Phasing out Fannie (and Freddie)

Late yesterday evening I found an article outlining the House Financial Services Subcommittee’s idea on how to replace, at least in part, Fannie Mae and Freddie Mac’s role in our mortgage system.

For those who are not familiar with how our lending system works currently, banks fund the loans on houses out of the deposits of their account holders with the goal of making more money back in interest than they have to give out on CD’s and savings accounts.  In order to keep enough cash liquid to continue to make new loans and to be able to give you back your money when you go to withdraw it, banks sell those loans to investors on what is called the “secondary mortgage market.”  The secondary market is made up of the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac). These two agencies package and insure loans which are then sold to investors.  They make profit when the transfer of loans are completed, but lose money when those securitized assets go bad.

The House Committee’s new proposal would reduce the reliance on banks to sell loans through Fannie Mae and Freddie Mac by creating a securitized bond program instead.   The proposed law would allow banks to package and securitize their loans and borrow, against those loan’s value, bonds to keep their funds liquid.  Unlike the old system, where once the bank sold the loan they removed much of their risk, the new bond system would require the bank to keep the loans on their books, so if the loans failed it would be their responsibility alone to face the losses.   This system is very similar to the one currently used through most of Europe for securitizing home loans.

While, in principle, I agree that the originating agency (the bank) should share responsibility if an asset they created goes bad this could create an issue if banks lose too much on loans and suddenly lack the assets to pay account holders.  This would trigger the FDIC to step in and insure the funds of the account holders if the banks lost too much liquidity.

Under the current system, since Fannie and Freddie are quasi goverment owned our taxes indirectly go to cover the losses suffered by those agencies due to foreclosures.  In this new system our taxes would go to covering the account holders of the banks when they go under instead.  Either way, our government, and therefore our money, is still backing the financial industry…it is just whose money we are protecting that changes. 

There is no intent for these bonds to completely take over the role of Fannie or Freddie in the lending market, but maybe it will help to give the banks another way to keep funding liquid so they can continue to lend to, hopefully, well qualified borrowers moving forward as we continue our recovery.

To read the original article, click the link HERE.

Do you think this idea will help our lending system?  Share your thoughts in the comments section of the blog!

Sue the Germans to Save our Economy! Well..maybe not.

I know we all want a villan in this financial meltdown we have experienced the last 5 years.  We would love that villan to be an entity we can dispise and can easily never do business again. 
Hey, I know, lets blame the Germans…our old enemies from the last two world wars!  That’ll be an easy one for everyone to jump on the bandwagon to hate!  I hope this sounds as rediculous to you as it does to me…but that appears to be just what our federal government is doing us right now as they proceed to begin a lawsuit against Deutschebank. 
The lawsuit claims that Deutschebank made a $5 Billion worth of bad loans that they sold into government backing (FHA) and then didn’t continue to track those loan’s default rates after they initiated them.  In short…Deutschebank is accused of making the same loans that every American bank was making (which, by the way, conformed to the overly loose underwriting guidlines that were established by the federal government during that time to encourage home ownership for “all” and economic growth) and then after it was too late to revoke those loans they weren’t “doing enough” to track them and stop them from defaulting further after they sold the loans to investors (again like every other bank was doing at the time). 

When this exact same scenario happened with Bank of America, Wells Fargo, Chase, Citi, and hundreds of other American banks showed similar losses and have caused mortgage giants Fannie Mae and Freddie Mac to hemorrage money like a politician with a hankering for pork, we decided to give the banks $700 Billion in bailouts to help them get back on their feet (and off the books the Federal Reserve has pumped Billions more into keeping Fannie Mae and Freddie Mac afloat).  The American banks made the same Billions in bad loans, stuck taxpayers with the bill, sold them to investors in toxic packages that were destined to fail (but somehow were still rated as safe investments by the rating bureaus…those same rating bureaus who have yet to face any repercussions or regulation changes in this meltdown) and once they started failing were extremely slow to start doing anything to try to save or track any of the loans defaults to prevent more of them.  Hmmm…sound familiar to anyone?

The only real difference in this entire scenario that I can see is that the American banks, if they fail, have to have the FDIC pay back all of their account holders up to $250,000 of lost money.  The FDIC almost went broke over the last few years handling those payouts for banks like IndyMac and the hundreds of others that closed their doors over the last 5 years.  The FDIC could hardly have afforded to protect the money of account holders for banks like Citi, Wells, Chase, or BoA  without going bankrupt…they are too big (which is why they are “too big to fail.” If FDIC failed to back the accounts on one collapsing bank it could cause a real great-depression-like meltdown of our ENTIRE financial system).  So these banks we bailed out.  Since Deutchebank is a foreign bank, only their American divisions receive FDIC protection (Deutschebank has two American Trust divisions that are set up to be covered under FDIC but their international operations beyond our borders would not be).  While Duetschebank is one of the world’s largest banking institutions if we sue them into oblivion our goverment would only have to cover a small portion of their account holders losses.  The rest of the losses would have to be dealt with by people in other parts of the world.  I know we want to blame someone for this mess, but I just don’t see how Deutschebank is really the one to shoulder the blame for all of this while the rest of the banks (and the rating agencies) get off scott free…but then again I didn’t feel blaming the loan officer and cutting his/her pay for helping people getting loans that followed every rule of the day was really the right way to go either (but that’s just what we did 4/1/11 with the Frank-Dodd Bill). 

I could be off base with this analysis, but I don’t think so.  If you have a different opinion, voice it in the comments. 

I look forward to the debate, and Keep Dreaming!

The Truth About Credit Scores and Mortgage Delinquency

Today Eileen Ambrose of The Baltimore Sun reported on a study conducted by FICO into the true damage that happens to a person’s credit score when they miss mortgage payments or go through a short sale or foreclosure.  They analyzed how the score would be impacted if you had a high credit score (780) a good credit score (720) and an average credit score (680) and how long it would then take your score to recover back to its previous level if you had no other damaging factors.

The study produced a number of interesting results.  First, it debunked a myth which exists within our industry, and that is that short sales damage your credit score less than foreclosures.  As both are reported as defaults upon your mortgage and both result in losses for the lender, they damage your credit score equally no matter what your credit score was before.  In both short sales and foreclosures, it can take a long time for your score to recover from the damage caused by a default event (3 years if you have a 680 score at the start to rebuild your score to a 680 again, or 7 years to rebuild your score to its starting point if you had a 720 or above).  Now there is truth that you can qualify to buy a home again sooner after a short sale rather than a foreclosure, as both FHA and Fannie/Freddie have rules about how long you must wait after a foreclosure before being allowed to purchase again, and generally those rules are applied in a much shorter amount of time on a short sale (usually 5 year limit for foreclosures and 3 years for short sales).  If you could get your score back above the minimum of 620-640 used for FHA right now within 3 years of a short sale it would allow you to recover faster than a foreclosure…just it would still take another few years to get your credit score back to where it was previously. 

One other thing from the study I found interesting was how badly being a single month behind on your mortgage affected your credit score.  While I always knew the biggest component of a person’s credit score was their history of paying bills on time, I didn’t realize that a single missed payment would affect their credit score by over 10% of their current score!  If a person with a 680 credit score missed a single mortgage payment their score would drop between 60-80 points.  You might think that missing a payment just once when you have a great credit history might be met with a little more forgiveness than if you had a history of missing payments in the past (or a lower score).  Not so…in fact you get hit even worse for missing a single payment if your credit score starts higher.  If you had a 780 credit score and missed one payment your score would drop between 90-110 points off of that one offense (and that can take up to 3 years of perfect credit records to restore your score back up to your previous 780 level). 

What this study really showed was that you have to be on time with your payments if you want to have a good credit score.  Missing even one payment can do damage that can last for years and is far more significant than you might think if you didn’t know better.  This is very important for people to understand, whether you own a home now, intend to buy one in the future, or even just want to be accepted for nice rental homes instead of having to live in low end apartment complexes the rest of your life.  All of these things require good credit scores to do, and it can take years to restore your score once you damage it!  Share this article with those who are important to you so they can better understand what they need to do to protect their credit scores.  Keep Dreaming!

The article from the “Sun” can be found at: http://www.baltimoresun.com/business/real-estate/bs-bz-ambrose-fico-scores-foreclosure20110502,0,1824554.story?page=1

4 Tips For The Home Loan Process

Over the past several months I have heard stories from several Realtors, Loan Officers, and my wife (who is a Loan Processor) about clients who had their loans denied because they were un-willing to provide financial documents and verification which was requested by their lender.  Not only were these people protective of their information, but they got downright hostile in many cases when asked to provide documentation showing where they got certain checks, why they withdrew certain amounts, or why they opened new credit cards in the last few months.  While I can agree it can be frustrating to go through the “Inquisition” that loan underwriting has become over the last few years, let me offer some advice to anyone going through the loan process in today’s market.

1.  Don’t Shoot the Messenger, Or Your Loan Processor.
Loan Processors are not much more than secretaries with a fancier title.  They are given your file after your loan officer collects it, they make sure all of the “normal” needed documents are there, and if they are they pass your file to underwriting.  If you hear from a loan processor requesting something, they are doing so because someone higher up in the bank (an underwriter, executive, or their loan officer) is requiring them to do so.  They NEVER have the authority to change any rules or requests if you don’t like what they are asking for, so yelling at them will NEVER do you any good.  It can, however, do you bad.  If you scare or piss off your processor so much that they are reluctant to call you again it might delay your file getting completed, which can delay your closing.  Processors are on your side…get them what you need and they will get things done so you get your loan.

2. If the IRS Doesn’t See It, It Doesn’t Count
If you make income in a way that is paid under the table and you don’t report it to the IRS your bank can’t use those funds for how much you can qualify for on your home loan.  If you collect any “under the table” checks during the time your loan is in process, DON’T CASH THEM UNTIL YOU CLOSE ON YOUR LOAN, or really for 2 months before hand either.  All of those checks/deposits will need to be shown as to where you got them from, why, and more.  In short, it creates a major headache. 
On a similar subject, if you have a ton of deductions on your taxes where it looks like you made almost nothing to get a ton of taxes back…you probably won’t qualify for your home loan either.  If you made $50,000 and had $45,000 in writeoffs the bank can only count your $5000 profit towards your home.  Since you can only use 38% of your post tax income towards your housing payments you would only qualify for a home that would cost $159 per month in that scenario…Have fun with that $22,000 home loan.  Tons of deductions are great for getting taxes back, but really bad when it is within the last 2 years before you go to buy a home.

3.  Once You Start a Loan Application, Don’t Touch ANYTHING!
When you are in the process of buying a home a lender checks your financial information twice.  Once at the very beginning and once at the very end.  They want to see that your financial information is pretty much exactly the same at the end as it was at the beginning, and if anything has changed, they are going to HAVE to ask you why.  If you have a lot of money in stocks, bonds, IRAs, or multiple accounts, once you apply for your loan resign yourself to the fact that YOU CAN’T TOUCH THEM FOR THE NEXT 60 DAYS!  If you move the money around at all they will need documentation showing the transfer and why you did it for each and every single transfer that you do.  This isn’t just annoying, its time consuming and can delay a deal by days if you aren’t quick to get them what they need after they do their final checks at the end.  If you are at the opposite end of the spectrum and are short on money, do yourself a favor and don’t open a new credit card, buy furnature, pay for your moving truck (and especially don’t buy a new car) until the day AFTER settlement.  If the bank is requiring that you have a certain amount of money left in your account (called reserves) after closing and you spend that money prior to settlement they will deny your loan…and I have seen this happen to people at the closing table.  Give yourself a few extra days to complete your move and just don’t spend any money (other than basic food and gas costs) until after closing is done!

4. Its Now The LAW!
While the bank requiring you to provide documentation of the $50 birthday check from your Aunt Mavis may seem excessive and un-necessary to you, it is required under federal guidelines that they be able to show the source of all funds that come into your account if it isn’t your regular paycheck.  Homeland Security rules require the banks to do this to prevent the transfer of terrorist funds, especially for the use of purchasing US property.  While we no longer have to worry about those funds coming from Osama Bin Laden (Yay!), the rules have been there since 9/11 and will be there long into the future.  Even if it seems stupid, trivial, invasive, or annoying…take a deep breath and ask yourself- “Do You Want The Money?” If the answer is Yes to that question…get the bank whatever they ask for.  It would take an act of congress in most cases for them to be able to make an exception for you…and I doubt your loan exception would make it out of congressional committee 😉
If it isn’t required by Homeland Security, than what they are asking for is probably required under the new lending and underwriting guidelines set up by FHA, Fannie Mae, and Freddie Mac.  Failing to follow these guidelines can result in fines of up to $250,000…and trust me the bank won’t pay those for you no matter how big your loan is.  Your business isn’t THAT valuable to pay fines that big!

I hope that these tips will give you a little insight into today’s lending world.  Forward this to anyone you know who may be trying to navigate the loan process for themselves, or if anyone is thinking about it.  Keep Dreaming, and remember that Loan Processor you are venting at about something she can’t control is probably someone’s wife…like mine!

White House Proposes Plan For Housing…But Does It Have a Basis in Reality?

A loan officer friend of mine today forwarded me an article on the Obama Administration’s new plan for housing that they put forward.
http://www.washingtonpost.com/wp-dyn/content/article/2011/02/11/AR2011021102035.html?wpisrc=nl_natlalert

A short summary for those not inclined to read for themselves…
Obama wants to phase out Fannie Mae and Freddie Mac while also reducing the number of loans coming into FHA.  Since the government practically owns Fannie/Freddie, and most of the loans completed today are done with FHA backing or VA financing, the government is really either insuring or financing nearly every loan in our housing market today.  While I’m not a major fan of this, I’m not sure now is the time to attack this “problem,” and especially not in the ways that the White House is proposing, by increasing fees and downpayment requirements to use government backed loan options.  The truth is, at this point, there are NOT any options for loans out there that aren’t government backed.  Banks aren’t really in the business of lending money any more the way they used to be.  They lend money, sure, but really only at this point when they either know they can sell it to another investor (using Fannie/Freddie) or when they know the loan is insured to protect their investment (FHA).   I only know of 2-3 bank programs where a bank will finance a person’s loan without an intention to sell it when it isn’t FHA backed.  All of those programs are extremely limited, either in who can get the money (specific job fields) or how much can be lent.  So what happens to our housing market when we reduce the options (or make them more expensive)  that people have to get loans?  The government thinks by making their programs more expensive that it will allow private investors to be more competitive in the loan offering market…but where are those investors right now?  Who would be stepping in to take the place of these massive government lending an insuring agencies?  Lets be honest…who would want to right now?

If foreclosures continue to be a risk for financiers in housing (and high un-emploment rates that aren’t rapidly shrinking say that they will remain a risk for some time to come) what investor is going to put their money into a 5% growth fund that takes 30 years to pay off?  With housing prices declining, still at the moment, even with the bottom in sight, is it the best place to put several hundred thousand of your dollars at a time if you are that rich?  At the moment, with the stock market increasing gradually again, I would be putting my money there before housing.  I don’t think that people smart enough to make enough money to fund a loan are going to look at the situation much differently that I am right now.

So if the government loan options are more expensive and no private investors step up, that all we have accomplished is to make home ownership more expensive for Americans yet again.   This reduces demand for housing (fewer people can afford to buy) while our supply is still relatively high.  Basic economics say that this course of action will cause another decrease in housing prices. 

I don’t necessarily like that my tax dollars are protecting banks and funding the recovery of housing nationwide.  This is actually a remarkably conservative idea from this administration, trying to find a way to reduce the government’s involvement in an aspect of society, so I love the concept…but this isn’t the time to make this type of change.  If we were back in the market of 2003 when investors were lining up to give housing loans (even to people who didn’t deserve them-aka subprime loans) than this plan would work great.  It could also work well if the interest rates were high enough to encourage an investor to put their money into housing for a higher rate of return.  Maybe if our economic recovery was complete so that we wouldn’t have risk of foreclosures and decreasing prices.  But we have none of these things, so right now, all this plan can do is harm the fragile beginnings of the recovery that are starting to take root.  Mr. Obama…your plan has merit, just please hold off on it until the economy is in position to handle such a change.  Comment, Share, Link, and spread the word.  Above all…Keep Dreaming!

Positive News on the Housing Front

Last Thursday congress quietly pushed through a piece of legislation to help keep our housing market moving at least at its current level.  H.R. 3081 was passed to extend the conforming loan limits for FHA, VA, and Fannie and Freddie for another year (to September 30, 2011) instead of letting them expire that day.  These conforming loan limits were adjusted last year, after years of stagnation to account for the changes in housing prices that had occurred over the last decade.  For those that are not aware, the conforming loan limit is the highest amount of money that can be lent to a person without charging them additional fees or interest rate increases (loans that exceed the conforming limit are called Jumbo loans.)  By keeping this limit up at the current levels, congress is allowing more people to be able to get homes at the lower interest rates that prevail in today’s market, which should help keep things moving in the right direction (or at least shouldn’t get worse). 

If you would like to know the conforming loan limit for your area please contact your local Realtor or ask me to look it up for you in the comments.  They differ by area of the country, and even county to county, so I cannot just give a list of them here.  I hope this news is as heartening to you as it is to me.  See you tomorrow, and keep dreaming!

Dennis Cardoza (D-CA), What are you THINKING?

So today I am out doing my research and come across information that there is a bill floating around (The Home Act: HR 6218) proposed by Representative Dennis Cardoza of California (D) to bring back some of the extremely loose lending practices that got us into the financial mess a few years back.
Dennis is proposing to have a No Documentation, No Credit, No Appraisal re-fi program available for people who currently have government backed (Fannie and Freddie) loans to allow them to re-finance into a fixed program at today’s rates.  Wait a second…did we all read this right…NO documentation or credit needed?  Isn’t that what got us into this mess in the first place?  Lending to people who didn’t have the income or the credit to afford the homes?  Mr. Cardoza *THWACK* that’s me trying to smack some sense into you!
First, Fannie and Freddie already have a rate relief program in place to refinance people up to 125% of their home’s current value.  It requires some documentation to make sure they aren’t delinquent and about to be foreclosed on (though even here exceptions are made if they can afford the reduced payment but not the current payment) but is generally pretty easy to get through, according to my wife who is a mortgage processor. 
Next, if we aren’t checking these people out to make sure they can afford the new payments we are just delaying the inevitable foreclosure that will STILL happen, even with this refinance.  Why waste people’s time doing something that won’t actually do a darn thing? 

To be honest, I would whole heartedly support this if it were changed in one little way, requiring a certain basic standard for income and credit, but waive the appraisal on the home (maybe also make it available for FHA/VA since they don’t have a rate relief program available now like Fannie and Freddie already do).  In THIS format we would only be modifying the loans for people that would be able to keep their homes at this reduced rate.  They could free up a little extra of their income to go back into the economy in other spending.  It would also lower the rate of strategic foreclosures (where people walk away from homes they are underwater on and cannot reduce rates on), as these people may decide at today’s rates their home is still an investment worth keeping over time. 

Instead, we get this…redundant, un-neccessary, and ill conceived idea to fix our mortgage woes.  If this is what got us in trouble (sub-prime no doc lending) how is it going to be what gets us out of trouble, Mr. Cardoza?  It won’t but it sure does make you look insane (Insanity: Doing the same thing over and over and expecting a different result despite getting the same results every time). 

Thanks for reading, you can find the source bill I am discussing at Htt p://cardoza.house.gov/uploads/The%20HOME%20ACT.pdf.  See you tomorrow and Keep Dreaming!

Market Confidence Up Among Buyers

It was reported today by Fannie Mae that in a recent poll, 70% of people in our nation felt that now was a good time to buy a home.  This can only be positive news for our real estate market moving forward.  If more people become interested in buying homes, realizing what good deals there are to be had out there, it will reduce our back logged inventory, creating a more balanced and level real estate market.  Now that we have a large portion of our population realizing that it is, in fact, the most affordable time to buy a home since the 1970’s, its time for more people to begin acting on that knowledge to spur this recovery on.  If you know someone who is renting, and probably could afford to own a home, or if you yourself have been thinking about buying…STOP WAITING!  These interest rates at historic lows won’t last forever, and have actually been creeping up over the last 2 weeks (only by .25%, but its still more than it was before).  If you want to get the best deal, you have to go out and make it happen BEFORE the recovery is universally acknowledged.  By then, rates will be back at a more normal 5-6% since they won’t need to give such good deals just to get people in the door, the inventory will be reduced meaning there will be less options for you, and prices will be either level or ascending meaning that the sellers won’t be so quick to work with lowball offers and requests for large amounts of seller help.  If you want your part of the best real estate market for buyers, than make it happen.  Call your local Realtor if you have one already (I’m in Maryland,  so if that’s your local area, call me 443-745-1593), or if you need a recommendation for someone near you in other parts of the North American contenant, call me as well!  I can recommend you to great people I know nationwide.  Get a great deal, help our nation recover faster, and get great tax benefits from ownership for the rest of your life: Everyone Wins!

This Week’s Featured Loan Program: The 20 Year Loan

This week we are going to talk about a product that allows you to pay off your loan in 2/3 of the time of a standard loan program and at a lower interest rate.  The 20 year Conventional Loan Program, available today at a rate of 4.25%. Read below for the costs and advantages of this program.

Mortgage Rates and Programs: The Much Maligned ARM

As promised last week, today marks the second installment in our weekly article on mortgage programs and rates.  This week we will be discussing the Adjustable Rate Mortgage Loan, or ARM.

Its almost laughable how bad a rap the ARM has been given by the media.  This program has been saddled with the blame for most of our financial mess, though in reality it never had as much to do with the loan program as it did with the types of people that were able to get these programs at that time, who probably should have been buying homes at all!

Today, ARM’s are generally only given to high quality loan candidates, and are best used if you have a plan for the property that you are buying that involves moving again within 5-7 years.  Read Below for the rates, overviews of the loan programs, and the best ways to use them.