Remember when you purchased your home? Maybe it was your first home or maybe you were a seasoned pro and the allure of walking through the doors of your new dwelling no longer excited you. Regardless, you undoubtedly knew that your home was an investment and in 5 to 10 years along with some improvements, you could stand to make some money on your purchase.

Unless you’re an economist, an investor, or other financial professional, there’s a good chance that you didn’t know that home prices were rising much too fast. You didn’t know that just around the corner a blowout would happen.

The Recent Economic Meltdown

In 2008 the blowout occurred. The economy had a severe meltdown and home prices dropped rapidly. When the dust cleared, you went to bed in a home that had lost half of its value or more. You were paying a mortgage that, if you paid the entire 30 years, you would most likely still lose money.

To compound the problem, you may be one of the 9.5% of Americans who were unemployed. You were a victim of the bad economy. You were considering sending your house keys to the mortgage lender and walking away.

The Economic Stimulus Plan

On March 4th, President Obama came to the rescue. As part of the stimulus plan, Obama made it possible for people to refinance their home loan at a 4.5% interest rate. This was done in the hopes of keeping people from walking away from their mortgages.

This interest rate has limitations. It has to be a refinance or a first home purpose. This keeps the real estate investors from using this rate to buy homes as investments. With more than a 3 trillion dollar price tag, the Obama administration wants to minimize the cost as much as possible.

Additionally, as part of the stimulus package, Obama was hoping that with lower mortgage payments, consumers would use their extra money to make purchases. This would help stimulate the economy. While that hasn’t happened on a large scale, it has helped to keep people in their homes.

If you are one of those who has lost your job or is considering walking away from your home, talk to your lender. This program, and others, may be able to help you make your home more affordable.

How the 3 Day Right of Rescission Works

The law gives a borrower 3 full business days to rescind, or change his mind, after signing the loan documents. That means you can sign your loan docs on Monday, and if you go home and notice there’s a mistake on the loan documents and the interest rate is significantly higher than expected, you have 3 full days to fax in your notice of rescission to the lender and you won’t lose anything because of it.

An Example

The 3 full days begin the day after you sign your loan documents and do not include Sundays and federal holidays (list of U.S. federal holidays), but do include every other day, including Saturday. For example, if you sign your loan documents on a Thursday, the 3 days doesn’t begin until Friday. The first day is Friday, the second day is Saturday, you skip Sunday, and the third day is Monday (assuming Monday’s not a Federal holiday). In this example, you would have until Monday at midnight to send in a written notice of rescission to your lender.

The rescission notice can be anything typed or hand-written by you notifying your lender that you would like to rescind. Be sure to include your name, loan number, your lender’s name, and the current date and time on your notice. You can also find sample notices by searching Google for “Rescission notice.” The notice can be faxed or mailed to your lender.

If you mail the notice, the 3-day rule says it only has to be dropped into the mailbox by the rescission deadline. So, in the above example – your rescission period ends on Monday at midnight – you could drop the letter in the mailbox at 11:59 pm on Monday and you would have just made the deadline. Obviously they have no way of knowing whether you dropped it in the box at 11:59 pm on Monday or if you were a bit late and dropped it in at 12:01 am on Tuesday, but that’s the rule.

Another Example

Now let’s say you sign your loan documents on Friday, but the following Monday is a federal holiday. Your rescission period begins the day after signing, which would be Saturday in this case. We skip Sunday, but we also skip Monday since it’s a federal holiday. So day 2 would be Tuesday, and day 3 would be Wednesday. You would have until Wednesday at midnight to rescind in this example.

Calculate Your Funding Date Based on the Rescission Period

If you’re wondering when your loan will fund, it’s simple to calculate, it’s just the day after your rescission period expires. So, in the previous example, where Monday was a holiday and the rescission period expired on Wednesday at midnight, your loan would fund sometime on Thursday. The exact time really depends on a number of factors, but I’ve found it’s usually before noon.

When Your Right to Rescind Does Not Apply

It’s important to note that the 3-day right of rescission does not apply to all types of mortgages. Here are some examples of when the 3-day right of rescission does not apply:

1. Does not apply to purchase mortgages, only to refinances
2. Does not apply to refinances if you refinance with the same lender
3. However, if you refinance with the same lender and take cash out, it does apply to the cash out portion of the loan
4. Only applies to refinancing of your primary residence (doesn’t matter what type of home – i.e. manufactured, mobile, etc)
5. Does not apply when you borrow money for your business
6. Does not apply when you borrow from a state agency

It Gets a Bit More Complicated Now

Those are the basics of the law, however, there are some interesting quirks that you may never have to deal with, but we’ll share them anyway just in case . The 3-day clock doesn’t actually start ticking until 3 conditions have been met, however, in the vast majority of cases, all 3 of these things will happen on the signing day. Nonetheless, the conditions are:

1. Borrower must sign the loan papers
2. Borrower must receive a copy of all loan disclosures
3. Borrower must receive a copy of the Notice of Right to Rescind

In the rare case that your lender does not supply these on the day of your signing, the rescission period can run up to 3 years after your signing date. In such a case, should you decide to rescind, say, a year later, your lender’s security interest in the property becomes void and they must reimburse you for all finance charges collected over the life of the loan.

Additionally, the right to rescind applies to anyone with an ownership interest in the property. For example, if your husband is on Title, but will not be signing for the loan, he still has the right to rescind because the Title grants him ownership interest in the property.

Now, if you’ve really been paying attention up to this point – and bravo for you if you have – you may be wondering why the rule only requires that you drop your rescission notice in the mailbox by the deadline and not that the lender receives your notice by the deadline. Because your loan funds the day after your 3-days expire, and if you drop your rescission notice in the mailbox at 11:59 pm on the 3rd day, your loan will undoubtedly fund before the lender receives your notice.

Well, you’re right about this…in such a case you’d end up having to pay the lender right back. The law only requires that the lender be reasonably satisfied that the owners have not rescinded before releasing the funds from escrow. It ends up being a hassle for you and, especially, for your lender. That’s why it’s always a good idea to give your lender a call before the deadline if you plan to rescind. That way you can avoid the hassle of having to pay back the full amount of the loan. Incidentally, the potential for something like this to occur is just the reason your loan officer/broker may call you on the last day of your rescission period just to check that you haven’t decided to rescind or, in some cases, your lender may request written confirmation that you or anyone else with ownership interest in the property has not decided to rescind.

Waiving the Right of Rescission

While the 3-day right of rescission is designed to protect borrowers, it can also be a burden. The lender will not release funds from escrow until the day after the rescission period expires, but what if you need those funds immediately? What if your house was hit by a tornado and you need the funds to make repairs or you’ll have nowhere to live? In such a case, and only if you have a “bona fide personal financial emergency,” you can opt to waive your right of rescission and have your loan fund 3 days sooner.

If you’re interested in more information, you can check out the FDIC’s page on the topic of rescission at http://www.fdic.gov/regulations/laws/rules/6500-200.html#6500105

• Truth in Lending Act requires a lender to tell you how much it will cost to borrow money so that you can compare the terms of credit offered by different lenders.
• Fair Credit and Charge Card Disclosure Act requires a lender offering you a credit card to tell you the annual percentage rate (APR), the amount of any annual fee, and whether
• Fair Credit Reporting Act controls how your credit history (how you pay your bills) is kept by credit bureaus and used by lenders
• Equal Credit Opportunity Act prohibits lenders from discriminating against you in a credit transaction on the basis of certain personal characteristics such as race, color, religion, national origin, sex, marital status, age, because you receive public assistance or because you’ve exercised your rights under the Consumer Credit Protection Act.
• Fair Debt Collection Practices Act lays out the rules a debt collector must follow when trying to collect a debt from a consumer.
• Home Equity Loan Consumer Protection Act requires a lender to give you complete information about the home equity loan plan it offers—first when you receive an application and again before you first use the line of credit.
• The Home Ownership and Equity Protection Act requires disclosures and imposes substantive limitations on mortgage transactions having rates or fees above a certain percentage or amount. It also requires disclosures about the potential costs for reverse mortgages.
• Fair Housing Act prohibits lenders from discriminating against you in real estate mortgage or home improvement loans on the basis of race, color, religion, national origin, sex, familial status, or handicap.
• Real Estate Settlement Procedures Act states that lenders must give purchasers information about the costs required to close a mortgage loan. It also protects consumers from unnecessarily high real estate settlement costs by prohibiting certain business practices. This applies when you take out or refinance a loan secured by real estate such as a mortgage loan or a home equity loan.
• Fair Credit Billing Act requires that a lender promptly correct a mistake on your credit card bill.
• Truth in Savings Act requires lenders to disclose the terms of their deposit accounts in a uniform way.
• Consumer Leasing Act requires the costs and the terms of a consumer lease, such as a lease for a car or for furniture, be outlined to you so that you can compare the cost of leasing.

Licenses Required for Mortgage Originators

For the first time, mortgage originators are now required to be registered and licensed on the national level. This is a big change over the past when originators could, quite literally, be pulled off the street, handed a phone, and selling mortgages in the same day. Obviously, this appears to be a step in the right direction in overcoming mortgage fraud, and it’s something the National Association of Mortgage Brokers has been a vocal proponent of for some time.

HERA Won’t Be Active Until October 1st, 2009

Like most laws requiring major changes, states aren’t required to have licensing systems in place until the beginning of October, 2009.

Does this mean no more convicted felons in the mortgage business?

A few weeks into my first mortgage job at the height of the refinance boom in Southern California, the police suddenly showed up asking for one of my co-workers. The guy wasn’t working that day, but needless to say, I asked around and imagine my surprise when I was told this guy had recently been released from prison and, apparently, had violated his parole!?

Well, I left that company real quick!

After You Sign the Papers

We’ve covered the mortgage process a bit in the past, but we’ll give you a quick refresher here. In many cases, soon after a borrower signs his or her loan documents the loan is sold to investors on the secondary mortgage market. This happens more often than most people realize, in fact, even if you’ve got a loan with a major company like Wells Fargo or Bank of America, those lenders may still opt to sell the loan to investors.

When Mortgages Are Sold

Now, when mortgages are sold, generally they’re split into two major parts.

First is the actual mortgage itself, which is bundled with a bunch of other mortgages and sold to an investor in the form of bonds or some other investment vehicle. When you make a payment to the company servicing your loan (covered in the next paragraph), that company takes a small percentage and pays the rest to the investor. So, while you’re making monthly payments, the investor is receiving them, after the servicing company takes its cut.

The second part of the mortgage that is sold are the servicing rights. This is the portion that, if you’ve ever had a mortgage, you’re more familiar with (more so than you probably think at least). Servicing rights grant a company the right to handle, well, the servicing of your mortgage. Whatever company you’re making payments to is the company that holds the servicing rights to your mortgage. That company takes a small cut, usually around 0.25%-0.5%¹ of the monthly payment in return for handling all the administrative tasks that come with servicing your loan, like sending out statements, collecting past due payments, etc… After that, the rest of the monthly payment is sent to the investor who bought the investment vehicle your loan is bundled into.²

What If Your Original Lender Goes Bankrupt?

If the lender who you got the loan through originally goes bankrupt, you may not even know about it. If that lender sold off both the mortgage and its servicing rights, you wouldn’t even be making payments to them anymore. They’ve essentially taken themselves out of the loop entirely this way.

Some of the larger companies will keep the servicing rights and sell off just the mortgage as an investment vehicle. If your lender goes bankrupt after this happens, the lender will be forced to liquidate its assets, in other words, it has to sell the servicing rights to someone else. Since we’re talking bankruptcy here, those servicing rights will generally sell at a discount and, in many cases, people/companies will be fighting tooth and nail to get to purchase those servicing rights. Once a deal is struck, the biggest change you’ll notice is that the company you send payments to will change. Most homeowners have had their mortgage servicing rights sold at one point, although it doesn’t always mean their lenders went bankrupt.

What If the Servicing Company Goes Bankrupt?

If your original lender sells off both the mortgage, as well as its servicing rights, you’ll have to start making payments to the new servicing company. Now, what if that company goes bankrupt? Same as above…that company will be forced to liquidate its assets, of which your mortgage servicing rights are one of those assets, and those rights will be sold at a discount to another company or investor, at which point you’ll have to start making payments to yet another new company.

What If the Investor Who Bought Your Mortgage Goes Bankrupt?

Now that we’ve covered the servicing side of things, what if the investor who bought the actual mortgage itself, as some sort of investment vehicle, goes bankrupt? Well, that’s just like if you bought some stock in a company and then you had to declare bankruptcy; you might sell the stock to someone else, or you might lose it in a lawsuit, either way, the company who’s stock you own isn’t really going to be affected. Likewise, if the investor who bought your mortgage goes bankrupt, you likely won’t even know about it.

Will the Terms of the Mortgage Change?

No. No matter what happens, no matter how many times your loan is sold or how many companies holding it go bankrupt, the terms of your mortgage will never change. Now, you may have to start making payments to a new company, and that can be a bit of a hassle, especially if it happens several times, but your 5.5% 30-year fixed (or whatever) will stay a 5.5% 30-year fixed.

Why All This Buying and Selling Mumbo Jumbo?

So, the question still remains, why are there all these companies that handle these different aspects of your mortgage? Aren’t they all middle-men jacking up the cost you ultimately pay for your home? Well, no, and we don’t want to leave you hanging, but that’s a topic for the next article here at Truthful Lending.

Also, if you haven’t seen our brand new Debt Free Calculator, take a look.

Sources:

1. New York Times
2. Mortgage News Daily
3. MSNBC
4. Bloomberg News

The Federal Housing Administration

FHA stands for Federal Housing Administration, and, among other things, it insures mortgages for low to moderate income Americans, allowing them to qualify for loans that they normally wouldn’t qualify for because, if an FHA insured loan defaults, the bank doesn’t lose because the loan is insured by the U.S. Government.

You see, normally the lender, or Private Mortgage Insurance (PMI) companies assume the risk of default on a home loan, however, many would-be homeowners can’t qualify for traditional loans and aren’t afforded coverage by PMI companies, so the FHA steps in to help some of those people.

How FHA Secure Works

FHA Secure is the name of the new plan to help homeowners struggling as a result of the current mortgage market woes. The program will allow homeowners with adjustable-rate mortgages (ARMs), who are late on their payments because their loan adjusted, to refinance into FHA secured, fixed-rate loans. There are a few qualification requirements, the biggest of which is that the homeowner must not have been late on any payments before the loan’s rate adjusted and the payments went up.¹

Where The Controversy Lies

There is a certain bit of controversy over the new FHA Secure program, and it lies in a debate between who is at fault when a loan adjusts. Since the FHA is funded by tax-payers, there is a question as to whether tax-payer money should go to bail out homeowners who signed for the loan they were given, and thus, should be held responsible for any negative consequences years down the line, such as increasing rate and payments.

The other side of argument is that the homeowners in trouble were essentially duped into signing for adjustable-rate mortgages by shady mortgage professionals who were dishonest about the loan terms and, as such, should be given assistance to get out of their current situations.

Whoever is at fault, FHA Secure aims to solve the problem with government assistance. If you’d like to find out more about FHA Secure, you can do so at the Federal Housing Administrations Website.

Sources:

Federal Housing Administration, http://www.fha.gov/about/fhasfact.cfm