The Rates Aren’t The Only Thing That Matters….. (My thoughts on how to create healing in the housing market)
by Tom on December 12, 2009
in Market Musings, banks
A couple of thoughts about this article from the New York Times:
- It’s true. Anecdotally, I’d have to say that depending on the day, anywhere from 30-50% of the people who I discuss refinancing with are either not able to do it because their income has fallen or because property values have dropped. Now wait, you’re probably thinking, “I thought that the government was allowing people to refinance even if their mortgage was over 100% of the value of their property. They are, but there are a couple of caveats to that:
- The loan has to be with either Fannie Mae or Freddie Mac and a substantial portion of the market isn’t with either one of those. If you want to find out whether your loan is with either one of them, check Fannie Mae Loans or check Freddie Mac Loans to find out.
- If you have a second mortgage/home equity line of credit on your house and the combined balance of the two loans exceeds 105% of the value of your home (but is less than 125%) then you can still refinance, but the pricing adjustments that Fannie and Freddie charge are so extensive that unless your interest rate is over 6%, it’s probably not worth refinancing.
- If you are like a LOT of people in today’s economy, your credit score isn’t quite as high as it used to be. It might be because you’ve had struggles to make some payments on time, it might be because you’ve had some of the credit lines cut on some of your credit cards (thereby lowering your credit scores because you’ve got too much of your available credit tied up), it might be a variety of reasons. But the end result is the same. In order to get the best possible rate, you need to have either:
- A 5% equity position in your house and no second mortgage or
- A first mortgage of no more than 80% of the value of the house and a combined loan to value (including second mortgage) of no more than 90%
- AND a credit score of 740 or higher.
- Ask yourself, if the majority of markets in the country have dropped in excess of 20%, how many people are able to meet those guidelines?
- Part of the reason that this is happening is because Fannie and Freddie are losing not only their shirts but pretty much everything else too. So they have no choice but to tighten up their guidelines. However the question does come up whether they are closing the barn door after the horses have left the county…..
- There is a huge economic impact – if we can’t refinance someone’s house, we can’t make their payments cheaper. That means they can’t use that money to either pay off their debts, spend at McDonalds or save for a rainy day.
So what’s the solution? A couple of thoughts:
- We’re in an extremely overleveraged situation right now. When property values were still going up, it wasn’t as big of an issue because liquidation was always an option. If you bought too much house, you could sell it and almost always be “guaranteed” to at least get your initial investment out. Not so much any more.
- Loan modifications don’t seem to be working. Why not? Two main reasons: 1) They are not offering substantial enough savings on a monthly basis for people to stay “on top” financially or 2) The borrower is so "underwater” in their financial situation that it’s not a substantial enough situation where they can see their way out of the problems.
- We need to face the fact that there’s still a substantial amount of bad debt out there. There are a lot of mortgages that are “under water” and there are a lot of people who have loans that they can’t pay.
So what am I proposing? Here’s an idea (I’ll call it the deferred equity proposal):
- All homeowners with a mortgage against their home (primary residences only) would receive a 20% principal reduction in their mortgage along with a reduction in their monthly payment.
- They would need to sign a second mortgage with their existing mortgage holder for that 20%. The second mortgage would need to be paid upon the sale of their existing home unless the seller buys another home and closes within 2 business days of the closing on the sale of the existing home. The second mortgage would automatically become a prior lien to any other second mortgage that was filed prior to implementation of this policy.
- The mortgage is transferable to a new home if the owner decides to sell. So, you have a $40,000 “new second” on your home, you can use that as the downpayment for a new home.
- All guidelines for refinancing would acknowledge this 2nd mortgage but it would be viewed as equity and would enable many more people to refinance.
- For every year that the owner remains a homeowner (rather than reverting to renting), 4% of the original balance would be forgiven. So, in 5 years, the homeowner who is able to remain a homeowner will have a substantial amount of additional equity. That would provide a strong incentive for people to remain in their homes and keep making payments.
- Yes, 20% of the value of the mortgage backed securities would “disappear” but I honestly don’t think that it would make that big of a difference in the value of those securities (and the corresponding value of Fannie, Freddie and FHA). Let’s look at it this way, if 20% of the loan balances goes away but the rest of the portfolio performs better, isn’t that going to actually make them worth more? I’ve heard estimates of mortgage backed securities portfolios selling for 40 to 60 cents on a dollar. If it was performing better, don’t you think it would be worth at least comparable amounts, even if it was 20% smaller?
What does this actually accomplish? A couple of things:
- Immediate payment relief for everyone in the country who has a mortgage (well, not immediate because it will take a while to accomplish).
- A very strong financial incentive for people to stay as homeowners.
- Provide a substantial additional boost to the economy because thousands of additional homeowners would now be able to refinance and generate additional cash flow opportunities that they wouldn’t have had otherwise.
- Many people who aren’t able to move now due to a lack of equity would be able to move – thus spurring the housing market.
This is obviously a 30,000 ft view, but tell me. What am I missing? Our government is already pouring billions into Fannie and Freddie and it hasn’t made a difference yet. Wouldn’t something like this actually make a difference? And wouldn’t it put a boost in the economy and make people feel better about owning homes?
Well, what do you think?
Tom Vanderwell
Despite Low Mortgage Rates, Homeowners Can’t Refinance
Published: Saturday, 12 Dec 2009 | 5:31 PM ET
By: David Streitfeld
The New York Times
Mortgage rates in the United States have dropped to their lowest levels since the 1940s, thanks to a trillion-dollar intervention by the federal government.
Yet the banks that once handed out home loans freely are imposing such stringent requirements that many homeowners who might want to refinance are effectively locked out.
The scarcity of credit not only hurts homeowners but also has broad economic repercussions at a time when consumer spending and employment are showing modest signs of improvement, hinting at a recovery after two years of recession.
A Question That Needs to be Asked More Often…..
by Tom on November 27, 2009
in Market Musings, banks
Technorati Tags: Mortgages, Big Questions
I was joking – honestly, I was really joking!
by Tom on October 20, 2009
in Market Musings, banks
Approximately a month ago, I was getting a client approved for a mortgage with mortgage insurance and while going over the details of what we needed to document the deal, the customer deadpanned to me, “Where do I go to get the bloodwork done?” My response, “Nah, we don’t need that —- yet.”
The report below is actually from England but it now appears that the government is going to start requiring mortgage lenders in England to ask questions about how much their borrowers spend on tobacco and alcohol.
Now, if you ask me, I think that tighter restrictions in terms of downpayments, debt to income ratios, credit scores, job histories, cash reserves, etc. all make sense. But whether my neighbor spends more or less on alcohol than I do, I can’t see what substantive difference that makes in our ability to repay our mortgages. (Hint – I’m not the one who spends more on alcohol.)
The pendulum is swinging too far in the other direction in some areas and not far enough in others.
Homebuyers face questions on alcohol and smoking under new mortgage rules – Times Online
Homebuyers could be forced to provide detailed information about the amount of money they spend on alcohol each month to qualify for a new mortgage under a new clampdown on reckless lending.
In a sweeping review of the mortgage market published today, the Financial Services Authority (FSA) said lenders needed to be far more rigorous about their financial checks of potential borrowers.
It said lenders should delve deeper into homebuyers’ personal spending including the amount they spend on alcohol and tobacco.
Spending on shoes, clothes and childcare could also be assessed under a new, industry-wide “affordability test”.
At present, the FSA does not prescribe rules about assessing a consumers’ ability to repay a mortgage and practices vary from one lender to the next.
Technorati Tags: Mortgages, Alcohol use
Zillow’s 4th Quarter Real Estate Market Report
by Tom on February 4, 2009
in banks, house prices
is out. Download a copy of it at Zillow.
A couple of thoughts about it:
- This report illustrates very well that real estate is local. The variations between different regions in property values and their year over year change is quite dramatic.
- There were very few places that actually registered a positive change in property values, but there were some.
How does this relate to what you are seeing in your market?
Also, while real estate is local, lending isn’t and what does something like this mean for mortgage lending?
- The likelihood that downpayment requirements aren’t going to loosen up any time soon.
- That as the job market deteriorates and more people are struggling to keep their homes due to job losses, property values are going to continue to be under stress and losses at banks and at Fannie and Freddie are going to be ongoing…..
What do you think?
Mortgage Market Week in Review
by Tom on October 3, 2008
in Market Musings, Mortgage Market Week in Review, banks
Well, here we are on Friday again. Are you getting motion sickness from all of the news and rumors that are flying back and forth? Wow has it been another week to forget, hasn’t it?
Here are the topics we’re going to talk about today: The Bailout/Rescue Plan, some very weak economic reports, the credit markets and do bankers really trust each other?
First, there were several economic reports that came out. None of them were good. Here’s a rundown of them:
1. Jobs – the jobs report came out this morning and showed that 159,000 jobs were lost in September. While the number was lower than what the markets expected (they expected 200,000), it was a very weak report.
2. Factory orders came in down 4%. That’s not the direction we’d like them to go.
3. Car Sales fell off a cliff in September. Ford’s sales dropped 35%. Ouch.
4. A couple of reports on personal incomes, personal expenditures and the like came out and they weren’t good.
If these were the only issues that we had, we’d have our hands full and we’d see mortgage rates drop due to the increased weakness in the economy.
But that’s not all. The credit markets have taken a major hit in the last week. What’s happening with that? A couple of brief highlights:
1. Banks are very concerned about running out of money (capital). Wachovia (more on this later) and Washington Mutual have been “bought out” to keep them from going under. Other banks are concerned that the losses they are experiencing will not enable them to keep their capital ratios where they should be. Due to that, there is an increasing reluctance to lend to commercial customers and to lend to consumers. How bad is it? I’ve heard a variety of conflicting reports. What I can say from personal experience is that for people (consumers, not businesses) who have the following: 1) Some equity in the item they want to borrow against (car, house, boat) 2) Good credit – not spectacular credit, but at least good credit, 3) sufficient verifiable income to support the loan request and 4) Cash reserves – i.e. you’re not flat out broke after closing shouldn’t have problems getting the financing.
2. As the economy continues to falter, the concern, in banks writing loans to commercial customers, is what is the likelihood of the commercial loans and lines of credit getting repaid. That makes borrowing more expensive (when they can get it) and difficult to get. For those who run businesses that need financing (to maintain inventory, etc.) it makes being productive and keeping their portion of the economy going.
Banks don’t really trust each other. Surprise?
Well, sort of. Here’s the scoop. Many banks actually lend money back and forth to each other. They do it literally on a daily basis (i.e. Wells could say to JP Morgan – can you loan me $100 Million until Monday?). With the issues that are going on in the financial firms, very few banks are inclined to lend to other banks. Why? Because they don’t want to loan money to a bank who is going to go under next week. How’d you like to loan someone $100 Million and find out that the FDIC is shutting them down. So there is now very little lending done between banks and the rates that they would charge is skyrocketing. In addition to that, the financial stress that this is causing is extending to banks in other countries and causing growing concern that other banks in other countries are going to fail.
Oh, and also, Citigroup and Wells Fargo really don’t trust each other. Citigroup thought they had bought Wachovia but this morning Wells came in and made a better offer. So now they are fighting over it. Me first! No, it’s mine!
The Bailout Bill – as of about 10 minutes before I finish writing this, the Bailout Bill passed by the House of Representatives. So now what? A few thoughts on the bailout bill:
1. We needed to do something. You can’t fiddle while Rome burns, the stakes are indeed too high.
2. There are a lot of people who feel that this bailout bill, while flawed, was better than nothing.
3. There’s also a growing feeling that the economic issues (see above) are going to be more than just what this bill can deal with.
So where does this leave the mortgage market?
1. The fact that it passed will keep the conforming market moving. Fannie and Freddie and FHA loans will still get done.
2. The economic weaknesses that are present should push mortgage rates down. They haven’t dropped this week (like they usually would with economic reports like we had) because of the uncertainty of what was going to happen in Washington.
3. Since the consensus in the markets are that this plan that just passed won’t solve the economic problems and won’t cure the housing market, we’re going to see continued tightening of lending requirements and over the longer term, I expect we’ll see mortgage rates trending up.
That’s about all that I’ve got for now. Stay tuned because it’s not over yet.
Could we be getting close to the "price bottom?"
by Tom on April 2, 2008
in Uncategorized
It’s purely anectdotal evidence, but I was talking to a local appraiser today (yes, loan officers can talk to appraisers as long as it’s not a matter of coercing them for values!) He was asking me if I had a different phone number to get in touch with one of my customers.
We were chatting about the market and he had a couple of interesting comments:
1. The majority of the purchases that he’s seeing are in the lower price ranges (no surprise there). Not necessarily a good thing, but at the same time, any of the non-foreclosured homes that sell free up others to buy “up the ladder.”
2. He said that “some” price ranges in “some” areas he’s starting to see “some” signs of price stabilization.
So is it a sign of getting close to the bottom or not? Only time will tell.
