Articles

David Reed copyright 2008 (reprinted from CD Reed Newsletter)...to subscribe to my newsletter, email us! 

Saving the Housing Industry Before we know it, we'll have some sort of government "fix"... The Senate and the House both are in competition to show how much they care about our national housing situation.  The one that sticks out the most to me is the $400 billion given to cities to buy, fix up, and sell foreclosed homes.  The idea is to keep home prices from falling any further. I have two problems with this. If foreclosed homes are just sitting there with no offers on them then why does the Federal Government think that a city (oh, I'm sorry, you and me) can buy them, paint them and suddenly they'll sell?  Does the Federal Government have better Listing Agents than banks do? If homes haven't sold I'll just bet it has something to do with the prices being too high.  They'll have to come down some more before people will buy them.  Prices go up, prices go down. This proposal is nothing more than creating a false economy.  Cities will buy properties,  fix them up then wait for the bevy of borrowers to buy these new-found deals?  Come on, this won't work.  If a house doesn't sell it's due to there being no willing buyers, at least at the price that's currently being offered. Would the banks object to such a plan?  Why would they?  They've been trying to sell their foreclosed properties with no luck.  Suddenly the city comes in and writes them a check using money that belongs to you and me. My second problem?  Why is the government keeping housing prices from falling further in the first place?  That's the open market's job.  But for the sake of argument, okay, let's step in and prop up the price. But if that logic works then the reverse has to be true as well: If the government thinks there should be a bottom for real estate prices they should also think there should be a "top."  After all, if the government stepped in a limited price INCREASES to say, 2% per year, then we wouldn't be in this mess, now would we? I say we'd better watch out for the unintended consequences of this nonsense.  The heart might be in the right place but goodness gracious, what a precedent! -DR   Bear-Stearns, the Fed, OFHEO, Gold, the Dollar... So many factors, many are simply guessing...but last months' inflation numbers came in flat In a recent issue of mine I said that rates wouldn't go below 6.00 percent as long as inflation loomed large. Well, last month's inflation data essentially came in flat.  That was in concert with: The Bear-Stearns panic made way for a flight to quality, and mortgage bonds benefited The Office of Federal Housing Enterprise Oversight (OFHEO) and the GSEs have reached an agreement to pump out an additional $200 Billion for the purpose of providing lenders with more money to make loans (good loans, the Fannie and Freddie kind) The Fed's rate cut of 3/4 percent instead of a full point is seen as anti-inflationary helping to restore confidence in the Dollar again and to help keep a lid on Gold and other commodities.  BUT:  While this is temporarily pushing rates lower, we're simply in uncharted territory.  Investors don't have a road map for this kind of thing and there's a lot of guessing going on. In times of uncertainty, investors who want their money to work for them place it in bonds; and now that the Fed and OFHEO have come to the aid of conventional mortgages we could see rates drift lower. Repeat after me:  "As long as inflation is held in check!" -DR "Jumbo" FHA Mortgages They're here, but they cost more than their younger sibling....   As part of the Economic Stimulus package, conforming and FHA loan limits were temporarily increased to $288,750 for both Williamson and Travis counties.  This new limit will be good until December 31 of this year. Prior to this temporary package, the FHA loan limits for our area were $200,160.  The initial reaction was "wee-hooo!" but as of March 17, when lenders introduced the new "Jumbo" FHA loans we also determined that the higher loan limits will come with a premium, in the form of a higher rate. Still only 3% down and with all the bells and whistles FHA loans offer in the form of relaxed ratios and credit guidelines but the higher limits have no track record with HUD.  There is nothing to rely on that shows any performance with these new loans. So lenders offset that perceived risk with higher rates.  How much higher?  Not a lot but still higher.  Current Jumbo FHA 30 year fixed rates are about 3/4 percent higher when compared to the standard FHA limit. That's quite a bit higher but still lower than the spread between conventional Conforming and Jumbo programs. Here in Austin these new FHA limits provide a wider buyer pool; especially for first timers trying to get into their first home with little money down. -DR Further Rate Cuts By the Fed Won't Matter As long as commodity prices continue their surge, don't expect mortgage rates to come back down.... A few issues ago I mentioned that rates could continue their downward trend as long as inflation would be held in check. January's core inflation number came in at 2.5%, not terribly high but anything above 2.00% keeps the Fed nervous. Gold flirts with $1,000 per ounce Oil consistently trading above $100 Commodity prices in general pushing higher The Weak Dollar makes everything more expensive Today's Unemployment Report showed that we actually lost 63,000 jobs last month but instead of mortgage rates falling on the news the street rate has barely nudged since yesterday. All based on inflationary fears, both real and imagined.  Granted, we're still at mortgage rate levels seen about a year ago but if inflation had been held at bay we might very well be seeing 30 year mortgage rates around 5.00%, equaling record lows we saw in 2003. Instead, mortgage rates are closer to 6.25%. Keep a sharp eye out on those inflation numbers, and be prepared to explain to your clients why mortgage rates aren't dropping even though the Fed keeps cutting the Fed Funds rate. -DR The Fed Might Just Have Its Hands Tied.... What if they don't do anything?   The Fed cuts the cost of money to banks, making money cheaper.  The theory is that if banks can borrow money at super-cheap rates they can then offer lower rates to their business customers.  Cheap money. But sometimes money can get too cheap, meaning the value of the dollar declines against other currencies.  Right now for instance the Dollar trades at a record low against the Euro. Cheap dollars means it takes more dollars to buy stuff. That's inflationary.  That causes mortgage rates to rise. Now the Fed runs the risk of creating more inflation each time they make money cheaper by cutting rates. There is likely another round of rate cuts in store at the next round of Fed meetings but the markets have already priced that in. I don't see mortgage rates getting below 6.00% for quite some time.  At least not in this 'go-round.' What's going on right now.... I wish I could think up of a better title for this article but it really gets to the point: lenders are shutting their doors leaving buyers, sellers, agents and everyone else out in the cold and you need to know why. It's important to know the 'why' but also 'what you can do about it' but that would take up too much space so I'll split it up into two articles. Okay, who exactly is going out of business?  Lenders who have relied on 'alternative' or 'subprime' loans as their staple.  You may not recognize some of the names such as Aegis or American Home but they all have one thing in common:..they offer loans as an 'alternative' to conventional loan product, often characterized by no or low down payment, perhaps relaxed credit standards but most usually some part of the loan is not fully documented, sometimes called 'stated' or 'no verification' loans.   Most of these lenders relied heavily on mortgage brokers to market their product. As well, the subprime turmoil has been well documented when the subprime biz began to self-destruct late last year.  Either way, these loans are the culprits. On the other hand, depending on which report you read, the emergence of Alt and Subprime loans over the past few years has contributed to the record home ownership levels never seen in the United States, approaching 70%.  7 out of 10.  That's a lot.  And these two loan types have make up about 35% of all loans closed last year. Alt and subprime lenders are closing their doors because they run out of money.  Loans are originated by a loan officer, be it a mortgage broker or mortgage banker, then ultimately packaged with other loans and sold to Wall Street as a security...a mortgage-backed security. When the subprime fiasco hit last fall, those investors who bought subprime mortgage-backed securities refused to buy them because of a high-default rate.  This was purely the fault of the subprime originator...increasingly lowering credit and documentation standards in order to close more deals.  Yeah, people got to own their own home but in more than a few instances not for very long. As these securities began to lose value, bond raters lowered the value of those mortgage-backed securities.  Essentially, a 'margin call' was issued which the original lender couldn't pay for. Mortgage lenders don't have a vault full of money to make a loan, they have a credit line they use to fund the mortgage but then sell that loan to replenish their funding ability.  If the lender can no longer find a buyer for the loan they just closed, they have no more money to make new loans. They then have to close their doors.  Rates Rise Over Past Week at Fastest Pace in 20 Years! The Economic Stimulus' Package of Unintended Consequences Fixed rate mortgage product has gone up a full 1/2 of one percent in one week's time; the fastest increase in two decades. Not kidding. While there has been a certain amount of technical selling of mortgage bonds and mortgage-backed securities - dropping the price of those bonds and increasing rates - the culprit of such a rise in rates just might be the possibility that the Economic Stimulus Package just might work. The theory is that if someone suddenly gets $1,000 in their hands and it's their patriotic duty to go out and spend it then more money chasing the same amount of goods and services causes inflation... [Let me pause here and ask the question:  if keeping more of our own money so we can buy things is such a great idea then why not let us keep it in the first place...hmmm?] That is what's happening to mortgage rates as you read this.  The fear that the economic stimulus package will send the country on one huge binge at the mall to jump start the economy will bring on still more inflation...not just fear of inflation but the real thing.   Rates are now where we were back in mid-December and we've crossed two critical support levels...this continued rise would offset any help that raising the conforming loan limits would do. -DR And Speaking of Raising Loan Limits... When, how much and where?   Congress enacted temporary loan limit increases for both conforming and FHA loans.   But details on how the loan limits will apply are a bit murky. First, trough, when?  Probably around March 17th, just in time for St. Patrick's day.  Why then?  HUD has 30 days from the day the bill was signed to establish what the new loan limits will be. For conforming and FHA loans, the loan limits will be no more than 125% of the median sales price for HUDs MSA.  In Travis/Williamson County the most recent data showed our median home price to be about $239,900. That's great news for FHA loans.   125% of $239,900 is $299,875!  The current FHA loan limit is $200,160 for our area so that's a huge benefit. Especially for first timers (or second or third) that can't seem to find the right home here in Austin for $200,160! FHA asks for 3% down, has less stringent credit and income guidelines and is simply much easier to qualify for. CD REED is an FHA lender and we are excited about this new change! Conforming loans?  The current limit for conforming loans is $417,000, higher than 125% of the median price limit of $299,875.  In areas where the median sales price for a home is higher than $333,600 then the new rules will help (think East and West coast, Hawaii, etc..). But here in Central Texas we won't see any benefit from conforming loan limit changes. The buzz on the street was that suddenly all conforming loan limits would automatically be raised to $625,000 and higher in high cost areas....but the truth lies in the median sales price. These changes are "temporary" in that they're set to expire 12/31/2008 but I've never seen anything from the government get phased out.   It's possible these changes will stick.

What You Need to Do Right Now Is the sky falling?  No.  Most mortgage companies don't rely on Alt or Subprime business, including mine.  But as mentioned, this type of lending can make up to 1/3 of all loans issued.  At least until recently.  So it is a concern. If you're a Realtor, you need to verify that your already-approved client isn't relying on a subprime or alternative loan.  A colleague sat at a closing two weeks ago with his clients and the loan didn't' fund because the lender went out of business.   Here in Texas. Can you imagine?  Sitting at the closing table and being told that 'your lender is out of business and you have no loan.'  Without warning.  There's nothing a loan officer, or anyone, can do about it.  Sue the lender?  Sure, why not?  But they're either in bankruptcy or their doors are closed.  And this is happening without the loan officer knowing in advance. If you're a borrower and you've been approved using a 'stated' or 'no verify' type of loan or a subprime loan then the first thing you need to do after reading this is call your loan officer or lender and let them know you're concerned and want to close sooner rather than later. This will all shake out.  And I'm hoping all the lenders who made loans they should not have made get shaken the most.

What exactly is a 'buy back' and why have I never heard of it?

A buy back is the current problem de-jour in the subprime mortgage business.  A buy back means a loan didn't exactly go as planned.

Here's how lending works:  mortgage companies originate a bunch of loans. When a mortgage company makes too many loans, soon the mortgage company isn't a lender any longer  because they're out of money to lend.  They're 'lenders in waiting.'  To replenish their money so they can go out and lend some more, they sell the loans. 

This is one of the major differences between mortgage bankers and mortgage brokers. Bankers sell loans, brokers do not.   Brokers don't have to worry about cash in the bank or keep up a credit line that matches mortgage markets.  Bankers do.

'Flow' selling means selling a mortgage one by one.  Most mid-size mortgage bankers sell in this fashion.  'Bulk' selling means lenders pile up their mortgages in one big pool of funds, then sell that pool to investors who invest in such stuff.  Technically, mortgage loans are pooled into securities that can be bought and sold on Wall Street. 

When you hear the term 'mortgage-backed securities' this is what's being referred to.

These loan sales don't surprise anyone because these sale agreements are written up in advance between the buyer and the seller based upon how much the seller will pay, when the loans will be delivered and various other factors such as quality, note rate and so on.

The major '...and so on...'  element is the 'buy back agreement.'

This agreement states that the seller of a mortgage will buy that mortgage back from the original buyer if:

1:  There was fraud involved
2:  A first payment default has occured or paid off early
3:  The loan went into delinquency during the first 180 days

Mortgage lenders who originate then sell loans don't have the kind of money it takes to buy loans back.  If they had that kind of money it would be likely they wouldn't have sold the loans in the first place.

This is why some lenders have closed down or filed for bankruptcy.  They couldn't afford the buy backs.

Foreclosure rates... ...in subprime lending have surpassed 4.00% nationwide.  Note that this number is the number of homes that have gone through foreclosure, not the homes that have started in foreclosure yet got out of it. According to the Mortgage Bankers' Association, about 3/4 of all homes that go into foreclosure never get foreclosed on.  Either the homeowners make a repayment plan with their lender or the home is sold. Still, 4.00% is very high.  At that rate, lenders wouldn't be lenders very long.  But there are rattlings that we need to more thoroughly regulate the subprime industry altogether.  Maybe.  But the lending industry is heavily regulated as it is, bad guys are bad guys in every business.  Let's not harm the good guys while we're beating up the bad guys. Let's look at it another way, with a 4% foreclosure rate, out of every 100 subprime homeowners there are 4 that were foreclosed on.  Do we take away homeownership from those other 96 people because of the unfortunate 4?  I don't think so. Instead, we should find out  why those 4 were foreclosed on and address that issue.  Not throw the mortgage baby out with the bath water. And of those 4, which ones experienced income problems due to loss of job, illness or divorce?  Probably 2 of them?  3?  I don't know exactly but I think those in Congress need to step back and take a deep breath.  There's lots of finger-pointing today on Capitol Hill...let's make sure those congressional committees really look into this issue and not look for another photo-op. That's what I think.

 So what's going on...really.