Marc's Mortgage Matter's

The Federal Housing Administration, which is either running out of money or is fine, depending on who you ask, is raising some eyebrows by insuring mortgages for apartments at a 98-unit Gramercy Park development in New York. The insurance enables buyers to make a down payment of as little as 3.5% in a building where apartments are listed at $820,000 to $3 million. Of course the developers of the project think its fine that the FHA, founded during the Great Depression, has the ability to do this. In Southern California, where the median home price is $300,000 (well above the national average), about 40% of the loans in the last 16 months have been insured by the FHA. Critics believe that it is time for HUD to brush off the FHA's mission statement.

It is rumored that large lenders are beginning to feel that property flips may represent an unacceptable risk. For example, flips create quick and substantial profits for the property sellers, but potentially high losses for the investor, and the properties are typically located in areas with a high percentage of distress sales. Investors believe that second home occupancy is often dubious, and borrowers who purchase investment properties out of flip transactions are often gullible, inexperienced in property management and unfamiliar with the area where they are buying. The projected rental income may not be realistic because of an imbalance between rental properties and available tenants, or borrowers may be attracted by supposed guaranteed rental income not disclosed to the lender - which is unacceptable. There is a high potential for severe property abuse by foreclosed borrowers, vandals or squatters, and some properties purchased from institutional sellers do not include interior inspections that would discover plumbing or electrical problems. And often times any renovation is merely cosmetic.

What's the difference between a "mortgage" versus a "deed of trust"?   A mortgage, used in playing Monopoly or in the securities business, is not used in California - but it is used in many other states (NY/NJ). California is a "deed of trust" state. Taking a step back, when a borrower signs a promissory note, he is agreeing to pay the lender a specific amount of money according to certain conditions. The borrower will sign either a mortgage or a deed of trust, securing the note and offering protection to the lender. (Remember that a deed conveys title & ownership of the property.) In "title theory" states, a mortgage is used and it conveys ownership to the lender. A clause in the mortgage provides that title reverts back to the borrower when the loan is paid. In "lien theory" states, the mortgage creates a lien only on the property and the title remains with the borrower. The lien is removed when all the payments have been made.

One basic difference between the mortgage and a Deed of Trust is that in doing a mortgage two parties are involved (the lender and the borrower) whereas with a DOT there are three parties involved: the borrower, the lender, and a trustee. In a DOT, the borrower conveys title to a trustee who will hold title to the property for the benefit of the lender. The title remains in trust until the loan is paid off, with a title company, escrow company, or bank usually listed as trustee and issuing a trustee's reconveyance showing that the lender's interest has ended upon pay off.

More pertinent now, unfortunately, is the difference in how foreclosures are handled. Servicing companies know that, although state law will determine the method of foreclosure. The rules when using a DOT allow for a faster foreclosure time than with a judicial foreclosure required with a mortgage. Under a Deed of Trust, when the borrower defaults on the loan, the lender delivers the Deed of Trust to the trustee, who then is instructed to sell the property at a trustee's sale. 

Economic growth has weakened to the point where we now have 1.6% GDP readings as bookends to the year-old recovery. After the deep recession, any positive growth readings are of course welcome, but the very muted pace of growth in the second quarter of 2010 isn't warm enough to feel much different than the recession did.

Addressing the audience at the annual Economic Symposium in Jackson Hole, Wyoming, Federal Reserve Chair Ben Bernanke detailed the Fed's disappointment with the present rate of growth, and stock markets were cheered that he took pains to express both optimism for the coming year and that the Fed still has tools it can employ to ward off deflation or even a double-dip recession. Frankly, what else could he say?

Just as 1.6% growth is insufficient to produce much economic heat, cheap mortgage rates alone are insufficient to produce recovery in the housing market. Along with the broad economic slowdown, the hangover from the homebuyer tax credit "party" has become increasingly apparent. Arguments about its benefits or drawbacks aside, there can be no doubt that the credit has produced distortion in the housing market.

Existing Home Sales dropped by a shocking 27.2% in July, landing at a pace far weaker than expected. The 3.83 million annualized pace was the worst reading of either the recession or the recovery. Meanwhile, the slump in demand means that available supply ballooned up to 12.5 months, a level certain to put renewed downward pressure on home prices. Given the size of the drop from June's 5.26m rate, there is some hope that next month will bring an upward revision, but even if it does, homebuying has come to a virtual standstill.

There is perhaps a little irony in that among the worst housing markets in memory comes what might be the best refinancing opportunity ever... provided you can make it over the hurdles needed to access today's fantastic mortgage rates. Unfortunately, too few borrowers can, and while refinancing activity has picked up to a fair degree, the aggregate amount of activity so far is small relative to other refi booms and boomlets. With about 11 million borrowers underwater to some degree, there are a lot of people who might wish to refinance but cannot, and probably many millions more who lack the steady income needed to qualify.

We seem to be in a vicious little trap at the moment in a number of ways. There's not enough job growth to produce the kind of consumer spending which can produce more and more self-sustaining growth. There aren't more jobs available because there isn't enough final demand to produce them. Due to that lack of growth and a lack of inflation, we have fantastic rates for borrowers who either lack the confidence or income to take advantage of them to buy homes, and we have millions of folks who would love access to those rates but cannot qualify to borrow... because they have no jobs, or because others have no jobs to produce the kind of growth which would serve to create demand to firm home prices... and around we go.

We certainly hope that the swoon to a 1.6% GDP rate in the second quarter was a temporary one. The ugly news from July and August doesn't give us a great feeling about the potential for a huge increase in that rate for the third quarter. On the bright side, there is still more than a month to go, and there have been a few indications here and there that we could finish the period more strongly than we began it.

As the bus stopped and it was her turn to get on, Jill became aware that her skirt was too tight to allow her leg to come up to the height of the first step of the bus.

Slightly embarrassed and with a quick smile to the bus driver, she reached behind her to unzip her skirt a little, thinking that this would give her enough slack to raise her leg. Jill tried to take the step, only to discover that she couldn't.
So, a little more embarrassed, she once again reached behind her to unzip her skirt a little more, and for the second time attempted the step.
Once again, much to her chagrin, Jill could not raise her leg. With a little smile to the driver, she again reached behind to unzip a little more and again was unable to take the step.
About this time, a large Texan who was standing behind her picked her up easily by the waist and placed her gently on the step of the bus.
She went ballistic and turned to the would-be Samaritan and yelled, "How dare you touch my body! I don't even know who you are!"
The Texan smiled and drawled, "Well, ma'am, normally I would agree with you, but after you unzipped my fly three times, I kinda figured we was friends."