Mortgage Industry News

Ruth Lee

CNN Money: “Pending home sales ‘fell off a cliff’”

The tax credit expired yesterday.  Thousands of new homeowners were able to meet much stricter lending guidelines due to the government’s subsidization of their required “skin in the game.”  Whether this has expanded the moral hazard evident in 100% LTV financing is not yet clear.  What is clear is that the American economy is resilient enough to respond to a deal, a bargain or a “giveaway,” but not resilient enough to spend without it.  In much the same way that car sales plummeted after the “cash for clunkers” giveaway expired, I don’t think it is shocking to see home sales follow the same path.   Americans have exhibited much higher savings rates over the last year – realizing that a world of unlimited, cheap credit is gone…eternal equity and housing appreciation has disappeared… and that the consequences of abusing or luxuriating in a life above your means can set you and your family up for a hard and painful fall.

An article in Mortgage Servicing News entitled Housing Finance System Future is Wide Open written by Brian Collins quotes Treasury Secretary Timothy Geithner “as blaming the GSEs’ large investment portfolios for the substantial losses on the inherited commitments of two, saying FNMA and FHLMC failed to charge appropriate guarantee fees on low quality loans.”  I would argue that once again the real issue has been missed.

Encouraging the collection of more fees to shore up “guarantees” is not going to fix the problem or prevent what has happened over the last couple of years from happening again.  The real issue is not that appropriate guarantee fees were not charged.  While this may have stemmed some of the bloodletting, it does not fix the real problem.  Quality loan production tiering from loan origination through purchase is the real issue.  Charging more fees just drives up the cost to produce mortgages, which ultimately has taxpayers eating it coming and going.  Haven’t we already eaten our portion of this dog’s breakfast?

The REAL Solutionis to not buy the loans in the first place if quality production cannot be demonstrated prior to purchase.  No more exceptions or backroom deals based on volume submission allowed.  The days are numbered for direct seller/servicers who deliver Notes for purchase knowing the mortgage produced wasn’t done in accordance with good lending practices.  The winds of change are a blowing… slowly, but surely.  The new FNMA Loan Quality Initiative set to go into effect June 1st is the first step in the right direction, but there is so much more that can be done.

Have I mentioned standardization?   

Speaking of contrarian thinking, Ahead of the Tape columnist Kelly Evans wonders whether the “unpleasant scent from the housing market” is “leading policy makers astray,” and asserts that the “market mightn’t be nearly as weak as is commonly assumed.”  The columnist proposes that even if the worst case scenario of oversupply in housing inventory materialize, the net result on housing affordability would be positive.  We agree that it is time to take a more optimistic position on the mortgage economy and we continue to urge community banks to support the revitalization of mortgage lending by becoming lenders and/or extending warehouse lines of credit to local independent bankers.

Ruth Lee

So… what happens when the academics encourage people to walk away from their homes?  With almost a quarter of Americans underwater on their home….what could go wrong?  This professor is telling Americans to emulate Wall Street… but I question the wisdom.  Wall Street affects macro…while being this cynical and self-serving in a local community is definitely micro.  Sage words – don’t mess where you sleep.

If we are okay with this “it’s all about me” attitude, then we cannot blame Wall Street for the same thing.  I am horrified by the notion that you should abandon your “inconvenient” obligations… there’s no cost…right?  But there is always a cost… always… from destruction of the local economy – you know, the one we actually live in – to the disintegration of the wealth and investment of our friends and family – to the erosion of local community banks… Fabulous idea!

Right now the government is our lender, because we screwed up so badly (IN HOUSING) that the rest of the world won’t invest.  So the best way to court investors?  Default!   That promise to pay was only a “sort-of” promise… you know, with fingers crossed behind your back…predicated on only favorable and optimistic assumptions of infinite appreciation and 50% bonuses!

How do we engender investor confidence when risk is solely shouldered by the investor?  When we don’t even retain the ethos that a promise to pay is a personal matter?  That integrity is just an ancillary quality for chumps when it comes to credit.  (Sounds very subprime doesn’t it.)

Buyers consider abandoning troubled mortgages

December 1, 7:18 AM Baltimore Real Estate Examiner Rashida Bandy

Despite stabilizing home prices in many areas, foreclosure numbers are still reaching record numbers. According to First American CoreLogic, a company that provides real estate information data, 23 percent of American homeowners have negative equity in their homes, classifying almost 10.7 million households as “underwater borrowers.” The 5.3 million of these households which owe at least 20% more than the home’s value are more likely to default on their mortgage loans and end up in foreclosure status.

In fact, the mortgage dilemma some homeowners are now experiencing has led to an interesting debate about whether underwater borrowers should simply cut their losses and walk away from their homes (and their mortgage payments). Brent White, an associate professor at the University of Arizona, thinks it is a mystery that more homeowners aren’t abandoning their homes. In a discussion paper White wrote, “Homeowners should be walking away in droves.” Trends show that homeowners under 30 (who are likely unattached to their homes and lack strong community ties) are more likely than other age groups to feel it’s okay to simply walk away.

The bottom line, however, is that a resulting surge in foreclosures will affect progress in the real estate arena if left unchecked. As a result, the U.S. administration is boosting its foreclosure-prevention efforts. On Monday a plan is expected to be announced that will crack down on mortgage companies who aren’t fully committed to assisting borrowers at risk of losing their house. Currently, companies that lower payments for troubled borrowers received financial incentives. The new plan will likely withhold these incentives unless mortgage modifications are made permanent.

What do you think? Is it okay for borrowers to simply walk away from their mortgage?

THE FUTURE OF THE HOUSING MARKET: 2009-2010 – Foreclosures, Recession and Loan Resets.

Ruth Lee

While the financial markets have seemingly stabilized in the wake of massive taxpayer intervention, many Americans have started to feel optimistic about the economy. Independent mortgage bankers across the country have seen enormous demand for refinances with a relative resurgence of purchase demand. However, are we feeling a little too good about the economy? Are we still solely using Wall Street as a litmus? Actually, yes we are…. because it is easy…and we still believe that the market is somehow “smarter” than we are – being able to neatly tie in economic metrics and reporting into a simple number with a plus or minus next to it. (The Dow rallies – we are golden… the Dow falls – things are not so good.) However, in truth, the Dow has been a poor harbinger of future financial information. Three months before the meltdown, financial gurus were still promoting investment in financial services – which turned out to be a “double plus ungood” financial plan.

We cannot be lazy about viewing the economy and our place in it. We cannot continue to take the “infomercial green means go, red means stop” method of analyzing our financial futures. While the media has been entirely focused on the evils of subprime… you can review the chart below to see that ARM resets are just getting started… The green bars from subprime resets have bottomed out in Q2 09… however, the tide of resets for Option ARMS and ALT A are just getting started.

What does that mean? Specifically, subprime loans were made to marginal borrowers with poor credit and/or an inability to prove income and assets enough to qualify for standard mortgages. In the early 00s, Option ARMS and ALT-A were given to marginal borrowers with good credit and/or an inability to prove income and assets.

Continue reading »