Foreclosure help another first step

Fannie Mae and Freddie Mac have a new plan out to help homeowners facing foreclosure.

Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans' principal may be deferred, though not reduced.

Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.

This plan differs from the housing bill passed in August. The original plan allowed borrowers to refinance into a FHA 30 year loan at 90% of the current appraised value of the home. This required that the current lender agree to write down the loan, which is at their sole discretion. Even though it was in the best interest of the current lender (they would likely lose more money by going forward with foreclosure), very few loans were modified.

This new plan removes the stipulation that the current lender agree to the modification, but also does not write down the principal amount of the loan.

In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.

"Loan modifications are not a gift ... the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment," said Brian Montgomery, commissioner of the Federal Housing Administration. "This is not loan forgiveness."

Another major issue in this loan modification is that it does not address a majority of the loans likely in or headed to foreclosure - subprime loans.

Though Fannie and Freddie own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.

This plan is an important first step, and hopefully its success will encourage private lenders to follow suit. As always there are no simple fixes to complicated problems, and it will take some time to dig our way out of the mess we have created, but this is an encouraging step.

Full article.

The mortgage market likes Obama

Using the same 30 year fixed loan with a 20% down payment that I have used in previous posts, the rate is now back down to about 6.125% when it was 6.625% just yesterday. What a difference a day makes.

Both Dow and rates climb, Fed considers more action

The Dow closed up 976 points today as investors (finally) reacted to worldwide government interventions to ease the crisis. This is the largest single day point gain, and the fourth largest when viewed as a percentage gain (11.1%). This of course follows a historic slide over the last week.

At the same time mortgage rates climbed further, up almost a full point since Thursday to around 6.875%. Though the stock market is now reacting to the Fed's recent moves, credit markets remain somewhat frozen.

The Fed is considering a less talked about provision in the bailout bill that allows it to pump money directly into banks for an equity share. Rather than buy up the mortgage backed securities that have unstable value, the Fed can pump money into the banks and credit market. An article in the Seattle Times does a good job of explaining the different strategies and benefits.

If Paulson pays banks exactly what their mortgages are worth, he will not increase banks' capital (or their lending ability) — he will merely convert one asset (mortgages) into another (cash), making no impact on the credit crisis. If, to protect taxpayers, he buys mortgages at lower prices than banks list them, banks will have to write down their capital and consequently contract lending — and the credit crisis will worsen. If Paulson overpays for mortgages, he may marginally augment bank capital, but also incur massive taxpayer losses when he later resells the mortgages at their real price.

The silver lining is a little-noticed provision in the bailout bill allowing Paulson — if he chooses — to buy ownership stakes in banks. According to Robert Johnson, the Senate Banking Committee's former chief economist, this would cost roughly $375 billion less than the mortgage-buying plan and, better yet, more aggressively attack the credit crisis.

Mortgages may be underpriced today, but they retain some value on banks' books. So rather than purchasing mortgages (a capital-neutral transaction), Paulson could buy bank stock, infusing banks with new capital on top of their mortgages. That would exponentially increase lending capacity, prevent taxpayers from buying toxic assets, give the public a share of future profits, and grant regulators ownership leverage to restructure bank management.

Full Article

Crisis metaphor

Here is an article that was published in the Seattle Times that uses It's a Wonderful Life as a vehicle to explain the current mortgage crisis. It is pretty basic, but introduces the subject of credit-default swaps which is a complicated piece of the crisis puzzle.

Mortgage rates up sharply

The rate on a 30 year fixed mortgage shot up by over half a point overnight following the drop in the Federal Funds Rate.

The Federal Reserve has dropped the rate that banks lend to each other from 4.25% in January to 1.5% yesterday, trying to spur economic growth without increasing inflation. Yet mortgage rates have been (relatively) steady in the high 5% to low 6% range for most of the year.

This latest point drop had an effect opposite to what people may expect. Rates at one of our lenders shot up from 5.875% to 6.5% on the same 30 year fixed loan. The effect of lowering the Federal Funds Rate is more a long term economic fix, as it can take six months to increase borrowing. It is unusual to see such a dramatic jump in mortgage rates as a response. It is possible things may settle down in the next couple of days, but clearly lenders are not any more confident in the market, and credit (at this point) remains tight despite the Fed's actions.

Housing bill

The "American Housing Rescue and Foreclosure Prevention Act of 2008" was passed by both houses and signed by the President on July 30, 2008. The measure provides mechanisms to help the troubled housing market as well as tighten lending practices and reform financial institutions. Though the 238 page law can be found online, I thought I’d hit a few of the highlights here.

One of the provisions garnering the most attention is the program to allow homeowners in danger of foreclosure to refinance into a new 30 year fixed loan. At a glance, the bill provides that the homeowner would be eligible to refinance into a FHA 30 year loan at 90% of the current appraised value of the home. This requires that the current lender agree to write down the loan, which is at their sole discretion. However, it is estimated that banks would lose an average of $25,000 to this program vs. $64,000 by letting the house go to foreclosure. As a trade off for this opportunity, any future appreciation realized in the home would be shared with the FHA.

The bill also creates an independent regulator to oversee both Fannie Mae and Freddie Mac, while increasing the dollar amount of loans they can buy or guarantee from $417,000 to a maximum of $625,000 (based on individual markets). FHA down payment requirements increase from 3% to 3.5% as well, and the bill provides an additional $4 billion for hard-hit communities to buy and rehabilitate foreclosed homes.

One bright spot in the legislation is the tax credit for first-time homebuyers. A taxpayer is considered a first-time homebuyer if they have had no ownership interest in a principal residence in the last 3 years. If your home purchase closes before June 30th 2009, you may be eligible for a tax credit for 10% of the purchase price, up to $7,500. This is a credit, not a deduction, so it can wipe out what you owe and get you a refund as well. It does phase out at certain income levels.

However, this is not a gift. The credit must be paid back over a 15 year period ($500 a year for a $7,500 credit). If you sell the house before that time, the remaining repayment will come from the gain. If there is not enough, or no gain at all, you will not be required to make up the difference. In essence, the tax credit is an interest-free loan with the government taking all the risk on house appreciation. Plus with the time value of money, you will be paying back less than you received. This is a great benefit to first-time homebuyers, and could give the market a little boost.

Foreclosure

Here is a good description of foreclosure and pre-foreclosure options detailed on the blog of one of the agents in our office. Hopefully you will never need to go through any of this, but with so many people going through this around the country, it can't hurt to know the related terms/options available.

Home Foreclosure Options Explained

Foreclosure occurs when the homeowner falls behind in monthly mortgage payments and defaults on the loan. The lender repossesses or sells the home in order to satisfy the debt. Typical options you can pursue to avoid a home foreclosure are set out below. Your solution will depend on your financial status, the mortgage's default status, the type of loan you have and the various laws that apply.

List of options.

Thinking of refinancing? Don't let a good rate slip away.

Are you watching interest rates to see a substantial dip before moving ahead with your planned refinance? When you see that dip, you may not be able to react quickly enough to lock in that good rate.

Lending guidelines have tightened significantly and underwriters are taking longer to pore through a borrowers documentation. You can't really lock in a rate until you know your credit score and documentation will get you that loan approval. There are fewer lenders remaining after the mergers and closures, and the remaining underwriters are backlogged. It can take a week or possibly three to get approval. In that time rates may have bounced back up and your refinance doesn't look so attractive anymore.

Get pre-approved today. Once you have that pre-approval, we can watch rates daily and be prepared to lock in a good rate when it comes along. All it takes is a little time to gather your documentation and $19 for the credit report.

It is a great idea to watch rates. It is absolutely essential to be pre-approved to lock in that good rate before it slips away. Contact me today.

Comic relief

Click to enlarge.

Don't wait on the sidelines

The real estate and lending market is pretty uncertain these days. The Puget Sound area has fared better than most around the country, but we are feeling our own pain.

It is understandable to feel hesitant, but this is actually a great time to be a buyer. There is a surplus of homes on the market, and buyers are enjoying their first real buyer's market in some years.

However, though rates are still historically low (low 6% range), many buyers are being kept out of the market due to tighter restrictions from lenders. As I mentioned previously, 100% financing is pretty much gone outside of VA finacing. Higher credit score and lower debt ratio requirements are keeping other buyers out as well.

Do you know where you stand? Are you staying out of the market for fear that you can't qualify? Or are you staying out of the market because you are waiting for prices to hit bottom?

Don't wait on the sidelines. Find out if, and for how much, you can qualify. Even if you know you can qualify, you should get pre-approved as soon as you are in the market for a house. The pre-approval process can take some time, and you want to be ready to nab that perfect home at a great price. If you wait to start the loan process until you think prices have "hit bottom", you could be weeks away from acting on it. In the meantime interest rates continue to change and have been on the rise in the last couple of weeks.

As always, I want you to be the strongest buyer possible. Contact me today to see if you can qualify. After some questions and some quick calculations, we can tell where you stand. If you are ready to enter the home buying market, it will only cost $19 for a credit report and a little time to gather your documentation. By being pre-approved now, you are ready to act when that perfect home comes along.

100% financing no longer available

First a little refresher on the lending market.

Lenders loan money to home buyers, then typically sell the loans to investors on the secondary market to obtain more money to lend out. In the past, investors rushed to buy up these Mortgage Backed Securities, seeing them as a safe investment with a nice return. In the rush of cheap money the last few years, some lenders didn’t bother to qualify the people they were lending to. This lack of underwriting, in addition to rising unemployment in the Midwest, pushed defaults and foreclosure rates to record levels. Investors unsure of which securities held bad mortgages stopped buying the securities altogether. This in a nutshell is what lies behind the “Subprime Crisis”.

When investors stopped buying loans, many lenders had no funds to lend out, and many (246 at last count) went out of business. The remaining lenders have tightened guidelines to stabilize the industry, and in hopes of making mortgages attractive again to investors. These steps included eliminating “no document” loans and 80/20 programs, reducing the amount of debt a borrower may carry, raising credit score requirements, and requiring significant down payments in declining markets.

The latest change comes from the mortgage insurance industry. As you may know, mortgage insurance (MI) is required on any loan that exceeds 80% of the homes value. MGIC, a leading MI company, will no longer issue insurance on loans over 97% loan to value (LTV). Going to 97% also requires a credit score above 680. In restricted markets they will only go to 90 – 95% LTV. Restricted markets include the entire states of California and Arizona, and the Tacoma area in our own state. Cash-out refinances and condominiums have further LTV restrictions.

So with mortgage insurance unavailable, lenders will not issue loans above 97% LTV. This of course affects first-time homebuyers the most as many have not saved up for a down payment. This will eliminate more buyers from an already slow real estate market.

Because of the slower market, I imagine lenders will seek to find a way to assist first-time homebuyers, but it may be some time before that happens. In the meantime, homebuyers should concentrate on saving up for a down payment.

While you're waiting for prices to drop, you're losing buying power

Many buyers are sitting on the sidelines waiting for home prices to drop or bottom out. While they've been watching prices, interest rates have gone up half a point in the last three weeks.

For example, three weeks ago a principal and interest payment of $2,000 would have qualified you for a $342,000 home at 5.75%. At today's rate of 6.25%, that same $2,000 principal and interest payment now qualifies you for only $325,000.

You've lost $17,000 in purchase power and it is unlikely that the home's price has dropped by 5% in that same three weeks. In the last year home prices in King County dropped .2%, and in Snohomish County prices actually increased by 2.4%.

As an Integrated Agent at The Real Estate Group, I am both a Real Estate Agent and a Loan Officer. While I can save you some money during the real estate negotiation, it is likely I can save you even more when I help you obtain financing. I will search for the best loan program to maximize your buying power, and I will keep an eye on rates each day and do my best to lock you in at the lowest rate available.

Home buyers are in their strongest negotiating position in the last 5-10 years. Don't wait any longer. You can't afford to.

What 80% of buyers find out the hard way

That their loan officer sabotaged their home purchase.

In speaking with a number of Escrow Officers, they estimate that about 80% of people signing their loan documents when buying their home are surprised to see that the rates and fees are higher than they were told. They try to reach their loan officer on the phone, but no one answers. Do they sign for the loan with worse terms, or do they risk losing the house?

Law requires that, if requested by the borrower, the closing statement figures must be given one business day in advance. Without this review, clients see the final figures for the first time at the closing table when they sign their papers. Victims of these bait-and-switch tactics are put on the spot and usually sign the papers with these higher terms in place.

There are several advantages of using an Integrated Agent from The Real Estate Group when purchasing your home. Integrated Agents are both real estate agents as well as mortgage loan officers. Your Integrated Agent will have all the important figures at hand throughout your transaction, so you will always have up-to-date figures available to you. Also, typically a real-estate agent will be with you when you sign your papers, but rarely/never your loan officer. As we are one in the same, you will have both at your signing to explain every figure and answer any questions.

An Integrated Agent from The Real Estate Group is your strongest ally in buying or selling your next home. Please call me or drop me an e-mail if you are interested in learning about the best way to buy a home.

Is your loan officer licensed?

In Washington State, mortgage brokers and loan officers now need to be licensed. Beginning in January of 2007, loan officers needed to submit fingerprints and undergo a background check. Sometime last year they also needed to pass a competency exam and complete some continuing education.

At the end of 2006 there were approximately 18-19,000 loan officers. 13,722 applied for the license, and by the end of last year, only 5,720 had successfully completed the entire process. Part of this is due to the slowing industry, but I wonder if some are still operating without a license.

Any advertising by a loan officer must list their license number. The Department of Financial Instiutions (DFI) is advising consumers to verify the status of loan brokers or originators either online at http://dfi.wa.gov/cs/list.htm or by calling 877-746-4334.

Read beyond the headlines

I saw this on money.cnn.com the other day:

No wonder there is so much uncertainty as to what is going on. If you click the links you find that these stories cover back-to-back one-week periods. This sort of time period is hardly indicative of any trend, especially when they conflict with each other. Also, when you read beyond the headline about "sliding" applications, you find this information:

Refinance volume plunged 15.3 percent during the week, while purchase volume increased 6.1 percent.

So actually purchase loans increased during this time period which is a better indication of what the real estate market is doing. You certainly wouldn't know that from reading the headline.

CNN is of course dealing primarily with national trends which may or may not have any bearing on your local market. Keeping an eye on your local information and speaking with local professionals is your best bet to keep a finger on the pulse of market.

Mayor bans the phrase "I don't know"

The mayor of a Siberian town has banned 25 phrases including "I don't know", "I can't" and "It's not my job". People using these phrases will be on their way to unemployment.

I embrace this mentality. In past jobs when I was supervising projects and people, when people contacted me with a problem, I expected them to have thought of some possible solutions before they contacted me. They were deeper in the project than I was and would have a better understanding of the problem. They often came up with good solutions, and could then check in with me for my opinion on which course was best. It certainly simplified my job and as the article states "To say 'I don't know' is the same as admitting your helplessness."

As an Integrated Agent, any time I normally would answer 'I don't know', I replace it with "I will find out". I try to have as much knowledge as possible, but I am certainly not all-knowing. I am your advocate and it is my responsibility to provide you with the best information possible. And you definitely won't hear "It's not my job". That is just another dead-end answer. I will contact the responsible party and find out what is going on. As always, I want you to be the strongest, most well-informed buyer out there.

“Mortgage Meltdown” is an overstatement

Part of the reason I haven’t written an entry on this blog in some time is the glut of sensational articles in the media. With headlines that scream CRISIS, MELTDOWN, and FORECLOSURE it is hard to get to the meat of the issue. Many potential buyers think that they can not get financing. This is not true for most borrowers.

First a little flowchart of how money is lent out. The mortgage broker or bank approves a loan for a home buyer. Rather than keep the loan and wait for the monthly payments, that loan is likely sold by the bank in order to get more funds to loan out. The way these loans are sold is by bundling many loans together and selling them as mortgage-backed securities on the bond market. Investors buy the securities and get a rate of return based on the types of loans in the security. The bank gets the needed cash to lend; the investors get a regular return.

The mortgage market’s problems stem from the past few years of easy lending requirements. The investors were all too eager to buy the mortgage-backed securities, not accounting that there was some risk attached to them. As the investors were buying without analyzing risk, some lenders (particularly sub-prime) stopped looking over borrower’s documentation. Borrowers were getting approved for more money than they could afford. Some borrowers never should have qualified at all. The lenders are to blame for not qualifying the borrowers; the borrowers are to blame for not realistically judging their ability to pay, and the investors are to blame for not balancing the return on investment vs. the risk.

Some loans started going bad --> Investors stopped buying the mortgage-backed securities --> Funds for new loans dried up --> Many lenders have gone out of business.

The remaining lenders have tightened their guidelines, partially to reduce the risk of foreclosure, but mostly in hopes of getting investors to start buying the loans again. This does mean that some borrowers no longer qualify, but many still do. The high loan-to-value and “no documentation” loans are largely gone, but the borrower that earns a paycheck and has a decent credit score can still get financing. 100% financing is still available as well, and mortgage insurance (if needed) is deductible just like interest on your loan. Rates are still at historical lows. This is actually a great time to be a buyer with low interest rates, a large supply of homes for sale, and employment still strong in the area.

Some sanity has returned to the lending industry. Lenders are back to qualifying borrowers based on their documentation. The highest risk borrowers will not qualify. It may be a while before the panic of the investors subsides, but for many borrowers not much has changed.

Guidelines Getting Tougher

One of our lenders sent out an e-mail last Thursday that they were eliminating their 80/20 and 75/25 programs. Many borrowers had used these programs to obtain 100% financing while avoiding Private Mortgage Insurance (PMI). They would now only go to 95% financing.

Five days later they announced they would only go to 89.99% financing. Lenders are really pulling back from any loans with increased risk until the investor panic cools down. I imagine these programs will be back in some form in the future, but until then things can change daily.

Another agent in our office sent out this joke e-mail about lender guidelines. It’s an exaggeration, but it becomes less so day by day.

Very Important- Guideline Changes

· All borrowers must have one blue eye and one brown eye to qualify.

· LTV’s > 65% SISA Loans now require a minimum credit score of 849.

· For all LTV’s > 65%, 360 months of payment reserves now required.

· Borrower’s must have no previous bankruptcies in their family history going back three generations (including, but not limited to 2nd cousins twice removed).

· A minimum of 25 years self-employment history now required for all Stated Programs (at same location).

· Minimum Credit Score for Subprime Loans raised to 720.

· All non-arm’s length transaction borrowers (mortgage, real estate professionals,family members) will be required to provide full-documentation, subject to criminal background checks, wire tapping, strip-searches, blood tests, and a minimum of 12 hours of interrogation by the Department of Homeland Security.

Please note that these changes will go into effect within the next five minutes. So please lock your existing loans immediately. All existing loans in your pipeline must fund by noon today. The vast majority of fulfillment staff is off today, so no Rush Requests will be accepted.

We apologize for the inconvenience. We realize these are tough times in the mortgage industry for all of us. Be assured that we have a commitment to remaining strong and weathering out the storm. We ask for your understanding and cooperation.

Will a rate decrease boost the real estate market?

Lowering the federal funds rate might not have the immediate intended effect of making it easier for people to buy a house. There are many other hurdles to buyers trying to obtain financing. As the secondary market for mortgage-backed securities has dried up, many lenders large and small have disappeared. According to the Mortgage Lending Implode-o-meter, 130 lenders have gone out of business or have been bought out. Greenpoint Mortgage owned by Capital One was shut down just yesterday.

There are very few lenders issuing subprime or Alt-A loans. These are loans that many people turned to in the last few years as home prices increased dramatically. These lenders had expanded guidelines that allowed self-employed and lower credit borrowers to obtain financing. They are also where many borrowers found 100% financing. Even prime lenders have tightened their guidelines significantly in the past months in response to investor fears of mortgage defaults. Many have increased credit score and down payment requirements. They have also required borrowers to have more money in reserves as well.

Unfortunately with fewer places to find a mortgage, and with much tighter guidelines at the remaining lenders, many buyers are now out of the market. A rate drop may help the people who already qualify to afford a larger home, but it won’t necessarily bring more buyers into the market.

As it has become more difficult to obtain financing, it has become even more important to have an Integrated Agent in your corner. When anyone could get a loan, deals didn’t fall apart on financing as often as they had historically. Now that borrowing has become more difficult, our track record of closing 98% of our purchases will stand above the rest. Find out more about Integrated Agency and myself at www.seanday.net.

The Fed cuts one of the rates

The Federal Reserve cut their discount rate by half a point late last week, from 6.25% to 5.75%. The discount rate is the rate at which the Fed will loan directly to banks. They did not change the federal funds rate, which is the rate banks will lend to each other. This rate sits at 5.25% and is what prime (8.25%) is based on.

By lowering the discount rate, the Fed has tried in another way to infuse the lending industry with more liquidity. The Fed had already pumped billions of dollars into the banking system in the past two weeks. The rate drop came as a bit of a surprise, however, as there has not been a rate change between meeting dates since the week after September 11th 2001.

Their next meeting is scheduled for September 18th, and there is increased speculation that they will lower the federal funds rate. In a statement accompanying the rate decrease last week, the Fed indicated that they were now more concerned with adverse effects of market instability over their fears of inflation. This is a clear shift from their statement at their last meeting on August 7th.