Broker's Blog

With Fannie Mae and Freddie Mac

I was just discussing with a colleague of mine all of the different rumors regarding housing and mortgage lending which are reported as fact, and what the real figures are. Ironically, he received an email today with links to both Fannie Mae and Freddie Mac 2009 2^nd quarter statements. They are full of information regarding profitability, loan portfolio allocation, delinquency rates, geographical housing depreciation/appreciation, modification info, and forecasts. I particularly like how Texas is positioned as one of the strongest housing markets in the country (see page 4 of Fannie Mae report and page 12 of Freddie Mac report)! It is also nice to see that both agencies are improving profitability. Delinquency rates also appear to be lower than they are frequently reported in the mainstream media. I encourage anyone wanting a deeper understanding of the current state of affairs within the agencies (which secure the majority of all residential mortgage loans) to thumb through the documents (links attached, below).

Fannie Mae: http://www.fanniemae.com/ir/pdf/sec/2009/q2credit_summary.pdf

Freddie Mac: http://www.freddiemac.com/investors/er/pdf/supplement_2q09.pdf

With the Federal Reserve and Interest Rates

I mentioned in yesterday’s blog that the Federal Reserve is easing out of the Mortgage Backed Security Market by the end of March. The following is a link to a brief NASDAQ article which mentions the same:

http nasdaq://www..com/newscontent/20090923/Federal-Reserve-slowing-pace-of-mortgage-securities-program.aspx

Rates are still floating in the neighborhood of historic lows. There was a significant decline in MBS pricing this morning, but rates are still very strong, for the time being. Below is a graph of Mortgage Backed Security pricing over the last 30 days. A decrease in price (red) represents and increase in rates, while an increase in price (green) indicates a decrease in rates. (This graph is provided by www.mortgagemarketguide.com ).  Kiplinger forecasts rates in the 6+% range for 30yr fixed conforming mortgages by March 31, 2010.

With Cash on the Sidelines

Yesterday, I mentioned that there was a large amount of capital sitting on the sidelines which could help boost demand for mortgage backed securities (and bonds/stocks, too). A fellow blogger (thanks, Trey) filled me in on a Bloomberg article from September 28 by Lynn Thomasson and Michael Tsang which discusses the “enormous stockpile of liquidity” which is on the sidelines. To read the article in its entirety, please click on the following link: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a98FvdWy6eLA

As always, thank you for taking the time to read this update…I look forward to your comments. -Marshall

1) First Time Homebuyer Tax Credit: Statements from Nancy Pelosi and other Congressional / Administration officials indicate that an extension to the first time homebuyer tax credit is in the works! Yeah! J There are also some great benefits being proposed for any military members which were/are deployed during the credit period. There is still discussion as to whether it should be extended to non first time homebuyers and if the amount will be increased. It is estimated that the program costs the US Government about $ 1 bil./month. Comparing that to the almost $25 billion spent by the Federal Reserve on Mortgage Backed Securities just last week, it seems like quite a lot of “bang for the buck”…especially in light of the current foreclosure overhang , the option ARM loans which have yet to go into foreclosure, and new foreclosures tied directly to a growing number of unemployed home owners. I wonder if anyone’s considered opening up the tax credit to all homebuyers for a short period (3-6 months) to help cut inventory and then restricting the credit back to first time homebuyers in order to encourage move-up activity? Should lending standards continue to tighten, the number of first time homebuyers eligible for financing may shrink to a level which would not generate adequate demand on its own…so it seems to be a double edged sword. The tax incentives only work if you are capable of buying a home (in most cases requiring a loan)…

2) The Kiplinger Letter (vol 86, No. 40) published October 2, 2009 had some very interesting info I’d like to share with you.

a) In the economy section, San Antonio, TX and Austin, TX were listed along with Denver, Raleigh, and Boston as metro areas which are most “likely to lead the pack” during the economic recovery! (Houston was listed as a leader in energy sector recovery, too). Have I mentioned lately how much I love being a Texan! J

b) The Federal Reserve has extended the Mortgage Backed Security purchase program through March 31, 2010. This extension is being used to phase out the program. The Fed currently is purchasing “about 80%” of new home mortgages being written/secured. Your eyes aren’t tricking you…the figure is 80%!! The Fed has also indicated that they will reduce purchases to every other week in the very near future. It is hard to believe that this will not cause much greater volatility in the mortgage rate market. There is still a very large amount of private money still sitting on the sidelines. It is also believed that these investors are risk averse (ie they are still on the sidelines), so it is hoped that when they come back into the market they are looking for Mortgage Backed Securities as a significant portion of their portfolios. I REALLY hope so, because finding buyers for 80% of the loans generated to replace Fed demand, seems a little daunting.

c) Kiplinger’s letter also predicts rates to be in the 6+% range for a 30yr mortgage by the end of March 2010. Savvy buyers and owners would be well advised to take advantage of historically low rates while they are available.

3) Private Mortgage banks may get warehouse lending relief! Yesterday, the Wall Street Journal published an article by James R. Hagerty discussing a program where Fannie Mae and Freddie Mac issue what appears to be forward purchasing agreements with pre-determined guidelines to independent mortgage banks in order to reduce warehousing risks and costs. Warehouse lines are essentially large revolving lines of credit where loans are funded and held until end investors or enterprises purchase them. Guideline changes have been coming fast and furiously which has resulted in some loans losing guideline eligibility for sale during the time they are on the warehouse line, which results in the originating mortgage bank either selling the loan at a steep discount or servicing the loan. With current mortgage interest rates lower than extended warehouse line rates, either option is a losing proposition for the originating lender and potentially the warehouse lending company. Due to this risk and a desire to consolidate mortgage lending into their retail channels, the big banks have greatly reduced or eliminated their warehouse funding operations to independent mortgage bankers. This program is designed to relieve some of the warehouse lending issues which currently affect the market. In the San Antonio area, if you need a loan to close in less than 30 days at very competitive terms, your best bet is a skilled and established independent mortgage bank. It is great to see steps being taken to help boost the ability of these providers to continue to fund good loans, quickly.

4) FHA Streamline Refinances are going through a lot of changes…on November 18, 2010 (Mortgagee Letter 2009-32)! Some highlights are as follows:

a) The borrower must have made at least 6 payments on the loan being refinanced

b) No more than 1 mortgage late within the last 12 months (and not within the last 90 days), unless owned less than 12 months, then no mortgage lates allowed, at all

c) Increased benefit to borrower requirements (good thing)

d) Credit scores will now be required

e) Borrower may NOT roll in discount points to lower the interest rate…must bring discount points from their own funds.

As always, thank you for taking the time to read my blog, I hope you found it helpful and I look forward to your comments! -Marshall

Go figure, the only constant in the mortgage world is still change...and lots of it! 

On that note, I’d like to mention some upcoming changes which we should all be aware of since they will change the way FHA business is done. Initially, it’s no secret that FHA is being inundated with claims and is looking for ways to shore up their balance sheets. One of the more significant changes is that FHA will require a higher level of appraiser qualifications (fewer appraisers on the list) and will also ENFORCE HVCC (as of Jan 1). The HVCC (Home Valuation Code of Conduct which eliminates discussion between lender/other interested party with the appraiser and disallows any conversation with appraiser regarding value) portion of this is somewhat surprising; since most of the communication from HUD was that they were not adopting it. So be aware that longer turn times and increased value concerns are on the way for FHA. You can still provide a copy of the contract on purchase and construction deals. Although our office is prepared for the change and expect very little difference in our provider’s turn-times, it will affect the market as a whole. Interesting question: If one of the bills proposed in Congress to put a moratorium on HVCC passes, will HUD/FHA/Fannie/Freddie drop the requirement? (http://www.housingwire.com/2009/09/18/fha-changes-credit-policy-ahead-of-reserve-ratio-drop)

Another change which is being made is to increase in the net worth requirement for lenders who do business with FHA from the $250,000 set in 1993 to approx $1mil. So, plan on seeing some loan officers from smaller, independent shops move around again to realign with companies who meet the new requirements.

A new bill was just introduced to Congress which would change the FHA minimum down payment from the current 3.5% up to 5%. This same bill will also prohibit the financing of closing costs. There are also some rumblings of higher credit score requirements, much stricter debt-to-income ratio limits, and revision of Reverse Mortgage products, but nothing concrete that I’ve seen. (http://www.thetruthaboutmortgage.com/bill-aims-to-increase-fha-down-payment-to-five-percent)

The Federal Reserve is also discussing extending the mortgage backed security purchase program so that they can ease out of the market. I like the thought of an extension, but not for the sole purpose of phasing out the program (unless volumes pick up enough from other funding sources that it will not pose a strain on pricing or another liquidity crunch) …it seems to be working and there’s still another wave of foreclosures to hit the market (appx. 7 million units, nationwide). Time will tell the whole tale…things are still changing by the minute!

As always, thank you for taking the time to read my article and I look forward to your comments.

I had the pleasure of speaking with yet another first time home buyer, today…I’ve noticed a significant increase in business from this segment due to the first time home buyer tax credit. It’s arguably the best time in history to be a first time homebuyer, so it makes sense that we’d see more people making the switch from renting to owning. What I found refreshing about this buyer/borrower is that she is truly grateful for the sub 5% interest rate on a 30 yr fixed FHA loan, tickled that she could borrow the 3.5% down payment from her 401k (pay yourself interest), and thrilled that the IRS is willing to give her $8,000 about 2 months later…that she doesn’t need to pay back if she stays in her house for 3 yrs. Why shouldn’t she stay there for 3 or more years? Her $150,000 home will cost her less per month than her apartment! To top it off, she had been declined at a broker shop which didn’t offer FHA, so she was floored to find out that she could get a competitive mortgage with a 631 credit score! I haven’t yet told her that we can close in less than 2 weeks and that are were ongoing tax/appreciation benefits…wasn’t sure she could take any more good news! :-)

I highlight this experience because it stands in sharp contrast to the clients I meet who wonder if they should wait for the government to “sweeten the pot” with a larger incentive in the future, or if something geopolitical will happen to temporarily drive rates below there already historic levels. They believe themselves to be entitled to something bigger and better than everyone else…although I’m never quite sure the reasoning behind it. I was taught that hard, conscientious work and treating others as you’d like to be treated were the pathways to success and that “a bird in the hand is worth two in a bush”. I was also taught that customer service was paramount in any business…and still believe it whole-heartedly, but I now seem to be among a shrinking segment of service providers which hold true to this belief. Ok, I’ll get off the soapbox and tie this up.

As service providers, we should do our clients the service of reminding them to take a close look at the short and long term benefits of homeownership during this historic period. When weighing the risks and benefits, most reasonable buyers (not trying to max out their house payment) will find the scale tipped heavily towards benefits and will hopefully realize that this is one occasion where the bird in the hand might be worth MUCH MORE than two in a bush!

Thank you for taking the time to read this, I appreciate your comments and feedback.

Ok, so after a long sabbatical I’m back in the blog-o-sphere…and, go figure, I’ve got something on my mind which is eating at me….

The Federal Reserve has made a big deal about their program which purchases mortgage backed securities (MBS) in order to keep mortgage interest rates low (Fed Reserve MBS FAQ). I applaud the effort, and for those with credit scores over 720 and lower loan-to-value ratios, it’s been great! What still bothers me is that at the same time the Fed is spending 100s of Billions (program allows for $500 billion) buying MBS to lower mortgage rates, the Treasury, through its receivership of the GSEs is allowing Freddie Mac and Fannie Mae to charge “adverse market delivery fees” which effectively increase the rate paid by actual borrowers. Here’s an example: A non-first time homebuyer putting 20% down with low debt to income ratios and 100 months in asset reserves would pay 5.25% with a discount point due to a 697 credit score. Were he to have a 720+ score his rate would be at or under 5.00% with no discount points. What is so risky about that scenario that deserves such a dramatic increase in rate and cost? I thought that FICO only based pricing/risk analysis was disproven by the Sub-prime/stated income loan debacle? The adverse delivery charges keep increasing and most guidelines continue to tighten, even as our government says it’s willing to do whatever’s necessary to end the housing and financial crisis. The fees have increased to such a level that the National Association of Mortgage Brokers is encouraging all originators to include the adverse delivery charges on Good Faith Estimates to clarify that these fees do NOT go to the originating lender, but are passed through straight to Fannie/Freddie (see Broker Universe / Origination News).

I think that this government 2-step is counter-productive and that those affected (all US current and potential homeowners along with anyone in a real estate affiliated industry) should make it known to our representatives in Congress (whoismyrepresentaive.com) that the adverse market delivery fees charged by Fannie and Freddie are egregious and are penalizing many hard working, bill paying Americans with good credit (since when did a 697 Fico become risky credit?) for purchasing a home in this current climate.

I should also note that at the present time these fees do NOT affect government loans. However, most government lenders have found other ways to tighten these loan parameters, including setting a minimum credit score requirement of 620 for all government loans (including Streamline Refinances and VA Interest Rate Reduction Loans, which until just recently required only a mortgage history for credit qualification), and not allowing alternative tradelines to build a credit profile.

I understand that our economy is strained and that risk management is part of any enterprise, but the magnitude of the adverse market delivery fees along with who they apply to seem to me to be out of whack and counter-productive to a recovery in housing.

Thank you for taking the time to read my comments…please let me know your opinion.

It seems like I can't ever get through a day anymore where the news, my clients, my referral sources, friends, family or all of the above isn't commenting, ok complaining, about the state of the housing market, the economy, foreign policy, the Fed, the presidential candidates, etc.  Is it just me, or does there seem to be an attitude of impending doom which is running through our society, and more specifically, our industry?  I admit, times aren't the greatest and I have done my share of whining, but is the sky really falling?

Perhaps the desire for immediate gratification has skewed our thinking and lead too many folks to focus on the short term challenges and to not look through the eyes of history at the bigger picture. 

I had the privilege of going to a benefits meeting attended by 100 or so American Veterans in beautiful Bandera, yesterday evening, at the invitation of Mary Jo Schaffer (a fellow activerain blogger).  It was a great experience...this is why.  Yesterday had more than it's share of uptight conversations and fretting emails and I was letting it start to get to me.  My phone was ringing all the way to Bandera and only a couple of the calls actually had to do with closing deals, most were folks bemoning the current state of affairs.  As I was entering Bandera, I got off the phone to find my way and quickly realized that even though I'm in the country more than most (our main office is in Boerne), I wasn't taking the time to enjoy it!  So I took  a deep breath, found the Silver Sage Corral Events Center, and walked in, not exactly sure what to expect.  What I found was a group of brave souls who risked everything on many occasions to allow us to live in this great country.  A few of the WW2 vets reminded me of my grandfather who was in the war himself and lived through the great depression.  A flood of stories he has told me over the years of his experiences in the depression and in the war ran through my mind.  I was immediatly embarassed of my own recent tendency to focus on the glass as half empty and to not be regularly counting my blessings.  On the way back to San Antonio I tried to take a step back and look at our current situation form a broader perspective...

Today is a sad day for those of us who have made Tex Vet Loans a regular part of our program offerings.  The Texas Veteran's Land Board has ended the rate discounts which were available on 15 year terms and for "service era" veterans (served during the Vietnam War and have been retired/discharged less than 30 yrs).  Up until now there was no lower interest rate on a fixed term than a Texas Veterans subsidized loan to a "service era" veteran.  The rates on these loans were almost always in the 4 percent range. 

But the news isn't all bad.  Texas Veteran's Land Board still has below market base rates, still has a rate reduction for veteran's with a service connected disability rating of 50% or higher, and VA still waives the funding fee for diabled veterans.  Also, it is strongly rumored that in lieu of the "service era" discount, TX VET Land Board will lower the base rate significantly.  This would help a much larger number of veterans, since the number of eligible "service era" veterans decreases significantly each year (mostly due to the <= 30 yrs since retirement/discharge requirement).  TX Vet Land Board publishes the TX Veterans Housing Assistance rates (www.texasveterans.com, then "housing assistance", then "interest rates") every Friday at approximately 5pm (officially it's at the beginning of the first business day of the week).  I'll post again, once we know what the policy rate change is going to be.

This program is still a fantastic benefit which Texas provides for our veterans, and I am unaware of any program like it in any other state.  For almost all qualified veterans, the deal still doesn't get much better than what Texas Vet Financing affords to our TX Veterans.

If you are a Texas Veteran or know someone who is and could benefit from a below market rate loan for the purchase of a home, please call Marshall @ 210-274-3037 for more information.

“If we don’t change direction soon, we’ll end up where we’re going.” This quip by Prof Irwin Corey, an American vaudeville comic and actor, seems to mirror the mindset of many government agencies dealing with the regulation and facilitation of the housing and finance industries. Change is the name of the game, today, and some say it’s barely half-time.

Congress passed, and the president signed into law, HR 3221 (the Housing and Economic Recovery Act of 2008) at the end of July. This law has many provisions and it’s not my intention to discuss them all. Here’s a highlight of some of the changes…

• Registration / Licensure of all originators: This provision requires all originators to be licensed/registered with the National Mortgage Licensing System and Registry (except Federally Chartered Institutions). Although this will be a logistical nightmare for some in the industry, it should help “clean up” the industry.
• Tax Credit for First Time Homebuyers: This provision allows for any first time homebuyer who purchases/purchased between the dates of April 9, 2008 and July 1, 2009 (it’s in effect now) receive a $7,500 tax credit for the year in which they bought their home. This is a tax credit and not a tax deduction and is paid back to the IRS over the next 15 years (or sooner if the property becomes a rental home). There is no interest charged on the tax credit funds which are repaid. As always, there are some exceptions. I am not a CPA, but I was told on an industry conference call that this will not affect alternative minimum taxation and phases out above $150,000 combined, married annual income. I would imagine there are other implications, so check with your tax advisor to find out how it would affect you, specifically. Either way, an interest free loan from the IRS doesn’t happen every day!
• Conventional Loan Limits Increased: The formula for determining loan limits in high cost areas was adjusted, but it shouldn’t affect us here in TX.
• Fannie/Freddie Oversight: This provision establishes a new federal regulator with powers similar to a Federal Bank regulator to oversee the activities of Fannie and Freddie. The funding source for this regulator and the associated funds is being paid for by an additional 4.2 basis point fee added to loan interest rates.
• Fannie/Freddie Stability: This provision authorizes the Secretary of the Treasury to extend lines of credit and to, if necessary, purchase equity in Fannie or Freddie to ensure solvency and calm the credit markets.
• FHA Rescue/Hope Now: These two programs are designed, in different ways, to help those experiencing serious delinquency or feeling a serious house payment crunch. The exact details of how the plans will be administered (and the details of the plan itself) have not yet been ironed out. More to follow when it’s known.
• FHA Modernization: Ok, here’s the biggie. As of the end of September, FHA will no longer insure loans which involve Seller Funded Down Payment Assistance (SFDPA). This doesn’t sound like such a big deal until you consider that over 1/3^rd of First Time Homebuyers who use FHA for financing utilize SFDPA, because if they can’t pay the entire down-payment themselves, get a gift from a blood relative, receive Down payment Assistance from a community or grant based program (will be used up quickly), receive the money from their employer, or borrow the money out of their retirement, that’s the only option left. So, in order to buy a home with little to no money down after the end of September, borrowers will have to be VA eligible, find and qualify for community grant money, have such high credit scores and reserves that they can qualify for one of the very few and far between portfolio zero down home loans, or have an employer or relative willing to GIVE them the down payment. As if that doesn’t tighten up things, enough, they are increasing the minimum down payment requirement from 3-3.5%, while also raising upfront and monthly mortgage insurance payments. I can understand needing to change some of the requirements for SFDPA or providing a 1-2% down program which requires a stronger credit profile, but HUD insists that if these changes aren’t made, then they will have to be supplemented by taxpayers to the tune of $1.4 billion in 2009.

HUD also sites that loans with SFDPA suffer almost 3 times the delinquency rates as traditional FHA loans. I’m not sure what the best answer is, but I do know that for millions of Americans who have the ability to reliably make a house payment and be responsible home owners, if they do not close on a FHA loan by the end of September, they will no longer be able to purchase a home without a sizeable down-payment, thus taking them out of the housing market until their savings or industry changes allow them to purchase. These loans are not inherently bad. Proper budgeting and planning before the purchase of a home and working with a mortgage professional who desires to see you in a good position go along way to ensuring a happy homeownership experience.

It’s a buyer’s market, San Antonio (and most of Texas) have seen stable real-estate markets (albeit a little slower), the IRS is offering $7,500 interest free “loans”, you can still utilize SFDPA and move in with little to no money down up to $332,500, and all this while rates are historically low. Although no one can predict the future, it would seem that the rest of August and September would be an excellent opportunity for FHA buyers (especially first time homebuyers) to realize the American dream and become homeowners before the process becomes even more difficult.

So change is still (and will continue to be) the name of the game. The upside is that with change comes opportunity. Ramsay Clark once said, “Turbulence is life force. It is opportunity. Let’s love turbulence and use it for change.” I think he’s got something there.

The real estate finance industry is a very confusing place for most consumers (and many loan officers) right now, and many of the mass media reports I read or hear aren't helping the situation.  Over the next few weeks I will address some common misconceptions and provide a few updates on the realities of today's mortgage marketplace in the hope of bringing some clarity to the situation.

Interest Rates 101

The need for a knowledgeable and conscientous mortgage professional has never been more important.  The only reliable way to monitor mortgage rates on a real time basis is to monitor the mortgage backed securities market.  The most common misconception that I hear over and over again is that the Federal Reserve's reductions of interest rates automatically translate into a reduction in mortgage rates.  In reality, the opposite is usually true, especially for the week or so following the reduction.  The reason is this - the rates which the Federal Reserve directly controls (Fed Funds Rate, Discount Rate, and Prime Rate) are ALL short term interest rates.  These reductions affect (or should affect) short term rates and/or adjustable rates such as credit cards, car loans, consumer loans, and the like. 

Mortgage Interest rates are determined by the demand for fixed rate mortgage backed securities which are mostly issued by Fannie Mae and Freddie Mac (known as GSEs - government sponsored enterprises).  The higher the demand is for these bonds/securities, the lower the actual interest rate is.  Wall Street usually sees a reduction in Fed Reserve rates as good news for stocks, and so the demand for stocks goes up, while the demand for bonds goes down (thus a higher interest rate on mortgage backed securities/bonds).  If the Fed continues to push short term rates lower too aggresively and inflation becomes a significant factor, mortgage rates will increase even more in both the short and long term.  So, you might think that a reasonable benchmark by which to guage mortgage interest rates would be the 10 or 30 yr US treasury bond...and that used to be the case.  In these uncertain financial times it is not uncommon for treasuries and mortgage backed securities to move in opposite directions at the same time.  Alot of this has to do with both the devaluation of mortgage backed security pools which contain subprime loans and the perceived stability of the companies which insure mortgage bonds. 

Are you still with me?  I can hear the yawns from here...stick with me for just a little longer...you'll have a better understanding of mortgage rates and pricing than many loan officers do...  As if this issue wasn't complicated enough, these days, Fannie Mae and Freddie Mac keep increasing the fees they charge to lenders to deliver a loan to be securitized.  Go figure, the lenders pass it right along to the consumer.  So, even if base interest rates stay the same, the effective interest rate provided to the borrower has increased (and all signs point to a continuing of this trend).  Example:  A borrower with a 640 credit score who wishes to put 5% down on the purchase of a home will pay approximately .25% higher in interest rate today than they would have with the same base interest rate 9 months ago.  The amount of mortgage insurance has increased, as well.  The news may say mortgage rates are getting lower, but depending on your situation, the exact opposite may very well be true.  Fannie and Freddie have announced additional underwriting guideline revisions AND LOAN DELIVERY FEES which will be in place by the end of May.  Wells Fargo announced, yesterday, the introduction of a .75% (300 bps to price) increase to rates on any program which has a guideline change which was not locked prior to that change.  Analysts don't expect the current trends to reverse until 2010.

The bottom line is:  If you have considered buying, building, or refinancing any realestate, the time to act is now!  Base rates could creep a bit lower before climbing higher, but lender delivery fee increases show no signs of slowing down...making your net interest rate higher.

Marshall Moody is a licensed mortgage broker and the owner of Stone Oak Mortgage - a full service mortgage broker firm - in San Antonio, TX.  Please feel free to contact him at (210) 497-6565 with any questions or concerns about realestate finance.

Howdy, folks! After much prodding by my web marketing consultant, employees, family and friends (all of which are most likely tired of my rants) I am starting a Blog…welcome to the first edition.

Since this is the first post, I’ll introduce myself. My name is Marshall Moody and I’m a manager and licensed mortgage broker (68973) for Stone Oak Mortgage (www.stoneoakmortgage.com) in San Antonio, TX. I also maintain memberships with National Association of Mortgage Brokers, Texas Association of Mortgage Brokers, Greater San Antonio Builder’s Association, Stone Oak Business Association, and the National Association of Home Builders. I’ve been in the industry in various capacities for over a decade. My biggest satisfaction is helping fellow citizens realize and maximize the American Dream of homeownership, but some recent events almost make it seem like the American Nightmare! Use a reputable broker to stay out of that second classification…but I digress.

Unless you don’t have any connection with recent news, you know that the mortgage industry is in shambles…which has spilled over into the real estate industry in a big way…and is spilling (or will be spilling) into the broader economy. Many analysts have said that this is the worst nationwide real estate market that we’ve seen since the great depression…in my opinion that’s pushing it, but not far off in some areas of the country (thank God I live in Texas!)

Congress and consumer advocate groups have responded by initiating, supporting, and passing legislation which they believe will protect consumers from loans which they do not need to be in, and will help keep brokers / lenders “in check”. I would guess that most folks (including me) find this admirable and worthy of pursuing…the mortgage industry obviously needs to change.

The first major piece of legislation was the FHA reform act which most citizens and many in congress support…it will greatly increase the ability of both banks and brokers to help out those who need to refinance out of ARMs and also keeps the lower priced purchase market liquid. Although met with significant support, it has stagnated in the Senate…presumably stuck in committee due to political concerns. It’s a shame and this bill should be passed as quickly as prudently possible.

This leads me to HR 3915 which recently passed the House of Representatives, and is on its way to the Senate. This Bill has some excellent provisions for protecting consumers, but in a few ways could actually lead to more harm than good.

First, the good stuff!

1) This bill provides for Nationalized Licensing requirements for all loan originators that are not employees of federally chartered banks (like Bank of America, WAMU, and the like). It appears that federally chartered bank’s originators will only need to be registered. Although it still has a loophole for federally chartered institutions, this is still being debated and is, at least, a big step forward in keeping the criminal element minimized in our industry. The obvious increase in accountability should be welcomed by consumers and mortgage professionals, alike, since any licensed originator will have to pass a 100 question test, a criminal background check, net worth or bonding requirements, and continuing education (along with occasional audits by state officials). Most would need to renew their license on an annual or bi-annual basis…all but originators at banks. Mortgage banking offices can still be a haven for those who fail to meet one or more of the requirements for licensing. It is well known in the industry, that if you can’t get licensed, go work at a bank…that must change.

2) This bill also re-emphasizes the need for early and frequent disclosure of fees to the borrower (brokers disclose the yield they make upon sale of the loan, while banks are exempt from disclosing this information, even an approximation). This is already required by RESPA and practiced by the majority of originators, but the strengthening and re-emphasis is appropriate considering the current state of affairs and consumer claims of ignorance and deception. If this bill is truly for the benefit of consumers, it is curious that the bank’s exemption from having to disclose their compensation and from licensing requirements still exists.

Now, the misguided stuff!

1) …as I just briefly mentioned above, the continuation of allowing the banks to hide their return on sale (Service Release Premium or SRP) while forcing brokers to disclose their return on sale (Yield Spread Premium or YSP) is still a disservice to consumers and grossly unfair. Beyond enforcing a less than level playing field, hurting competition and having transparency only on the broker side of the business, this allows high premium pricing programs to persist in the banking world. Some would say that the bankers are “safer” than the brokers, but please remember that it was mortgage banks and warehouse lenders which determined the underwriting guidelines for all the alt-a and sub-prime mortgages which are now causing these problems. Brokers do not set guidelines or package securities, they connect a borrower with a program which they qualify for based on the guidelines provided by the lenders or banks.

2) This relates to the info above in that the bill lowers the HOEPA triggers (thresholds which determine what a “high cost mortgage” is). HOEPA calculations for brokers include any YSP earned, but since banks are not required to disclose their SRP, it is NOT included in the calculation. The new standards would prevent brokers from being able to finance lower priced affordable housing…especially in high title cost states like TX. Do we really want the banks to have a monopoly on this business? Remember Countrywide is a bank and is not the only one who lended questionably. Brokers have traditionally done approx 60% of this business…many of these borrowers find banks intimidating.

3) This bill intends to legislate underwriting guidelines…WOW! That should be a scary thought for consumers! We wouldn’t want the government to tell us who can obtain life insurance and who can’t, which homes can be insured and which can’t, who can buy a car and who can’t, who can get medical insurance and who can’t…you get the point…so why would it be good for the mortgage industry? The bill requires that all borrowers demonstrate a documentable ability to repay the loan and it also all but outlaws non-prime lending. The reality of the matter is that the non-prime loans that started this problem are all but extinct since they are worthless on the secondary market. IF they ever return, it will be in a much more conservative, lower-risk-oriented version like the non-prime loan programs which have been around for many decades…which performed well (higher down-payment , reserve, credit requirements than existed in the previous few years). The language on “ability to repay” is currently being interpreted as the elimination of all stated income and low income documentation loans. Here again, the market and guidelines have already corrected. The only stated deals still readily available are for borrowers with sterling credit, lower loan-to-value ratios, are self-employed and have strong liquid asset reserves…these are tried and true guidelines from the past. To legislate these programs away will take another 20-40% of otherwise qualified buyers/borrowers out of the already struggling real estate market…further damaging what some are calling the worst real estate crisis since the great depression.

4) This bill also creates stiffer legal ramifications and exposure to civil litigation for firms which securitize mortgages. Although some level of accountability should be enforced, the current wording would lead to a rash of lawsuits and a whole new “how do you get out of your mortgage with no credit damage and maybe even some extra cash from the lender” industry which, one would think, raise mortgage rates to offset the legal losses they would surely incur. ….Right Motive…Wrong Methodology! I t could create a new term for lawyers, no longer the “ambulance chasers” they would be the “do you have a mortgage chasers”. Just what our country needs – more lawsuits.

If our government can pass prudent, constructive legislation at this very ripe opportunity, it shouldn’t be too long before the American Dream is a pleasant reality for more folks in more places while keeping the mortgage market solid and solvent.

Wow! More of a long rant than a blog post…I’ll work on that…apparently I had a lot on my chest…

I hope you found this informative. Please contact marshall@stoneoakmortgage.com with any questions, comments, concerns or suggestions!