CNC Mortgage Blog

The crisis in the housing sector continues for many reasons. One of the main reasons is that sub prime ARM mortgages have reset and payments are now very difficult for the borrower. The borrower can not refinance to a lower mortgage because he owes more than the property is worth.

This suggestion is aimed to solve a housing issue for people who want to remain in their home and can afford the mortgage payments at an average market rate.

Many of these borrowers had a loan known as a 2/28 Adjustable Rate Mortgage (ARM). The rate was fixed for two years and then could adjust upwards by more than 5%. These homes usually had a first mortgage as a 2/28 ARM for the first mortgage and a higher second mortgage, between 8% and 12%.

We assume that borrowers need a home to live in and want to stay in the home they bought.

FIRST MORTGAGE SOLUTION

The bank that holds the first mortgage must agree to modify the terms on the loan to between 80% and 90% of the new appraised value of the property. They will set the rate at the average national rate for 30 years loans plus 0.5 %. In order to qualify the borrower (s) must have sufficient income to be at a 45% debt to income ratio (DTI). Co-borrowers may be added at this stage in the modification. Maybe even non occupant co-borrowers would also be allowed.

TARP FOR THE BALANCE (SECOND MORTGAGE)

Because property values have gone down there is no more equity in the property. If these properties are left vacant they will be vandalized and the entire neighborhood will suffer and depreciate.

This proposal is based on the assumption that one day property values will increase either by market demand or just inflation.

A fund can be set up with TARP funds to buy the second mortgage from the second mortgage lender. This mortgage will be a silent mortgage, one where the home owner does not need to make payments.

If the homeowner sells the property at a price higher than the value of the first mortgage, 50% of the gain after expenses will go to the owner, 50% will go to pay down the second mortgage held by the TARP fund. This second mortgage will be assumable (remains with the new buyer) until it is paid off.

If the homeowner refinances his first mortgage he is allowed to do a rate and term refinance of his mortgage if he can get a better rate in the future. If the homeowner wants to do what is known as a “cash out refinance” of his first mortgage, again 50% of the money that is received after refinance will be for the homeowner, 50% will be for the holder of the second mortgage.

Once the TARP second mortgage is satisfied the home owner can keep all of the gains on the property.