My New Blog

(yesterday) as reported on Huliq.com

As Fed chairman Ben Bernanke continues his discussion before Congress today and tomorrow, we hear more of the same talk about slow gradual recovery, keeping interest rates low and the hard to solve situation with unemployment. Mortgage interest rates have been puttering along sideways since the first of the year but now we are nearing the 1.25 trillion dollar target of the Fed’s mortgage backed securities purchase program. Normally if the fed were to stop purchasing this would cause interest rates to go up.

Typically the month of February is where the mortgage world gets back down to business after a little hiatus in late December and early January. This year February has been slow due to few factors. Consumer confidence is down. We have had uncommonly bad weather preventing house hunters and realtors from getting any work done and in my opinion; we are starting to see a lack of qualified borrowers. One third of the country is underwater on their home values ruling out mortgage refinance programs except for the Home Affordable Refinance Program (105% or 125% rate and term financing) or the FHA Streamline Refinance without appraisal.

Unemployment is still around 10%, so there are limited borrowers in a position to take advantage of the $8000 or $6500 tax credit available until 4-30-2010. Many of the customers I speak with assume the credit is used as down payment money which is not the case. Few first time home buyers have substantial savings, so once they hear there are no federal funds available for down payment, the conversation goes on hold.

It will be interesting to see how the Fed reacts as they reach the 1.25 trillion dollar target of their Mortgage Backed Securities purchase program. Bernanke hinted today that the Fed will continue to purchase mortgage backed securities. I suspect this purchasing will continue along with a hint of innovation. Perhaps Fannie Mae and Freddie Mac will once again encourage private investors to start purchasing American mortgage backed securities for their portfolios. Also Fannie/Freddie and the Federal Housing Authority will continue to pursue some aggressive loan programs for homeowners who wish to purchase Fannie Mae owned and Hud owned inventory of homes or any home.

Programs like the HUD foreclosure purchase program which allows for $100 down, to purchase a HUD owned foreclosed home. Fannie Mae still allows 97% financing without mortgage insurance on purchases of Fannie Mae owned foreclosures. USDA still allows 100% financing in rural areas. I suspect more programs like these will emerge because the powers that be still need to keep putting a positive spin on our road to recovery while at the same time making options available for emerging borrowers with little or no savings. Mildly aggressive programs will continue to boost consumer confidence and expansion hopefully without going overboard and back into the madness of stated income programs or the pay select option adjustable.

 As seen on HULIQ.com

http://www.huliq.com/1/91604/does-fdic-know-something-we-dont

This week as I was sitting at my desk doing my best to help some of my mortgage customers, a very interesting video shot across my desk. Two guys who create You Tube videos for TBWS Daily were talking about a seemingly underhanded deal that took place with regards to the sale of the assets of the now defunct IndyMac Bank. These assets were bought by One West bank which was handed a lucrative deal by the FDIC. Today the L.A Times reported that One West bank posted a profit of 1.57 billion from the sale of these assets less than one year after the purchase. A profit greater than the purchase price! 

(watch the video)

http://www.thinkbigworksmall.com/mypage/player/tbws/23069/1464073

When I first saw the video I was shocked that the government would make such an arrangement. Looking at the many blog comments underneath the video many angry homeowners expressed anger with their dealings with the servicing department of the bank. The allegations are that it so profitable for the bank to allow a short sale or a foreclosure why should they bother trying to work with the existing homeowner and a loan modification. I have heard from friends who modify loans for a living that IndyMac was always difficult to work. Now I understand why. Money!

When the Obama administration passed the Home Affordable Program half of the legislation was designed make a set of standardized guidelines for banks to follow when dealing with distressed homeowners in need of modifications. This was good news because up to then one bank had one policy, then a different bank would have a different approach etc. Perhaps One West isn’t following those guidelines as tightly as they should if they stand to make $100,000 on each short sale or foreclosed home.

The larger part of this story is the FDIC. Are they in trouble or maybe do they see trouble on the horizon? What motivated them to give such a sweet deal to this privately held bank with ties to Goldman Sachs.  Whenever you are dealing in bad debts, due to the distressed situation the guy with the deep pockets is usually able to buy the assets for 50 cents on the dollar. In this case it seems that One West did better than that.

Last year September I was talking with a very savvy borrower who changed my views on where interest rates were headed. He pointed out to me that many banks were tightening up their balance sheets and saving in hopes of riding out the third phase of the mortgage meltdown, the commercial property meltdown. This would in turn slow the velocity of money and keep interest rates low. He pointed me towards a couple of sources discussing the health of our banking system one of which was called institutional risk analytics. In this information the experts pointed out that the FDIC had 400 banks in the “F” category of stability where other analysts had 2256 in the “F” category and projected that approximately 1000 banks would go under in the next year.  Also back in September the reserve accounts at the FDIC had already been depleted to 10 billion from 60 billion. What scared me the most was that these analysts were predicting 400 billion in losses in the next year.

Perhaps the FDIC had these figures in mind when they unloaded such a colossal mess over to One West bank. Supposedly 67 bids were made for the failed IndyMac assets and the FDIC chose a well experienced, well funded group to take on the first test of how to deal with a failed bank. Based on projections there most likely will be many more opportunities for other players to get a chance in the coming year.  Also, at that time, our banking system was seemingly in much more turmoil than it is today. We will see as a few more banks go under, if the FDIC takes it time selling the assets and has an open house first before going to the garage sale.

The Primary Mortgage Market Survey from Freddie Mac announced last week that the average rate on a 30 year fixed mortgage dipped below 5% to 4.97%. This average of home rates also included .7 of a point charged to the borrower to get that rate. This is good news for homeowners who have chosen to sit on the fence while we have enjoyed historically low mortgage interest rates.

Over the last year mortgage interest rates have been relatively flat with the exception of a spike in May and June. What is statistically interesting about mortgage rates is that, according to Freddie Mac, in the fourth quarter of 2009, 33% of people refinancing their mortgage lowered the balance. This is the highest “cash-in” share since Freddie Mac began tracking the characteristics of refinance transactions in 1985.

This phenomenon is probably due the changing collective mindset of the American consumer and dropping home values. For many of us, we no longer can erase revolving or installment debt by simply doing a cash-out refinance because we have lost equity in our homes. Also, in general, Americans have taken steps to reduce debts of all types during these difficult times.

Similarly the Federal Housing Authority (FHA) began to tighten their guidelines on Streamline Refinance Programs without appraisal so many borrowers took advantage of that program just before the guideline change at the end of last year.

In the fourth quarter of 2009 FHA switched to a slightly tougher set of guidelines when it comes to doing a streamline refinance without appraisal. They raised the minimum credit score a little bit and require a little more in the file but relatively speaking it is still an easy “no cash out” option.  This program allows the customer to lower their interest rate without the use of an appraisal in a very streamline process just as long as we finance a new loan that is less than the old loan amount. What many borrowers are unaware of is that in many cases the mortgage loan officer can pay closing costs for the customer. In some cases we can pay all of the costs!  Also, customers who are upside down may still be able to do a loan and lower their interest rate.

Consumers who are weary about increasing their loan amount can lower their interest rate from the mid sixes to say the low fives and capture a savings per month with little or no out of pocket expense. Also with every FHA Streamline Refinance there are three little pleasant things that happen after closing. The customer has a month before they have to make their first mortgage payment with the new lender. They get their old escrow money back from their current mortgage lender and they get a pro-rated rebate of their previous mortgage insurance premium back from FHA. All of these factors are calculated when setting the new loan amount so the customer can set an even lower loan amount knowing that these items will be rebated after closing.

For homeowners who are looking hard to lower payments without reducing equity in their home, they should seriously consider the no closing cost option when comparing interest rates.

When it comes time to crunch the numbers concerning your next home purchase or if you are pondering the benefits of a refinance let the “mortgage calculators” section of your favorite web site help you analyze the benefits of your new home or lower interest rate. Nowadays, thanks to the internet and technology we have so many more tools that help up understand the benefits of the loan and the interest rate we are getting.  Right at our fingertips we can calculate mortgage payments, tax savings, break-even points, whether to buy or rent, how much house to buy, etc. It is important to use the tools correctly because a wrong input will produce wrong output and everybody knows that a wrong number is a lie.

Here are a few things to keep in mind.

If you are pondering whether to purchase or rent, go to the Rent vs Buy calculator. Put zero in for price appreciation of the home as a starting point. Fill in the numbers for a modest home. I am willing to bet that your estimated mortgage payment is lower than what you are paying for rent. With interest rates in the fives and already discounted home prices, you can’t miss. This will motivate you. Now go over to the mortgage tax savings calculator and punch in your tax bracket and projected payment. For example, a modest loan of $100,000 at an interest rate of 5.25% with a 20% tax bracket will save the homeowner another $1243 per year. After seeing this, go back to the rent vs buy graph and lower the mortgage payment by $100. Look good? Now go back and start playing with the appreciation field for the purchase and the numbers will really jump out at you.

Looking at the mortgage qualifier calculator, required income and maximum mortgage calculators, I noticed that the system default is strict. My system used debt ratios of 28/36 which are the numbers FHA likes to see. Having worked in the mortgage industry for 15 years I can tell you that many customers get away with much higher debt ratios. In other words you probably can borrow more if you want to. Whenever we process a mortgage, the loan is run through an automated underwriting engine that weighs all of the factors of the loan including equity in the transaction, reserves and credit that can offset higher debt ratios. Although these sections are helpful, I would rely on the advice of a mortgage professional for these answers. Determining the household budget not only takes into account ratios but it also involves knowing what income we can use to qualify. This is what we do before we issue the pre-approval letter before you go shopping with the realtor.

The refinance interest savings calculator and refinance break even calculators are excellent tools to use when considering a refinance. I found these tools somewhat limited because on my system there was no room to consider cash flow savings from paying off credit cards or a second mortgage. A  15 vs 30 year mortgage calculator will demonstrate the power of interest and why banks are happy when you select a 30 year fixed over a 15 year fixed.

Of all the calculators that I looked at, the one that appears to be the most misleading is the adjustable rate mortgage calculator. With the low cost of money, adjustable rate mortgages have sort of made a comeback in the last year or so. Today’s adjustable rate mortgages are not as “dangerous” as the sub-prime adjustable rate mortgages sold previous to the sub-prime meltdown because the margins are low. When I went into my calculator the default change rate from one year to the next was .25% . This is misleading. Whenever an adjustable rate mortgages gets out of the fixed period the interest rate is at the mercy of the index and the margin and the caps. Caps can be either 1, 2, 3 or 5% in a given year. It is wise to over estimate and be conservative by predicting changes of at least 2% when the interest rate adjusts.

Years ago there was talk that appraisers might be replaced someday by automated valuations and now we see that their job is more important than ever. This is similar to the way I feel about using mortgage calculators. They are an awesome tool that you can use in the comfort of your own home but it is still necessary to consult a mortgage professional to fill in the blanks and make sure the correct numbers are going in.

MortgageCalculators

    Following up on comments about the new Good Faith Estimate I am seeing that it is being used as little as possible. Loan originators are not required to issue it unless the customer has provided all of the elements of a loan application. In many cases if a customer is "shopping" they will not provide their social security number or if they are purchasing they will not know the property address yet.

    In these cases the loan officer will provide an "initial application disclosure" which is an exact replica of the previous version of the Good Faith Estimate with a new name. This document is not binding in the same ways as the new Good Faith estimate with regards to tolerance levels of the numbers provided. In some ways, it is better than the new Good Faith estimate because it provides a clear estimate of cash to close which the new version of the form does not.

    Also, in all fairness to the loan officer, we really should not be issuing a Good Faith Estimate in a case where the property address is not determined. The reason being is that the loan originator is responsible for estimating a proper measure of closing costs for the title agent. If we are wrong, it will come out of our commission check. Getting an accurate estimate involves locating the agent that will be handling the closing and calling them up to discuss fees associated with purchase price and loan amount. In some areas of the country such as Broward county and Palm Beach county Florida, the closing agent handles closing costs completely differently based on county the property is in. One mile over the county line can result in a completely different estimate. Also, depending on how the contract is written will determine who is responsible for what costs.

    Another reason for not issuing the new Good Faith Estimate that is the more obvious, is that many "shoppers" do not wish for us to pull credit until they have a comfort level with the numbers we are quoting. (Which is understandable) Since every loan program today has very sensitive risk based pricing based on credit score it is really unfair for the loan officer to be expected to quote a rate and guarantee that rate for 10 days if we have no measure of what the true credit report looks like. The new form was partially designed to cut down on "shoppers" but so far that is not the case because the initial application disclosure is still being used in exactly the same way as the previous good faith estimate was.

    A good loan officer should be able to provide an estimate that comes within $200 of the final closing costs. As I tell my customers, it is always better to be overly conservative with the Good Faith Estimate and over estimate costs and escrows so that the final numbers come in much less than disclosed.

As published on Huliq.com  http://www.huliq.com/1/90405/mortgage-borrowers-should-be-happy-new-good-faith-estimate

As of 1-1-2010, when they are quoting a mortgage rate, Mortgage Brokers and Mortgage Lenders are required to provide a new and improved version of the Good Faith Estimate . This will make borrowers happy because the risk of a bad estimate has been shifted from the borrower’s shoulders to the mortgage broker and mortgage lenders pockets.

This measure was taken to try to make the document easier to understand for the average customer and also to make it much more binding on the person providing the estimate. I am not sure if it is necessarily easier to understand this quote of a mortgage rate but it certainly does protect the borrower and is a great step against predatory lending.

For those of you who are not familiar with mortgage lending or getting a quote of a mortgage rate, the Good Faith Estimate is a very important document that is disclosed within three days of the initial application. The purpose of the Good Faith Estimate is to provide an accurate measure of final closing costs and out of pocket expenses for the borrowers. A good loan officer will check the fees of the lender, the fees of the title company involved and also take into account escrows for taxes and insurance and transfer fees of the state in which the subject property is located. A good loan officer should be able to come within $200 of the final number. A bad loan officer in the past would employ selective memory by leaving a few fees off to make his estimate appear less expensive then the next guys.

 The new Good Faith Estimate for 2010 is better because the customer is protected against a really bad estimate because of tolerance thresholds placed on the lender/broker. For example, lender fees must be 100% correct or quoted higher than necessary or the originator absorbs the difference. Third party fees have a tolerance of 10%. State transfer fees need to be exact. There is tolerance for differences in taxes and insurance but that is understandable because those numbers are determined after the customer makes a decision on which insurance policy they are going to go with.

When it comes time for closing, borrowers will now sign the new HUD closing statement which is compared directly against the New Good Faith Estimate they were provided. Closing agents will simply do the math to see if there are any discrepancies and then the loan officer will write the check if there is a major difference.

Under the new rules, a typical Good Faith Estimate is a quote of a mortgage rate that is good for about 10 days then it expires. If the loan is locked, then it is good for the duration of the lock.  Also the originator is not required to provide the estimate unless the customer fulfills all of the requirements of a real deal. The customer will need to provide: name, gross monthly income, social security, number (to obtain a credit report), property address, loan amount sought and estimate of value. So in other words if you are searching for a home and have not found it yet, you will receive an initial disclosure form rather than a good faith estimate.

The initial disclosure form looks a lot like the old good faith estimate but is not nearly as binding. In all fairness to the loan officer, it does take a lot of time to track down each fee on a file with 100% certainty. Also, if a customer wants to play games by getting five good faith estimates, they will have their credit pulled five times now which probably isn’t smart.  If a customer is just shopping for the sake of shopping for an interest rate, the initial disclosure form should suffice until they step up to the plate and decide which lender they want to work with and make a commitment.

Written by Preston Ware
First South Mortgage
Tel: 704-542-8057
* http://www.prestonware.com
Email is preston@prestonware.com.

Besides getting qualified, the next most important step in the loan process is the lock. The lock is essentially the money you save and lock in over the life of the loan. Every year around Christmas and New Years through the middle of January the mortgage business experiences a hiccup because applications for purchases and refinances really drops off.

Whenever this happens usually one or two lenders will lead the pack and lower their rates substantially to try to capture whatever extra business they can find. This means, now is an excellent time to lock your loan for the coming year.  During the last two days (12-16 & 12-17) we have seen this begin to happen. Please check the daily rate lock advisory page to get the most recent information on the day you are checking. This is a wonderful service, and eventhough it is impossible to predict every move in the market, it is a very useful tool.

Daily Rate Lock Advisory

I can do a 45 or 60 day lock if your plans are far off in the future.

Mixed Signals in the Mortgage World

 Yesterday we heard the news that the First Time Homebuyer Tax credit that was slated to expire on November 30^th, 2009 is being extended until next spring. Future homeowners need to get under contract before May 1^st 2010 to take advantage of the extension. This is great news for realtors, mortgage people and most of all buyers. This is also smart way of phrasing the bill because prior to this we have seen a mad rush to try to get existing loans closed by November 30, 2009.

November was expected to be a stressful one for lenders and customers who were desperately trying to get their deal through the system and closed before the deadline. I have several customers who ran into credit score issues or time saving money time constraints that just made the deal impossible by November 30^th, 2009. At least this way, based on the new verbiage of the extension, they just need to sign the contract by May 1^st, 2010.

Mortgage Interest rates improved Friday morning amid concerns about unemployment figures. The labor department reported a spike in unemployment to 10.2%, higher than expected estimates of 9.9%. (Bad news for the stock market is typically good news for mortgage rates.) Typically anything that is anti-inflationary will help our mortgage rates. With less people in the work force and therefore less spending there is less chance of run away inflation.

I am seeing other mixed signs on the mortgage frontier as the year draws to a close. Many lenders have closed the doors to manufactured home customers. In my own experience, I know of eight who have turned this program off within the last few months, leaving only two available sources for me at the moment. This is another sign of the weakening economy as lenders track performance by borrowers on each segment of their portfolios.

Alternatively, I am seeing a few sources bringing back stated income loans, foreign national loans and home equity lines of credit to 89.99% of loan to value. The stated loans and foreign national loans are at 60% loan to value but at least they are there.

Lastly, the programs that I expect to see further change in the coming months is the Fannie Mae DU Refi Plus and the Freddie Mac Home Relief. These programs typically will lend up to 105% of the value of the home for existing Fannie Mae and Freddie Mac customers who purchased their homes without mortgage insurance and subsequently lost equity. The thresholds of these programs have been expanded to 125% of appraised value due to falling values. The cost of this added feature is expensive. Where the 105% loan is typically around 5%, the 125% alternative is around 5.75%. There is more talk of expanding the guidelines of this program again to allow customers who previously obtained lender paid mortgage insurance or traditional mortgage insurance.

Look for new lending alternatives in 2010 because they are necessary for our economy to rebound. Every time we go save $200 here or $300 there a month for a customer, it acts as a true stimulus for our ailing economy.

This news is great in a lot of ways!

• It helps loans in process which are running behind due to slow lender turnaround times or borrowers who are still saving or repairing their credit scores.
• It also goes one step further by offering incentives to existing homeowners who have been in their home for at least five years. This avoids benefits for "flippers" or "speculators" yet it provides bread and butter benefits to mainstream homeowners and senior citizens who wish to retire into a smaller home.

New York Times Nov 5, 2009: To spur the housing market, the bill extends an $8,000 tax credit for first-time home buyers that was due to expire on Nov. 30, making it available to those who have a contract before May 1 on a primary residence priced at up to $800,000. The bill also creates a new credit of up to $6,500 for existing homeowners who buy a new residence if they have lived in their current one for at least five of the last eight years.

Further expanding the number of eligible people, the measure raises the income limits for those claiming the credit to $125,000 a year for individuals and $225,000 for couples, up from $75,000 and $150,000. After that, the break begins phasing out.

The Obama administration had been unenthusiastic about extending the home buyers’ credit; many economists say most people claiming it would have bought homes anyway.

State of Housing: Tax Credit Must Be Extended to Sustain Stability