Still Going Strong…unfortunately

Foreclosure numbers are still staggering and they are likely to continue until some type of “real” aid is available to the average homeowner who is losing their job, unable to make payments or just made a poor financial decision.

What To Do Now

If you are at risk of foreclosure, you need to do something now. Do not wait as this is a sign of your willingness to go through with the foreclosure. Instead, invest the time in getting help.

#1: Talk to an experienced Housing Counselor about your situation. They may be able to point you in the right direction in terms of stopping the foreclosure process. There IS help available for many people.

#2: Talk to your lender. Today’s lenders are more willing than ever to keep you in your home by finding a solution to foreclosure. When they call, tell them what is happening and ask what type of help they can offer.

Should You Keep Your Home?

Those without income may be unable to remain in their home since no amount of mortgage can be paid. If you do have a job and you do wish to stay in your home, find out if there are any options to help you to do so. If you lose your home to foreclosure, lenders will not lend to you for years to come. With the credit market being so tight, even with good credit, you will struggle to find a lender to buy another loan, or even a rental agent who will rent to you. In other words, if you can stay in your home, do so.

Those who may be having trouble with lenders or those who are unable to find the help they need otherwise, may wish to look for help directly from FHA loan specialists. The goal you have is to get help now. Do not wait since it only takes a few months before you are too far into the foreclosure process to stop it.

Mortgage Rates in ’10

After hitting an all-time low in early December, the average rate on a 30-year, fixed-rate mortgage rose to 5.05 percent this week and could climb to 6 percent by the end of 2010, if not sooner.

The key catalyst for interest rates going forward will be the end of a Federal Reserve program that buys a sizable chunk of mortgage-backed securities issued by firms such as Fannie Mae and Freddie Mac. That program succeeded in immediately pushing mortgage rates well below the 6 percent mark when it was announced last year.

But the Fed has committed to winding down the program by March. Interest rates are bound to rise to 6 percent by the end of 2010 because private buyers will demand a higher rate of return on the securities than the Fed did. Lenders may have to raise the rates they charge to consumers in order to make that happen.

Short Sales…will they become less of a headache?

The biggest mystery to me over the last eighteen months was why banks weren’t more receptive to the ‘short sale’ process. Studies have shown that it costs the bank more money if a property was foreclosed upon than if they accepted a ‘short sale’. For homeowners, a ‘short sale’ makes much more sense for several reasons:

• There is a much higher chance that the deficiency judgment could be negotiated in a short sale versus a foreclosure.

 • A short sale would have less of a negative impact on the homeowner’s credit rating.

• The homeowner would have at least some control over the timing of their relocation to new living arrangements.

• A ‘short sale’ would allow the homeowner to leave with dignity.

So, if it would be better for both the bank and the homeowner, why were more ‘short sales’ not completed? A recent research study by The National Consumer Law Center (NCLC) has uncovered the mystery behind this dilemma. In order to understand it, we must first look at the differences in the banking industry over the last ten years.

In the past, the banks used to process the loan (take the application, put together the file, etc.), lend you the money, and also service the loan (send the bills, make collection calls, follow-up, etc.). Over the last eight to ten years, the lending of mortgage money has shifted. First Wall Street and then the federal government became the primary lender in the mortgage sector. But, neither Wall Street nor the government had any interest in processing or servicing the mortgage. Mortgage companies continued to process the loans, but a new industry was created to fill the need for the servicing of these loans. So now, a separate and independent entity is servicing a tremendous portion of existing mortgages.

Just ten years ago, 37.4 percent of all mortgage loans were securitized (thus requiring a servicing company). Today, that number is 79.3 percent. The NCLC study shows that the reason more houses are not available for ‘short sales’ is because these servicing companies actually collected more fees for a foreclosure than they did for a ‘short sale’. Actually, the servicing company would lose money if they did a ‘short sale’. Since they were now in charge of making that decision, it was obvious why foreclosure was the alternative of choice.

The federal government realizing that modifications were not the answer and banks realizing that the foreclosure process was too expensive, have agreed to change the fee structure to make it more profitable for the servicing companies to lean toward ‘short sales’.

It’s always about the money. This situation was no different. Now that the money will flow to the companies that choose the ‘short sale’ alternative, watch how much easier the ‘short sale’ process will become.

The Future of the 8K Tax Credit

Will the $8,000 homebuyer tax credit be extended, or possibly even expanded?

Maybe… Or maybe not. It’s politics after all.

Currently there are FIVE bills flitting about Washington, D.C. that would, assuming they are signed into law, either extend or expand the currently existing $8,000 homebuyer tax credit due to end on December 1, 2009.

Senator Johnny Isakson (R-GA) introduced Senate Bill S1230 – the Home Buyer Tax Credit Act of 2009 – on June 10. Senator Isakson created the original $15,000 homebuyer tax credit that morphed into the current $8,000 first-time homebuyer tax credit that became law when the Stimulus Bill was passed. This bill proposes a non-refundable tax credit up to $15,000, that can be split equally over two years, for all primary residence purchases – not just purchases by first time home buyers. The bill has been referred to the Senate Finance Committee for further debate. It has 12 cosponsors, notably including Senator Chris Dodd (D-CT), the Senate Banking Committee Chairman. It would expire one year after enactment.

Representative Kenny Marchant (R-TX) introduced House Bill HR 2619 on May 21.  This proposes to extend the existing $8,000 tax credit to July 1, 2010 and adds provisions for a tax credit of up to $3,000 for homeowners who refinance. This bill has been referred to the House Ways & Means Committee for further debate. There are currently no cosponsors.

Representative Eddie Bernice Johnson (D-TX) introduced HR 2606 – the Home Buying Credit Expansion Act – on May 21. This bill proposes to remove the first-time homebuyer requirement (allowing all principle residence purchases to qualify for a tax credit) as well as extends the bill through Jan 1, 2010. It has one cosponsor (Rep Timothy Bishop D-NY) and has been referred to the House Ways & means Committee.

Representative Howard Coble (R-NC) introduced HR 2801 – the Home Ownership Move the Economy (HOME) Act – on June 10. From the Department of Redundancy Department, this bill appears virtually identical to Rep Johnson’s in that it opens the tax credit up to all primary residence purchases and extends the credit to Jan 1, 2011. It has no cosponsors yet and has also been referred to the House Ways & Means Committee.

Representative Dan Burton (R-IN) introduced HR 2655 on June 2. It has picked up six cosponsors, four Republicans and two Democrats. It joins its cousins in the House Ways & Means Committee and also eliminates the first time home buyer requirement while extending the credit to Jan 1, 2011.

What does all this mean?

I am clearly not a political analyst. It is apparent however, there is interest in extending the existing home buyer tax credit. Why there are three virtually identical bills proposed escapes me. Perhaps it’s a power play where Congressmen want their name attached to the bill. Power plays in D.C. – hard to imagine isn’t it?

Isakson’s Senate Bill proposes the most sweeping changes. Given that it is virtually identical to the original tax credit provisions in the Stimulus Bill, I think this one is going to have a rough road to passage. It was previously passed in the Senate, but the House squelched it. Seems they could just as easily do that again given the current makeup of the House.

The four bills in the House are all quite similar. None propose increasing the credit from the existing $8,000 limit. It will be interesting to see if Marchant’s proposed $3,000 credit for refinances gains any traction. All of the proposals eliminate the first-time buyer provision, which seems to me to be a good thing to do. The NAR recently reported that 40% of current home sales were made by first time buyers. Of course that means 60% were not (not factoring in investors and second home buyers, which are not an insignificant source of home purchases).

Expanding the availability of the tax credit to non-first time buyers seems prudent. There are no current bills that propose extending the tax credit to investors or second home owners – all require the purchase to be a primary residence.

Will the existing $8,000 tax credit be extended or increased?

While it is purely speculation on my part, I think we’re likely to see the existing tax credit extended beyond its current end date of December 1, 2009 (to qualify currently, your home purchase must close on or before November 30, 2009). And we may just see the requirement that you be a first-time home buyer lifted. I’d be surprised if the $15K credit gets past the House, though it may clear the Senate – Dodd’s co-sponsorship will help in that regard.

Of course we’re talking about politicians in Washington, D.C. so who the heck really knows what (if anything) will happen. Do not, I repeat do not plan on the tax credit being extended/expanded based solely on my speculation!

We’ll be watching these bills closely and will report when, or if, they make it out of Committee. Remember your High School civics class – the vast majority of bills die in committee…

Why now?…..here’s why

Anyone looking to buy, move-up or refinance, MUST do it before the spring. Let me explain why I feel this way. Banks are not currently in the business of lending money to home purchasers. Why? Because, with all the risk associated with mortgaging and with inflation looming why would anyone make a 30 year loan at 5%? So banks, for sometime now, have been content to just collect the up-front fees associated with the loan and the processing fees associated with servicing the loan (billing, collection, etc.). The actual loan is financed by the government who has been willing to make loans at a lower rate in part to help stabilize the economy.

Well, the Fed announced last week that they will no longer be buying those mortgages after March of 2010.

Once the government stops purchasing mortgage-backed securities and banks are forced to make the loans, rates will rise. History tells us that once they start to rise they will do so quickly and dramatically.

Again, if you are going to buy, move-up or refinance, DO IT NOW!

Another Lender…Done

One of the top-15 lenders overall, and the third-biggest originator of FHA-insured loans, Taylor, Bean & Whitaker, failed quickly and left many, possibly thousands, of would-be borrowers stranded. The lucky ones were early in the process, and had applied for loans and were waiting for approval. The unlucky customers had been approved for loans and were waiting for them to close. All must start over and submit a new application with another lender. As soon as Taylor, Bean’s shutdown was announced, mortgage brokers across the land solicited marooned borrowers through blog posts, e-mail and Twitter. The news came this week when the Federal Department of Housing and Urban Development announced that it had suspended the lender from underwriting mortgages insured by the federal Housing administration. HUD said that it had suspended Taylor, Bean because the lender “Failed to submit a required annual financial report and misrepresented that there were no unresolved issues with its independent auditor even though the auditor ceased its financial examination after discovering certain irregular transactions that raised concerns of fraud.” The next day, Taylor, Bean & Whitaker announced that it was ceasing all lending operations immediately.

Mortgage Application Fees

Most lenders and mortgage brokers will take your mortgage application free of charge and present you with your loan options.

Since it typically takes some time to do this analysis and present you with the information, they do incur some costs to do the mortgage analysis.

If the company does a good job then they actually need to evaluate your application by factoring in the following:

• your credit score
• see if any credit issues are a problem or can be explained
• see if your income can be documented properly and is acceptable to a lender
• research what loan programs are appropriate for you
• match you up with potential lenders
• factor in the debt load you can carry on an ongoing basis
• compensating factors should also be considered as part of this evaluation

   
  Why You Shouldn’t Pay Application Fees

  As you can see, evaluating a solid mortgage application is labor intensive. But if a company or an individual wants to earn your business you SHOULD NOT have to pay any application fees.  If they want to charge this, move on to someone else.

  At most you should reimburse them for the cost of the credit report they run (if they do this at all). Make sure you are reimbursing them for the credit report, not paying a markup. Most credit reports that lenders use don’t cost over $40, and typically around $10-$20 for a credit report. Over the weekend I heard someone being charged $60 for a credit report, and another individual being charged $75.

If you are being charged these fees, most likely you are dealing with a group that is having financial difficulties. Taking an application and paying for the credit report is part of doing business. 

Closing Costs

Yesterday a homeowner asked me why they have to pay closing costs such as recording fees, processing fee, underwriting fee, etc… even though they were going through their current lender.  Their thought was since they already have the loan why do they need to be charged these fees again.  The reason for this is that more than likely whoever you are making your mortgage payment to does not own your mortgage.  They are the servicer of your mortgage meaning they send you the bill, collect your money, manage your escrow account and update the credit agencies.  When they receive your monthly payment, they cash your check and forward your money to the end investor that actually owns your mortgage, which could be a Wall St. Hedge Fund, Investment Club in China or Bank in Hong Kong…etc.  They do keep a small portion to cover their expenses and make a profit for servicing the loan.  So even though you might be going through your current lender, you will have to pay these fees again because you are basically doing a new loan.

If you do not want to pay these fees, you can elect to do a no cost loan.  A no cost loan does not mean that there are no costs, rather it means the lender you are doing the loan with is paying them for you.  How they do this and still make a profit is by premium pricing which means they are giving you a higher than par rate.   A par rate means that the lender is not being paid on the back side to do your loan, so that is why when I quote a par rate I state that you must pay all costs including one point loan origination/discount/broker fee.   If you are keeping your home short term it would be better to pay less costs and secure a higher interest rate.   If the par rate is 5.00%, as a consumer you can elect to take a higher rate and with the money your lender is being paid for giving you a higher than par rate they can pay your fees for you and still make a profit.   Generally speaking you should expect a rate anywhere from .50% to 1.0% higher for a no cost loan.

The par 30 year conventional rate mortgage is in the 5.00% to 5.25% range for the best qualified consumers.  In order to qualify you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.   As always, you can elect to pay less in fees and take a higher interest rate.  I recommend to my clients if they are keeping their home for more than 7 years to pay all the costs to secure the best rate which over time will save them much more in interest than the upfront costs.

Tips for 1st-time Homeowners

Suggestions;

• Know your score. Check your credit score before you make any decisions. Credit scores range from 300 to 850. The median U.S. credit score is about 693, according to Experian, one of the three main credit reporting agencies. A score below 620 usually results in a borrower being charged a higher interest rate or being denied credit. In today’s environment, you will need a good score to qualify for a mortgage. If your score is lagging, wait a few months. In the meantime, pay every bill on time, pay down as much debt as possible to improve your chances. If possible, ask creditors for increases on your credit limits to help out the “credit available” aspect of your credit score – but do not tap into the addition.

• Do not stretch too far. Often, borrowers are told they can qualify for a higher mortgage than they can comfortably pay. It is wise to keep housing expenses below 35 percent of your total income. Leave breathing room in your budget so that if something unplanned does occur, you will be able to keep your home.

• Know the full costs of buying. The down payment and principal and interest on a mortgage payment are only the beginning of home-related costs. For a typical mortgage payment, “escrow” payments, or the costs of home insurance, property taxes, and, in some cases, private mortgage insurance, can total hundreds of dollars per month in addition to principal and interest. Determine the property tax amount – the largest part of the escrow payment – by checking with your real estate agent.

• Be sure to not deplete savings or cash on hand when making a down payment, since new homeowners often must complete initial work on the home, such as painting, flooring, landscaping or bringing an older house up to date. After that, a rule of thumb is to budget 1 percent of the home’s purchase price per year for home repairs and upkeep.

• Understand private mortgage insurance. Conventional Mortgages with less than a 20% down payment & all FHA Mortgages require PMI in case the owner defaults on the loan. When the home owner pays the mortgage down to 80% or less of the home’s value, the home owner can request the lender to cancel the PMI on a conventional mortgage and stop paying the additional amount. Meanwhile, PMI is tax-deductible, at least through 2010.

• Check for prepayment penalties and other provisions. If your loan has a prepayment penalty, borrowers face hefty charges if they pay it off early. This provision also can apply to future refinancing, so be forewarned. To determine if there is a prepayment penalty, review the Truth in Lending disclosure or ask your lender to find out. Prepayment penalties have come under increased scrutiny since the mortgage crisis began, so if you find your loan has one, voice your dissatisfaction directly and clearly to your lender or broker.

• First-time home buyers – including people who have not owned a home for at least three years – qualify for a tax credit of up to $8,000 if they purchase a home before Dec. 1, 2009. The credit does not have to be repaid if the buyer keeps the home for at least three years.

• Buyer beware. Some of the lowest prices on homes today are “fixer-uppers” or homes sold “as is” because of foreclosure. Invest in a home inspection before agreeing to purchase any home. You may even be able to split the cost of this inspection – typically less than $400 – with the seller. The inspection will inform you of any faults in the home and help you determine the approximate cost to remedy those problems. Without an inspection, you could wind up owning a home that requires thousands of dollars of repairs.

How long have MBS been around?

 A friend asked me some questions about Mortgage Backed Securities…one thing he asked was. How long have they been around?  He was surprised that most of my trading of MBS within our Hedge Fund was in the early ‘90s.  Many think this is something relatively new to the world markets.

So how long have Mortgage Backed Securities (MBS) been around? You could say 71 years…thank you FDR.

In 1938, a governmental agency named the National Mortgage Association of Washington was formed and soon was renamed Federal National Mortgage Association (FNMA or Fannie Mae). It was chartered by the US government as a corporation which buys Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages on the secondary market, pools them, and sells them as “mortgage-backed securities” to investors on the open market. FNMA was later privatized.

Certain old-time Wall St. traders and Lawrence White of the Stern School of Business at NYU says 1970 is when the first MBS was sold.

From its beginning, the issuance of MBS in the U.S. has been dominated by governmental and quasi-governmental entities, although “private label” MBS have been growing in relative importance after a late and slow start. The experience of MBS in the U.S. began in 1970, with MBS issued by Ginnie Mae. Freddie Mac, newly created in 1970, issued its first MBS in 1971. Fannie Mae, though in existence since 1938, issued its first MBS in 1981. Finally, the first “private label” MBS was issued in 1977, by Bank of America.

Lets go with the 1970 number, that means that MBS have been around for 39 years

Did the government create MBS?

MBS are a result of government monkeying around in the home loan market. Ginnie Mae stands for the Government National Mortgage and is a government Agency. Fannie Mae was a government agency that was created in 1938 and was later turned into a government sponsored entity and Freddie Mac was a late comer to the game but is similar in nature to Fannie Mae. According to Professor Lawrence White the first MBS was sold by a government agency, Ginnie Mae.

Second the government, through Ginnie Mae, and also implicitly through Fannie Mae and Freddie Mac guarantee home loan payments.

In 2007 government MBS were almost 8 times that of non-government MBS…enough said.