Marc's Mortgage Matter's

Knowing that April 15th is next month, here's a new word for you: "Intaxication", which is the euphoria at getting a tax refund which lasts until you realize it was your money to start with. 

Any weapons race with Russia doesn't receive the publicity it did 30 years ago. But whatever you call someone who originates loans in Russia (brokers?) received some good news last week, when Russia's Prime Minister Vladimir Putin announced that the government will help to lower the mortgage rates investing more than $8.3 billion. The government will provide this money to the banks thus substantially subsidizing the current mortgage rates, which are currently at 14-15% in Russia. Putin set a target rate at 11% with a maximum down payment of 20%.

Do folks here in the US and in the mortgage business have any good news to cheer about, besides rates not being 11%? Some are dealing with the changes in FHA lending and the effect on condominiums. The markets, and interest rates, are facing the end of the Treasury's purchases of mortgage backed securities and the end of the first time homebuyer tax credit ($8000). The economy does not appear to be rebounding enough to generate much home buying interest, the unemployment rate is hovering around 10%, and foreclosure filings not yet abating.

Should foreclosures be run by the government? Lordy lordy... the Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government's Home Affordable Modification Program. Bloomberg reported that the proposal was reviewed by lenders last week on a White House conference call, "prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed," according to a Treasury Department document outlining the plan. At present, lenders can initiate foreclosure proceedings on any loan that hasn't been submitted for HAMP eligibility. Under current HAMP rules, foreclosure litigation can proceed while borrowers are under review for the program or even in a trial modification. The proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan.

I don't know what I'll be doing around Labor Day, but Freddie Mac will be eliminating its Interest Only product. At that time the company announced that on or about September 1, it will cease purchasing and securitizing IO mortgages, including Freddie Mac Initial Interest fixed-rate and adjustable-rate mortgages. As agents and brokers know, what Fannie or Freddie do, the other usually follows, and with them, most investors. This will leave portfolio and hard money lenders as the only entities possibly offering IO products by late summer.

Here is a riddle for you. What happens every Friday, is tragic, and is only expected to become worse? The answer is regulators shutting down banks, this time in Nevada and Washington. The assets of Carson River Community Bank (NV) will be assumed by Heritage Bank (NV), and those of Rainier Pacific Bank (WA) by Umpqua Bank (OR). It is reported that FDIC officials claim that the pace of bank seizures will likely accelerate.

But a mortgage underwriter is an underwriter, regardless of name. Lately I have been hearing from fellow colleagues, some of whom are upset about the current lending environment, some not. But for a slightly different view of things, here is what one very experienced and knowledgeable underwriter wrote to me:

"It used to be that we could 'underwrite' a loan and use common sense to navigate individual circumstances and actually make a decision that a loan was a good credit risk. Then lenders (aka DU & LP in mortgage circles) came along and gave us the laundry list that had to be followed. We were still able to manually underwrite loans for those transactions that did not fit the box. Then the bottom fell out of the business and everyone got scared and new rules came out. Investors and Wall Street were to blame for allowing individuals who were not telling the truth to buy homes. Today investors are pre-underwriting loans prior to purchase and we have to 'march to their tune' including getting pieces of paper that seem ridiculous, but since we need the investor to purchase the loan so we obtain them anyway. Only the most qualified borrowers with all their ducks in a row get loans these days.

Manually underwritten loans are subject to scrutiny such as we have never seen before and frankly, we do not have the courage to paint outside of the lines because we cannot afford to have a loan purchase refused. Today, it takes two to three times as long to underwrite a loan and we have checklist upon checklist that help us make sure all of the i's are dotted and the t's are crossed. I have been doing this for over 30 years and frankly we are back to the rules of the early 80's or worse when it comes to documentation." I totally agree and this was an excellent assessment of the current landscape.

An Amish boy and his father were in a mall. They were amazed by almost everything they saw, but especially by two shiny, silver walls that could move apart and then slide back together again.

The boy asked, "What is this Father?"
The father (never having seen an elevator) responded, "Son, I have never seen anything like this in my life, I don't know what it is!"
While the boy and his father were watching with amazement, an overweight old lady in a wheel chair moved up to the moving walls and pressed a button.
The walls opened and the lady rolled between them into a small room. The walls closed and the boy and his father watched the small circular numbers above the walls light up sequentially. They continued to watch until it reached the last number and then the numbers began to light in the reverse order.
Finally the walls opened up again and a gorgeous 24-year-old blonde stepped out.
The father said quietly to his son....."Go get your mother."

At the last company Holiday party the loan agents lined up on one side of the room and the underwriters on the other side. The loan agents throw fire cracker at the underwriters...and the underwriters lit them and threw them back. 

Don't forget that the end of the first time home buyer tax credit is in sight, and I have heard nothing about any extensions. Borrowers need to be in contract by April 30 and close by June 30. Also the FHA upfront MIP is increasing from 1.75% to 2.25% with case numbers issued after April 5.

Last week the House Financial Services Committee held a hearing to discuss the future of housing finance, trying to start answering questions about what the new system should do. Many people spoke, although Treasury Secretary Tim Geithner was the headline witness with 17 pages of testimony. "It's important as we think about the future to make sure we retain what was good in this system." But Geithner said that the old system, would not be re-created and that Fannie and Freddie's status as shareholder-owned companies with the implicit backing of taxpayers would end. Basically, Fannie Mae and Freddie Mac won't be allowed to return to a pre-crisis structure that rewarded shareholders with big profits for years but ultimately saddled taxpayers with massive losses. Look for this to be a long and involved process.

For example, even if the market is under stress, mortgage credit should be available and distributed on an efficient basis to a wide range of borrowers, including those with low and moderate incomes, to support the purchase of homes they can afford. Affordable housing options should be available, and borrowers should have access to easily understood mortgage products. The mortgage finance system should not contribute to systemic risk or overly increase interconnectedness from the failure of any one institution. If there is government support provided, such as a guarantee, it should earn an appropriate return for taxpayers, ensure that private sector gains and profits do not come at the expense of public losses, and the role and risks assumed must be clear and transparent to all market participants and the American people. Regulations should ensure capital adequacy throughout the mortgage finance chain, enforce strict underwriting standards, and protect borrowers from unfair, abusive or deceptive practices.

The official announcement by the Federal Government was Friday, about funding & requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed. Banks and other lenders would have to reduce the payments to no more than 31% of a borrower's income, which would typically be the amount of unemployment insurance, for three to six months. In some cases, administration officials said, a lender could allow a borrower to skip payments altogether. And for borrowers who owe more than their home is worth, the US government, with its big budget surplus (right?) will be offering financial incentives for the first time to lenders to cut the loan balances of such distressed homeowners.


Are the people who are responsible about making their payments subsidizing those that don't? (Like the Greek debt issue in Europe, perhaps?) That is a huge argument of course, but those who are still current on their mortgages could get the chance to refinance on better terms into loans backed by the Federal Housing Administration. Officials said the new initiatives will take effect over the next six months and be funded out of $50 billion previously allocated for foreclosure relief in the emergency bailout program for the financial system. No new taxpayer funds will be needed, the officials said. We'll be watching this new twist in next few weeks, and see what it really turns into.

Mortgage market armageddon, or non-event? In just three business days, we'll start to find out, as the Federal Reserve ends its program of purchasing mortgage-backed securities to keep interest rates low. We don't expect there to be a huge change in mortgage interest rates. However, at least some firming should be expected as we move away from the safe, steady arms of the Fed and into the wilds of (at least partially) privately-driven markets, where demand for yield and concerns about fiscal policy and inflation inform investment decisions.

Some of the rise in rates this week might be as a result of the signing of the landmark health care reform bill, whose profound effects on the economy in years to come will produce huge (though not yet known) amounts of spending and taxation. Promises of ultimate savings from the program are as unknowable as the total cost of the new entitlement program, and investors are rightly concerned about high debt levels and budget deficits as far as the eye can see -- and that's without considering the coming Social Security crisis. At present, risks are such around the world that US-issued debt is still considered the safest, but endless commitments to debt service in the coming years (and the effects of those on economic growth) and worries about inflating our way out of debt are surely at the forefront of investor concerns at the moment.

(Warning: I try to give equal time to various political views.)

In honor of the 44th President of the United States, Baskin-Robbins Ice Cream has introduced a new flavor:  " Barocky Road."

Barocky Road is a blend of half vanilla, half chocolate, and surrounded by nuts and flakes.

The vanilla portion of the mix is not openly advertised and usually denied as an ingredient.

The nuts and flakes are all very bitter and hard to swallow.
The cost is $100 per scoop.
When purchased it will be presented to you in a large beautiful cone, but after you pay for it, the ice cream is taken away and then given to the person in line behind you at no charge.
You are left with an empty wallet and no change, holding an empty cone with no hope of getting any ice cream.

Whether it is a house, a bushel of wheat, or a share of stock, when a buyer and seller come together an item trades hands. A lower price will always benefit the buyer. Is that the case in the labor market, where buyers (employers) and sellers (employees) come together? Not necessarily, since the employee, given a low wage, will likely be less motivated to perform services. What will typically happen is that employers will pay more than the base wage for a given task, and employees will often work for less than the maximum that employers will pay. Therefore the labor market is not quite like other markets.

True story - one of many I am hearing often - Great client with super credit finds US Bank credit card (Visa) changed her billing to email statements. She never got this notice, and got a late on credit! Credit score lowered of course from 780 to 705. She calls - asks if they can remove that late or give her a letter explaining the error was not her fault.  Agent is totally clueless and uncaring and could not give a hoot. Manager equally evasive and played the same game. She closes account in anger and moves on. One of many such stupid moves by credit card companies and major banks throughout the country. From BOA and Chase to all in between they have it in for everyone - what a shame. Because they screwed up and gave the kitchen sink and the toilet away a few years running they are now alienating and penalizing everyone especially those with good credit and solid profiles. What a total waste of common sense.

I notice that gasoline prices are back up, usually attributed to demand by China and India. The price has been drifting around, not attracting too much attention, which is good because historically speaking any sharp spike in the price of oil leads to a sharp drop in consumer confidence. After all, gasoline prices are the most publicly visible prices in the economy - no other prices are displayed in bold, two-foot-tall numbers. But higher gasoline prices may not have the same impact as they did a year or two ago. To a great extent gas prices have already dropped the demand for SUV's, including the Hummer. This, in turn, impacted jobs, and to some extent housing since fewer people want or have a long commute to an overpriced suburb.

The all-important "spring housing season" is coming soon now that the official start of Spring is fast upon us. Although there are questions to how long rock-bottom interest rates will last, what with expiring Fed programs and a gradually improving economy, we will at least start out on a very positive note. Rates barely moved this past week - all eyes are on the March 31st MBS deadline.

The Federal Reserve held its regularly scheduled meeting on Tuesday and adjourned with no change to monetary policy, just as expected. In the statement issued at the close of the one-day affair, the Fed noted that "...economic activity has continued to strengthen and that the labor market is stabilizing." However, there were less-encouraging words to be seen as well, notably that consumer spending is being restrained by "high unemployment, modest income growth, lower housing wealth, and tight credit." The Fed also stated that "While bank lending continues to contract, financial market conditions remain supportive of economic growth." Business spending and inventory rebuilding continue to create a technical recovery, but consumers who have no cash to spend and cannot easily borrow will have a tough time joining any expansion. Because of this, "the pace of economic recovery is likely to be moderate for a time," the Fed noted.

An out-of-work Cajun oilfield hand answered a knock on the door one day, only to be confronted by a well-dressed young man carrying a vacuum cleaner.
“Good morning,” said the young man. “If I could take a couple of minutes of your time, I would like to demonstrate the very latest in high-powered vacuum cleaners.”

“Go away!” said the unemployed Cajun, “I'm broke and haven't got any money!” and he proceeded to close the door.

Quick as a flash, the young man wedged his foot in the door and pushed it wide open.
“Don't be too hasty!” he said. “Not until you have at least seen my demonstration.”

And with that, he emptied a bucket of horse manure onto his hallway carpet. “If this vacuum cleaner does not remove all traces of this horse manure from your carpet, Sir, I will personally eat the remainder.”

The unemployed Cajun stepped back and said, “Well let me get you a fork, 'cause they cut off my electricity this morning!”

At the last company Christmas party the loan agents lined up on one side of the room and the underwriters on the other side. The loan agents throw fire cracker at the underwriters...and the underwriters lit them and threw them back.

I am going to go out on a limb here, which is rare for me, and suggest that the consultants, market gurus, bloggers, paid services, etc., who firmly believe that mortgage rates are going to go up 50 basis points after March 31st are wrong. If NASA told you that it was certain a meteorite was going to hit the US next Tuesday, would that change your behavior now? You bet it would. Yet dealers are not seeing companies sell their entire pipelines and/or expected production (currently estimated at less than $1 billion a day) for April and May. If speculators are stocking up on puts on MBS's, they are keeping it well hidden. (Of course, the option market for mortgage securities is practically nil.) Mortgages have been getting tighter and tighter to treasuries, which one wouldn't expect if mortgage rates were going to skyrocket, and last week current coupons were the tightest they'd ever been. And why would any mortgage investor (currently hedge funds and money managers) want to own pools at these price levels if they were going to be two points lower in three weeks? Of course, no one wants to sell something that they don't own in this market. I don't think that the supply is there, no one wants to sell what they don't have (exposing them to some extremely volatile swap and role markets), and with Fannie & Freddie buying back delinquent loans, I think mortgages will hang in there with other rates.

Anyone who has tried to refinance a 1st mortgage while having the 2nd subordinated knows what a nightmare that can be. Apparently modifications are not much smoother, and last week House Financial Services Committee Chairman Barney Frank called on the CEOs of four major investors/banks (WellFargo, Bank Of America, Citi and Chase) to work with the Treasury Department and banking regulators to deal with second mortgages that have become an obstacle to modifying troubled first liens. These four have $452 billion of 2nds on their books, and writing them down is supposedly fraught with problems - especially since a lot of them are worthless. Gulp. The issue is that banks have not acknowledged these losses under the accounting rules and will adversely affect their capital ratios. 

Neither strategy worked for four more banks, as the FDIC shut them down last Friday (without finding buyers for two of them leading to losses for depositors who had balances exceeding the agency's insurance limits). Sun American's (FL) deposits and assets were acquired by First-Citizens Bank (NC) at a cost to the FDIC of $103 million. The Bank of Illinois was "absorbed" by Heartland Bank (IL) at a cost to the FDIC of about $54 million. Waterfield Bank (MD), at a cost to the FDIC $51 million, and Utah's Centennial Bank are now being run by the FDIC, with the help of Zion's Bank, at a cost of about $96 million. This past Thursday they closed up LibertyPointe in Brooklyn and Manhattan, and the two branches became Valley National Bancorp.

After coming out with new investor's policies on the FHA flipping waiver, especially concerning the amount of profit a seller can make, I received some mail. One wrote, "Telling some guy who is putting his money at risk how much he can make is bull. So some guy who buys a house in Detroit for $10,000 can only sell it for $12,000? Give me a break."

Another industry veteran wrote, "It is amazing how many creative ways the banks can find to sabotage the credit markets. Risk-takers all over the country sit on county court steps fronting their own cash to buy their troubled assets. They take on these risks in the pursuit of profit which can be realized after they clean up and stage the property...this so-called flip is a viable investment strategy that serves the bank's interests. In many cases the investor's markup on the flip is offset by the amount of rehabilitation put into the property or the rehabilitation itself is what inspires the buyer to pay that higher price."

"I can see it now. The listing sign will read, 'For Sale. The most we'll take is $250,000 and not one dollar more!' So if you're one of these investors you have a few options: accept the artificial markup caps because the reward is still worth the risk, stop rehabbing properties so you can keep the little markup they will allow, invest and hold your properties longer, or take your money elsewhere."

Fair Isaac Company, known as FICO, reported that credit score trends indicate that mortgage default risk for consumers with high FICO scores is now moving toward exceeding their credit card default risk, in spite of the fact that credit cards are generally unsecured and mortgages are secured by real estate. In 2005 bankcard accounts were more than three times more likely to become 90 days delinquent, but in the last few years this has dropped to only 1.6 times more likely. And FICO reports for borrowers scoring high on the FICO score's range (300-850) the level of repayment risk actually has become greater for real estate loans than for bankcards! And for more fun with numbers, in 2005, 46% of consumers who opened a new mortgage had a FICO score less than 700. In 2008 this percentage had dropped to 25% of the newly booked mortgage population. Fair Isaac reports that borrowers in the Northeast continue to present the least amount of default risk nationally for real estate loans. (Yes!, Northeast includes NY and NJ!)

Rate Stuff: Before too long, we're going to start to find out what "normal" mortgage markets may look like for the first time in a long time. There are only about two weeks remaining until the Federal Reserve's program of purchasing Mortgage-Backed Securities comes to a finale, and if one thing is clear, it's that there's not a great amount of clarity into what comes after.

The Fed meets on Tuesday next week for a one-day meeting, the shortest such event in over a year. Its more than likely that there will be discussions of contingency plans for mortgages should market conditions turn adverse in the months ahead, imperiling the relative stability forming in the housing market. Rate we a tad better this past week which is weird but this coming week should say something too! Personally, if you've got a mortgage running I would lock it in especially if your closing within the next 30 days.

NEW UNDERWRITING UPDATES

All borrowers' birth certificates will be required with pictures taken in the hospital with medical staff. Birth certificate with a live home delivery will not be eligible for first time home buyers.
Marriage certificate with bridal dress will be required if both husband and wife are required to qualify for the loan.
Bank Attorney will not require signature, but will require blood sampling from a recognized institution within three days of application.

DNA test will be performed at closing to avoid any non-arms length transactions. Loan funding will be contingent upon satisfactory receipt of DNA results.
Seven witnesses from the neighborhood will be required as proof of primary residence in case borrower owns more than 1 property.
All appraisers will be required to use masks and ear plugs at the time of inspection to avoid any personal influence by the borrower or broker for the appraised value. 
Closing will not occur without loan officer presence at settlement and loan officer picture will be taken at the closing in a mug shot format with loan number. Picture should meet standard guideline of 2 X 2 inch in color format with one facing and one side view.
Loan officer picture will be attached to the Deed and note and will be made available for general public and security agencies in case borrower defaults on the loan.