that's worth $300-350K? With all of the people in foreclosure, I highly doubt landlords wouldn't rent to us. I don't buy your line that "lots of landlords aren't interested in renting to people who foreclosed", especially in todays climate, where the landlords understand the situation, & imo, are benefitting from it!
    To answer your question, we bought the house to get into Lodi. We didn't buy it to live in it long-term. And I heard on the news the other day (I'd need to check w/ our tax preparer) is that they have suspended the tax law stating you have to pay the "ghost income" tax of the diff between what you owe & what the house is worth if you foreclose.

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  • Shari Posey
    Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes
    17y

    I can only comment on my own postion, the last time we had a vacancy about six months ago we had about 5 applicants and I think two had foreclosures on their credit. We didn't need to consider them. Howver, we have a vacancy coming up so maybe we will have fewer applicants, more people with foreclosures, but in the past we haven't considered those prospects.

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