It wasn’t too long ago, that as a Mortgage Broker, I was the life of the party. Everyone wanted an opportunity to discuss real estate and mortgages with me. It didn’t matter that I was also well versed in other areas and could easily hang in political or sports related conversations. It was the Lending business that everyone wanted to talk about! But then came the great subprime debacle and the later melt down of the prime lenders too, along with declining values of homes. I went from being the toast to the roast in just one short year! “My, how the mighty have fallen”, as the saying goes.
So even though it would be fun to discuss the Presidential race and appear on some TV news program as a political pundit, I however, write about mortgage related matters. Fortunately, there is enough misinformation about the state of the industry to write volumes.
Not a day goes by that an article appears about a major bank setting aside billions of dollars for future losses. The more they set aside, the lower the value of real estate goes. The lower the value goes, the quicker the government backed lenders, Fannie Mae and Freddie Mac tighten their guidelines, making it more difficult to refinance, or to purchase a home. Then the major lenders join in, blaming losses on evil mortgage brokers or third party originators, not ever taking responsibility for their own actions. And so it goes, day after day, week after week, with more and more pressure to blame whoever got us into this mess.
We read how with government intervention the GSE’s raised loan limits in high cost areas allowing millions of people to refinance into safe 30 year fixed mortgages or purchase a home. We were told that rates would be comparable to under $417,000 loans, and the bleeding will stop. Except when introduced, rates were 1-2 points higher than 30 year fixed on under $417,000 amounts. Many economists said that with lower rates and this boost in lending limits the market would stabilize. Salvation was here courtesy of the U.S. Government. We read how the government wants to convince banks to short- refinance loans as a way of keeping less people from heading into foreclosure. And we read how FHA with increased limits will be able to rescue homeowners in trouble.
But the opposite has occurred. Rates have come to market at levels higher than subprime in 2006. So tell me, if you have a 5 year fixed loan at 5.5% are you going to jump into an 8% -30 year fixed? And even if you chose to do just that, it is highly likely that you wouldn’t qualify for the payment, or that due to declining market phenomenon (anticipation of future loss that may never occur) they will finance 5% less. Self-employed individuals are essentially unable to purchase a home or refinance, no matter how good their credit may be. Mortgage insurers who insure loan amounts over 80% for lenders are refusing to insurer most borrowers, so loans above 80% loan to value are getting scarcer and scarcer.
Not only are guidelines forcing good borrowers out of the market, higher rates are making it impossible to complete a loan. When criticized by mortgage brokers and bankers about the high cost of loans in the oxymoron conforming jumbo market, Fannie Mae responded that their average cost was less than half a point higher than conforming loans and Freddie Mac says they can do even better! But, rates brought to the market are still considerably higher than lower conforming loans. If Fannie Mae and Freddie Mac are to be believed, then should we blame the actual mortgage lenders? Are they adding a higher margin on, so they don’t do business at all? Is it possible that the billions set aside for potential losses we keep hearing about is actually encouraged by the big banks for some sinister rationality or should we just assume that the government agencies can’t add?
Bottom line; don’t blame current borrowers for losses of past years. Good quality borrowers should not be penalized for bank decisions to lend money to people who should never have been in the market. Don’t build in higher rates for anticipated losses that may never occur, and don’t trust politicians who don’t understand this business who are just grandstanding.
Wednesday, April 23, 2008
Sunday, March 9, 2008
The Great Mortgage Bailout
So you say you have a mortgage or mortgages on your home and you can't pay? You did 100% financing in last two years and as a result, you owe more on the house than its worth? Thinking about giving the house back to the bank? No problem! Your elected officials will come to your rescue! After all, you are clearly a victim of circumstances out of your control, and besides its an election year!!!!
Excuse me if I sound like a late night informercial, but if you are one of the 95% or so that actually pay your mortgage on time, and recognize that a home is first and foremost shelter; hearing that our government is looking at ways to bailout strapped homeowners is at the very least unsettling. First came the Hope Now program- designed to help past due homeowners refinance into a more affordable mortgage by asking lenders to provide workout programs. The thing is, most lenders have always offered to help borrowers that are past due, as long as they took the inititive to call and ask for help. I can't think of a single lender that wants to take back property through foreclosure. Banks are not in the real estate business, they are in business to lend money. The Hope Now program could work if it was used to forestall a pending rate increase while a borrower made arrangements to sell the property or perhaps pay off other debt so they could afford the payment adjustment. It could also work if used to take past due payments and roll the debt into the loan, so that borrowers might be able to catch up and get a clean slate. However, it can not and should not be used as a means of lowering the principal on the loan, so that a borrower would choose not to walk away from their obligation. But, some in Washington think that is exactly what we should do. Let's make the bank lower the loan amount under duress, its the "right thing " to do. But, right for who? If you are paying your mortgage and believe that a home is first shelter, second a tax right off, and lastly an investment in the future, you might get a little pissed to hear that if you can't use your house as an ATM machine, then the government should bail you out!!
This week Federal Reserve Chairman Ben Bernanke warned that homeowners who have little or no equity in their homes are more likely to default and "walk away" from their mortgages. Democratic leaders in Congress were quick to pick up on this, and began advocating that stronger measures be put into effect, essentially saying to banks that they should reduce principal to borrowers who have no equity as a means to avoid foreclosure. It wasn't enough that Congress gave borrowers who short sale their house a pass, by not treating the banks loss as as a taxable occurance for the borrower; let's just lower their debt obligation too! So if I understand correctly, not only can a borrower buy a house with no money down, have closing costs paid by the seller, and miss a bunch of payments to the bank, we also should be tolerant of lowering their principal on their loans the 10-15 % that the property has dropped as well. The borrower would in this instance essentially be holding the bank hostage. But,by doing this Washington tells us, we will have less foreclosures and the economy will somehow benefit. What about the bond holders who purchased the loans? Will this somehow benefit them to?
Someone who buys a home regardless of downpayment and faithfully makes their payments to their lender and values their investment in the American dream can proudly call themselves Homeowners. Someone who buys a house only for potential gain is called a speculator or worse a gambler. Can I ask my Congressman to reimburse me for my losses in Las Vegas? If i loose money on a stock can I receive renumeration for my loss?
I can see it now, " Hello Congressman, I had a really bad run at the crap tables, and I wasn't told that my odds of winning weren't so good, so it has to be someone elses fault".
Excuse me if I sound like a late night informercial, but if you are one of the 95% or so that actually pay your mortgage on time, and recognize that a home is first and foremost shelter; hearing that our government is looking at ways to bailout strapped homeowners is at the very least unsettling. First came the Hope Now program- designed to help past due homeowners refinance into a more affordable mortgage by asking lenders to provide workout programs. The thing is, most lenders have always offered to help borrowers that are past due, as long as they took the inititive to call and ask for help. I can't think of a single lender that wants to take back property through foreclosure. Banks are not in the real estate business, they are in business to lend money. The Hope Now program could work if it was used to forestall a pending rate increase while a borrower made arrangements to sell the property or perhaps pay off other debt so they could afford the payment adjustment. It could also work if used to take past due payments and roll the debt into the loan, so that borrowers might be able to catch up and get a clean slate. However, it can not and should not be used as a means of lowering the principal on the loan, so that a borrower would choose not to walk away from their obligation. But, some in Washington think that is exactly what we should do. Let's make the bank lower the loan amount under duress, its the "right thing " to do. But, right for who? If you are paying your mortgage and believe that a home is first shelter, second a tax right off, and lastly an investment in the future, you might get a little pissed to hear that if you can't use your house as an ATM machine, then the government should bail you out!!
This week Federal Reserve Chairman Ben Bernanke warned that homeowners who have little or no equity in their homes are more likely to default and "walk away" from their mortgages. Democratic leaders in Congress were quick to pick up on this, and began advocating that stronger measures be put into effect, essentially saying to banks that they should reduce principal to borrowers who have no equity as a means to avoid foreclosure. It wasn't enough that Congress gave borrowers who short sale their house a pass, by not treating the banks loss as as a taxable occurance for the borrower; let's just lower their debt obligation too! So if I understand correctly, not only can a borrower buy a house with no money down, have closing costs paid by the seller, and miss a bunch of payments to the bank, we also should be tolerant of lowering their principal on their loans the 10-15 % that the property has dropped as well. The borrower would in this instance essentially be holding the bank hostage. But,by doing this Washington tells us, we will have less foreclosures and the economy will somehow benefit. What about the bond holders who purchased the loans? Will this somehow benefit them to?
Someone who buys a home regardless of downpayment and faithfully makes their payments to their lender and values their investment in the American dream can proudly call themselves Homeowners. Someone who buys a house only for potential gain is called a speculator or worse a gambler. Can I ask my Congressman to reimburse me for my losses in Las Vegas? If i loose money on a stock can I receive renumeration for my loss?
I can see it now, " Hello Congressman, I had a really bad run at the crap tables, and I wasn't told that my odds of winning weren't so good, so it has to be someone elses fault".
Thursday, March 6, 2008
The Incredible Shrinking A.R.M.
Not long ago, not a day would go by without some respected publication running an article about the exploding A.R.M. mortgages. Such articles would predict that thousands of people who had either 2, 3, 5, or even 7 year adjustable rate mortgages, would see enormous increases in their payments due to rising interest rates. In fact, many did see increases when their loans adjusted. However, as the Prime rate has dropped 2.25 points in last six months, and due to fall another half point in March, so has the most common index for AR.M.'s fallen. The L.I.B.O.R index has dropped over two points in the last few months. So after "those in the know" got through warning of the next wave of foreclosures from rising interest rates on adjustables, the exact opposite has occured!!!
You heard it right, the opposite has occured. Most prime mortgages that were fixed for 3, 5, or 7 years that are adjusting this year will likely either stay the same or actually decrease!!! Most of these loans to better quality borrowers had margins set at 2.25- 2.75 over either the six or twelve month LIBOR prevailing rate. Those rates have slipped below 3% and continue to slide, just like Prime has dropped due to the Federal Reserve reduction of their key indexes.
Most good quality credit customers had teaser rates under 6% in loans issued in 2004 and 2005. so these loans are now adjusting at 5.5%- 6%. Lesser quality clients on subprime loans who took out financing in 2005 or early 2006, and had 2 year adjusting loans had rates around 7%. While their margins were higher, their initial rate was also higher. So a 4.0% margin over LIBOR, would mean an adjustment of little, if at all! And even those with the highest possible margins around 6% will see an increase of maybe one point. This in contrast to a recent article in a highly regarded business magazine that used a hypothetical example of a 7.0% current rate mortgage that would adjust to 12%, essentially pricing the homeowner out of their home. This was blatantly overstated by the magazine, even with rates of six months ago. However, using todays rates, this poor sap of a homeowner would actually still see an adjustment, but a more managable 8%.
So if short term rates continue to fall, look for less and less people in A.R.M.'s losing their homes , at least because of monthly payments. But, I have to ask, why isn't the mass media talking about this?
You heard it right, the opposite has occured. Most prime mortgages that were fixed for 3, 5, or 7 years that are adjusting this year will likely either stay the same or actually decrease!!! Most of these loans to better quality borrowers had margins set at 2.25- 2.75 over either the six or twelve month LIBOR prevailing rate. Those rates have slipped below 3% and continue to slide, just like Prime has dropped due to the Federal Reserve reduction of their key indexes.
Most good quality credit customers had teaser rates under 6% in loans issued in 2004 and 2005. so these loans are now adjusting at 5.5%- 6%. Lesser quality clients on subprime loans who took out financing in 2005 or early 2006, and had 2 year adjusting loans had rates around 7%. While their margins were higher, their initial rate was also higher. So a 4.0% margin over LIBOR, would mean an adjustment of little, if at all! And even those with the highest possible margins around 6% will see an increase of maybe one point. This in contrast to a recent article in a highly regarded business magazine that used a hypothetical example of a 7.0% current rate mortgage that would adjust to 12%, essentially pricing the homeowner out of their home. This was blatantly overstated by the magazine, even with rates of six months ago. However, using todays rates, this poor sap of a homeowner would actually still see an adjustment, but a more managable 8%.
So if short term rates continue to fall, look for less and less people in A.R.M.'s losing their homes , at least because of monthly payments. But, I have to ask, why isn't the mass media talking about this?
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