The VA Loan Guaranty program had a big year in FY11, driven by a surge in refinance loans and a tighter lending climate that’s drawing renewed attention to this flexible, government-backed mortgage.
The VA guaranteed nearly 360,000 loans last year, a 14-percent increase from FY10. Since FY07, the number of VA loan guaranties has surged an astounding 168 percent. At the same time, these no-down payment loans have been the safest mortgage products on the market for the better part of three years, according to data from the Mortgage Bankers Association.
“The continued strong performance and high volume of VA loans are a testament to the importance of VA’s home loan program and a tribute to the skilled VA professionals who help homeowners in financial trouble keep their homes,” said Secretary of Veterans Affairs Eric K. Shinseki.
The sustained growth of VA loans comes as lenders have tightened requirements in the wake of the subprime mortgage meltdown. The program features more flexible credit and underwriting criteria than other loan programs. But far and away the most attractive benefit is 100-percent financing. About 9 in 10 VA borrowers purchase a home with no money down, and sellers often pick up most or all of the veteran’s closing costs.
For VA borrowers, who on average have less than $7,000 in assets, that kind of financial boost is tough to find anywhere else. While FHA loans continue to dominate the overall mortgage environment, even that program’s minimum 3.5-percent down payment can prove challenging for veterans and active service members.
What’s perhaps even more surprising is the VA loan program’s track record in terms of foreclosure and delinquency. Talk of borrowers needing more “skin in the game” has ebbed some recently, but it’s still a common refrain in industry and legislative circles. Granted, VA loans constitute a small slice of the mortgage market, but these no-down payment loans are turning the “skin in the game” argument on its ear.
The VA’s rates for foreclosure and serious delinquency have been the lowest of all loan types, including prime loans, for the last 14 quarters and 11 quarters, respectively, according to the delinquency survey conducted by the Mortgage Bankers Association.
Much of that success stems from the agency’s commitment to keeping veterans in their homes. The VA incentivizes lenders and servicers to work with borrowers to avoid foreclosure and provides individualized help and assistance to homeowners on the edge. The VA also uses some credit and underwriting standards, in particular its residual income requirement, that help lenders assess an applicant’s true ability to handle the financial burden.
But VA borrowers themselves deserve part of the credit, too.
With interest rates still hovering near record lows, not to mention thousands of soldiers set to return home from Iraq and Afghanistan, the VA loan program is likely to see continued growth through FY12 and beyond.
About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, from Lenderama and Bigger Pockets to the Huffington Post and Motley Fool. A former newspaper and magazine writer, he is also content director for a leading VA lender. Follow him on Google+.
President Obama inherited the worst financial crisis since Hoover and the Great Depression. It follows that getting the country back on track is no easy task and while his new housing plan includes much to support it also includes a provision to dump appraisals when they are most needed.
Dump is really the right word. Fannie Mae and Freddie Mac, says a White House fact sheet, “would be directed to use mark-to-market accounting or other alternatives to manual appraisals for any loans for which the loan-to-value cannot be determined with the GSE’s Automated Valuation Model. This will eliminate a significant barrier that will reduce cost and time for borrowers and lenders alike.”
This sounds great except that the goal of an appraisal is to protect not only borrowers and lenders, it’s also to protect mortgage investors such as pension funds and insurance companies — entities we want to attract or face far-higher interest rates.
The Need For Appraisals
It’s true that appraisals are a cost, but so are food, shoes and tires. The important point is not that appraisal are an expense, it’s that appraisals made by actual humans have value.
For some time there has been an effort to eliminate appraisers from the mortgage process with seers, soothsayers and automated processing. The pretext is that independent appraisals cost money and the computerized systems are pretty good.
Pretty good is an okay standard when you own thousands of loans, but residential borrowers typically have only one or two mortgages. To them, having a property accurately appraised is hugely important so they do not overpay whether they use conventional, FHA or VA financing. Indeed, most real estate sale agreements provide that the deal is off without penalty if the appraisal comes in below the sale price — speak with a buyer broker or attorney for specifics.
But not only home buyers are protected, with a good appraisal the lender does not lend more than it should (thus protecting shareholders) and a mortgage investor does not have excess risk (thus protecting pensions and insurance funds).
If you’re a buyer and make an offer on a property it will not get financed unless the appraiser says the home is worth at least the sale price. Without independent assurance from an appraiser — someone who is paid regardless of the valuation — no lender will provide the mortgage financing necessary to create the sale.
But it’s not just the buyer and the “lender” who are protected, if by “lender” we mean the folks who originate the loan.
Today after most loans are originated they are sold into the secondary market. Packagers gather up 5,000 or 10,000 loans and create a mortgage-backed security or MBS. Investors then purchase a portion of the MBS called a tranche.
One of the most basic protections for buyers, lenders and mortgage investors is an independent valuation of the property. The fact that a buyer and seller have agreed on a price does not mean they have accepted a price that will protect the investor if home values decline or the borrower defaults.
So, yes, let’s move ahead with new and better housing programs to reduce foreclosures and clean-up a system damaged by too many short-cuts. But while we’re at it, let’s not end a basic protection that makes the market safer for buyers, investors and mortgage insurers.
I got a letter from my mortgage lender offering to refinance my home. I could lower my rate, said the letter, and I might save money.
Actually, both claims are correct but the bigger issue is whether refinancing is actually worthwhile.
According to the letter my mortgage rate would drop from 4.63 percent to 4.46 percent if I refinance. That’s right, based on the APR or annual percentage rate, my rate would fall .17 percent. Not a partial .17 percent, not a fraction of .17 percent, but a full .17 percent. That’s about 1/6th of 1 percent.
But wait, there’s more.
And, yes, monthly costs would fall. For instance with a fixed-rate, 30-year $200,000 mortgage the monthly expense for principal and interest would go from $1,028.88 to $1,008.62. That’s a savings right there of $20.26 per month or $243.12 annually.
So the lender’s letter is literally true: I would have a lower interest rate and save almost $250 a year in this example.
Despite the accuracy of the lender’s claims — which are subject to change along with the interest rate according to the letter — the offer is unacceptable to me. Here’s why.
How much would I have to spend at closing to save $250 a year? If closing costs $3,000 for transfer taxes, legal fees, title insurance and other expenses than it would take 12 years of mortgage “savings” to get back my money.
And why are mortgage rates at anywhere near 4.46 percent attractive in today’s world? The latest figures from Freddie Mac show that a typical 30-year mortgage is priced at 3.98 percent — that’s almost a half point lower than the offered rate.
Nope, I won’t be taking the lender’s offer.
But here’s the question: Why didn’t the lender simply repeat it’s last refinancing offer — an offer I took. In that case the rate went down almost a point, I saved about $200 a month and the lender paid all closing costs except prepaid taxes and insurance.
The lender and I both benefited. I got the lower monthly payment and the lender got a crisp, new loan to re-sell at a profit in the secondary market.
In other words, everybody won.
The new refi offer doesn’t work because it’s one-sided — assuming the lender actually provides the terms mentioned in the letter (remember, they’re subject to change).
If I’m going to spend more money on a loan, I certainly would not pay $3,000 in closing costs to save $250 a year. Instead, I might simply increase the monthly payment by $25. While a $200,000 loan at 4.63 percent costs $1,028.88 per month, I might instead pay $1,053.88.
That would reduce the total interest bill over the loan term by nearly $10,000 — from $170,396.80 to $160,502.20 – and shorten the mortgage term by 18 months. This approach works regardless of whether the loan is an FHA, VA, or conventional fixed-rate loan. The concept also works for fixed-rate jumbo mortgages as well.
As to the lender — hey, write me again. Let’s redo the last deal at today’s rates. You know where I live.
John O’Brien is a Register of Deeds based in Salem, Massachusetts. Instead of burning witches, O’Brien believes we should investigate the people who created the notes and documents that have now destabilized the entire property records system. He also believes those who are guilty of criminal conduct should go to jail and not merely face fines.
The Massachusetts official is turning over nearly 32,000 documents to state prosecutors on the grounds that they may be improper. As a result O’Brien says criminal investigations should be started.
If 32,000 documents are questionable in just one recorder’s office, then what is the total nationwide?
In considering this matter, let’s recognize that a sworn foreclosure affidavit is used by judges and courts to throw people out of their homes for not paying FHA, VA or conventional mortgages.
If the affidavit is wrong — or fraudulent — it means an innocent family can unfairly be made homeless by order of the court. This is a big deal, certainly as big as shoplifting or stealing a cow, crimes we seem to prosecute with great zeal.
The O’Brien release is below:
Says they acted like “criminal enterprise”
Saying that the time has come for a full scale criminal investigation, Southern Essex District Register of Deeds John O’Brien, today has sent some 31,897 of what he says are fraudulent documents that have been recorded in the Salem Registry to Massachusetts Attorney General Martha Coakley, U.S. Attorney General Eric Holder and U.S. Attorney Carmen Ortiz.
O’Brien said that he is asking these officials to impanel a Grand Jury to look into the evidence that he has presented.
“I am confident that these documents will show a pattern of fraud, uttering and forgery. These documents are signed by known robo or surrogate signers, whose signatures were supposedly witnessed by notary publics. In addition, these documents may contain fraudulent information in the body of the documents. I believe that a criminal investigation is the next step to hold the perpetrators responsible.”
O’Brien praised Attorney General Coakley for her aggressive pursuit of wrongdoing in her civil action but noted that other states such as California, Nevada, Illinois and Michigan have launched criminal investigations, and O’Brien is hopeful that Massachusetts will do the same.
O’Brien strongly suggests that the Grand Jury should subpoena both the past and present Chief Executive Officers (CEOs) of the Mortgage Electronic Recording Systems, Inc. (“MERS”), Bank of America, JP Morgan Chase, Citibank, Wells Fargo, Countrywide, Washington Mutual among others. In addition, he is asking that the top officials of DOCX, Nationwide Title Clearing, Inc. and LPS also be subpoenaed.
“These companies have been retained by MERS and its member-banks to produce the documents that I am alleging contain fraudulent information. It is one thing to go after these institutions with a civil action, but the only way to let them know that you are serious is to call them before a Grand Jury.” O’Brien said,
“There is no question in my mind that the officers of these banks and loan processing servicers made a conscious decision to commit fraud and participate in a scheme to deprive the public from knowing the true holder of their mortgage while at the same time avoiding paying billions of dollars in recording fees. It is my opinion that they acted as a criminal enterprise, crossing state lines to commit their crimes and in most cases using the U.S. Postal Service to send these documents to registries of deeds, thereby committing mail fraud. We need to know what they knew and when they knew it. Until the CEOs who allowed these fraudulent activities to happen under their watch are sent to jail for what they did, these types of illegal behaviors will continue.”
Just last week, O’Brien’s Registry received 3 documents from Bank of America, all signed by a known robosigner, Linda Burton.
O’Brien said, “If they are sending them to me, of all people, it is safe to assume that they are sending them to registries across the country.”
O’Brien refuses to record any documents signed by a robo-signer on his list unless those documents are accompanied by an affidavit attesting to the signature. So far, he has not received one affidavit.
“That clearly shows me that those documents were in fact fraudulent.” O’Brien said that if he or anyone else went into one of these major banks and forged a signature on a loan document they would be arrested and sent into jail.
So it begs the question, why haven’t these CEO’S been held accountable? O’Brien cited the case of the individual who walked into a Walmart and tried to make a purchase using a fraudulent One Million Dollar bill. He was arrested and charged with attempting to obtain property by false pretence and uttering a forged instrument.
O’Brien said, “As far as I am concerned, this is what these banks have been doing for years. Make no mistake, MERS and its member-banks are taking people’s homes using fraudulent documents and that is something we do not do in America.” In addition, O’Brien is zeroing in on the major foreclosure law firms that he believes have acted as a co-conspirator in flooding the registries of deeds with these fraudulent instruments.
“These attorneys should know better. They have acted as co-conspirators in perpetrating this fraud. I am sending a letter to the Massachusetts Board of Bar Overseers asking that they conduct an independent investigation into the activities of these firms. Unlike our Massachusetts Attorney General Martha Coakley, I understand that there are other Attorneys General and other public officials across the country who would like nothing better than to sweep this matter under the rug and grant these lenders, loan servicing companies and their foreclosure-mill attorneys immunity for the damage that they have caused, not only to our
economy but to people’s property rights. They would be willing to accept pennies on the dollar, a slap on the wrist, and a promise to never do it again.
“If that should happen, it would be the biggest sellout of the American People that I have ever seen. It would send the wrong message that the big boys can get away with anything. As I have been saying all along, they may think they are too big to fail, but as far as I am concerned, they are not to big to go to jail. The top officials at MERS, its member-banks, servicers and foreclosure-mill attorneys must be prosecuted and held accountable for their fraudulent schemes that brought profits to their institutions by cutting corners, circumventing land recordation systems through fraud, uttering and forgery.”
More that a year has passed since HUD announced that it would investigate 22 lenders. The issue? Layering, the addition of requirements on top of FHA standards.
“The investigations,” said HUD, “are in response to 22 complaints the National Community Reinvestment Coalition (NCRC) filed with HUD alleging that the loan activities of the mortgage originators showed that their home lending practices deny FHA- insured loans to African Americans and Latinos with credit scores as high as 640. Federal Housing Administration (FHA) guidelines allow mortgages to borrowers with credit scores above 580, provided the borrowers have down payments equaling 3.5 percent of the loan amount, or above 500, provided the borrowers have down payments equaling 10 percent of the loan amount.”
In the usual case lenders can set whatever terms they want to underwrite a loan. However, the FHA loan program is an important exception. Here’s why:
“This decision is arbitrary,” says John Taylor, president & CEO of the National Community Reinvestment Coalition, “because the loans are 100% guaranteed, whether the borrower’s credit score is 580 or 780. That means the loans with lower credit scores don’t pose additional risk to the company, so there’s no legitimate business defense for this across-the-board practice.”
“In an effort to make homeownership possible and more affordable for families across the country, Quicken Loans Inc, the nation’s largest online retail mortgage lender, announced they have eased the minimum credit score necessary to qualify for an FHA loan to 580. This change allows more consumers to qualify for an FHA loan, as previous guidelines required a minimum credit score of 620.”
Quicken also makes a good point regarding credit scores in general.
“There are folks who have steady incomes, and a solid payment history but were temporarily affected by the economy or a life event in some way. These challenges can lower their credit score significantly. We believe that a credit score, on its own, is not the sole arbiter of a person’s credit worthiness,” said Bob Walters, Quicken’s chief economist. “This change will open up credit to a significant group of people and allow them to again have access to purchase or refinance a home.”
Tight Credit Standards
With all the complaining about allegedly-tight loan standards — much of which is nonsense — there is simply no justification for FHA layering. FHA mortgages must conform to standards set by HUD, not artificial and arbitrary standards above and beyond what HUD requires. Lenders who simply follow HUD guidelines can be rewarded with originations, profits and 100-percent loan guarantees.
That’s not a bad deal for lenders, borrowers or the FHA. The evidence? For the third quarter of 2011 the Mortgage Bankers Association reports that the general foreclosure rate was 4.43 percent — but the foreclosure rate for FHA loans was 3.27 percent.
So do FHA mortgage borrowers still face credit score layering? The betting here is no. Expect the results of the HUD investigation in about a month.
Mortgage rates are in the dumper.
Freddie Mac is reporting that mortgage rates have hit their lowest levels since last November.
The 30-year fixed-rate mortgage averaged 4.39 percent, its lowest level for 2011. Last year at this time, the 30-year FRM averaged 4.49 percent.
The 15-year fixed and 5-year ARM set new historical record lows averaging 3.54 percent and 3.18 percent, respectively.
One index of a housing recovery would be higher mortgage rates produced by increased loan demand. It should be fairly clear that loan demand is now minimal, a predictable result given continued high levels of unemployment as well as federal spending policies which contracting at the very time they should be expanding.
Don’t believe it: Look at the FAA shutdowns and their impact on jobs and local spending.
There are two interesting FHA mortgage figures floating around that may surprise a lot of people: At the end of June, the FHA had 7,151,199 single-family mortgages outstanding and these loans represent had a balance of $994.6 billion.
That means the trillion-dollar mark should be hit fairly soon, probably in the next month or so.
The enormity and importance of the FHA is sometimes unrecognized. In very simple terms, were it not for the FHA insurance program the housing market would have collapsed and with it the economy.
FHA Loan Limits
This is worth bringing up because of the conversation in Washington. On one hand we have pious worries that the FHA will be over-utilized. On the other there is now a push to continue current FHA mortgage loan limits, limits scheduled for reduction in October.
Think of it as a love-hate relationship.
The Mortgage Bankers Association says it now “urges Congress to extend the higher loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) at least through the end of 2012. While we had hoped improved economic conditions could warrant a return to the loan limits established by the Housing and Economic Recovery Act of 2008, the reality is that the temporarily higher loan levels are still needed.”
And why is that?
“If the temporary limits are allowed to expire on October 1, 2011, obtaining financing will become more difficult and expensive for borrowers in many of our major metropolitan areas, which in turn would inhibit home purchases or the ability to refinance into more affordable mortgages.”
But again, why is that? Why is it that lenders in the private sector, the folks who benefited from government bailouts worth trillions of dollars, are unable to make mortgages without FHA help?
The answer is that the FHA has proven to be very good for both borrowers and lenders.
Skin In The Game
Borrowers see the FHA as a safe and solid insurance program which allows them to finance property with 3.5 percent down. For lenders the FHA is also an insurance program, one which covers 100 percent of any loss.
Here’s a modest suggestion: Lenders now want to retain those higher FHA loan limits and the insurance coverage they provide. That seems okay — but ONLY if we also have an equity requirement for lenders.
Let’s continue the higher loan limits but let’s also reduce the FHA guarantee to something more sensible, say 95 percent of the principal amount, or maybe 90 percent.
In other words, in the same way that borrowers are supposed to have some skin in the game, why not lenders?
If we go by the numbers there’s good news on the foreclosure front.
Okay, there’s relatively good news on the foreclosure front.
Er, well, foreclosure activity is “better” in the sense of current numbers but we should be awfully concerned with what the numbers do not say.
RealtyTrac reports that foreclosure activity in the first six months fell 25 percent when compared with 2010. Still, 1.17 million homes received foreclosure filings of some sort — default notices, auction sale notices and bank repossessions. One in every 111 homes now faces foreclosure.
Looked at quarterly, the second quarter numbers were down 32 percent, the lowest level since the fourth quarter of 2007.
On a monthly basis, June foreclosure activity was down 29 percent from 2010. There were 222,740 foreclosure actions in June.
“It would be nice to report that foreclosure activity is dropping as a result of improvements in the economy or the housing market,” said James J. Saccacio, chief executive officer of RealtyTrac. “Unfortunately, with unemployment rates inching back up, consumer confidence weak and home sales and prices continuing to languish, this doesn’t appear to be the case.
“Processing and procedural delays are pushing foreclosures further and further out — we estimate that as many as 1 million foreclosure actions that should have taken place in 2011 will now happen in 2012, or perhaps even later. This casts an ominous shadow over the housing market, where recovery is unlikely to happen until the current and forthcoming inventory of distressed properties can be whittled down to a manageable number.”
In effect, the foreclosure process is stuck in first, lurching ahead, longing for the robo-signing days when owners could be tossed out of their homes with greater speed, even if foreclosure claims were iffy or required paperwork was incorrect, missing or nonexistent.
In effect, we’re postponing foreclosures for a future day — assuming the paperwork can ever be corrected and brought up to legal standards so that foreclosures will be accurate, both lenders and owners will be protected, and property records will thus be clear and unclouded.
In Oregon, lenders have tried to resolve the paperwork mess by simply changing the law. Brent Hunsberger, writing for the Oregonian, reports that the Oregon House Judiciary Committee defeated legislation sought by loan servicers, title companies and credit unions that would have “relieved lenders of ensuring a property’s ownership history is properly recorded in public records before foreclosing outside a courtroom ” (See: MERS foreclosure amendment dies in Oregon House committee, June 1, 2011)
The RealtyTrac study also provides additional information:
Nevada, Arizona, California post top state foreclosure rates
Nearly 5 percent of all Nevada housing units (one in 21) received at least one foreclosure filing in the first half of 2011, giving Nevada the nation’s highest foreclosure rate during the six-month period despite continued decreases in foreclosure activity. A total of 53,217 Nevada properties received a foreclosure filing from January to June, a decrease of 17 percent from both the previous six months as well as from the first six months of 2010. Overall Nevada foreclosure activity decreased on a year-over-year basis for the fifth straight month in June despite a 19 percent year-over-year spike in REO activity.
Arizona registered the nation’s second highest state foreclosure rate in the first half of 2010, with 2.82 percent of its housing units (one in 36) receiving a foreclosure filing, and California registered the nation’s third highest state foreclosure rate, with 1.96 percent of its housing units (one in 51) receiving a foreclosure filing during the six months. Other states with foreclosure rates ranking among the nation’s 10 highest were Utah (1.65 percent), Georgia (1.50 percent), Idaho (1.49 ercent), Michigan (1.34 percent), Florida (1.28 percent), Colorado (1.19 percent), and Illinois (1.15 percent).
California, Florida, Arizona post highest foreclosure totals
A total of 263,500 California properties received a foreclosure filing in the first half of 2011, the nation’s highest total but down 13 percent from the previous six months and down nearly 23 percent from the first half of 2010. California foreclosure activity decreased on a year-over-year basis for the 19th straight month in June, but default notices and REOs increased on a month-over-month basis, continuing a sawtooth pattern in the monthly numbers.
With 113,641 properties receiving a foreclosure filing in the first six months of 2011, Florida documented the second highest state total despite a nearly 55 percent decrease in foreclosure activity from the previous six months and a nearly 59 percent decrease in foreclosure activity from the first half of 2010. Florida foreclosure activity decreased on a year-over-year basis for the eighth straight month in June, but default notices spiked 44 percent from May and scheduled auctions jumped 17 percent from May.
Arizona’s 77,525 properties with foreclosure filings in the first six months of 2011 was the third highest state total. The state’s foreclosure activity decreased nearly 7 percent from the previous six months and was down 15 percent from the first half of 2010. Other states with first-half totals among the 10 highest in the country were Michigan (61,005), Georgia (60,870), Illinois (60,636),
Texas(55,442), Nevada (53,217), Ohio (44,419), and Colorado (25,744).
Foreclosure Process Timelines and Days to Sell
U.S. properties foreclosed in the second quarter were in the foreclosure process an average of 318 days from the initial foreclosure notice to the completed foreclosure, up from a revised 298 days in the first quarter and up from 277 days in the second quarter of 2010.
The foreclosure process took the longest in New York, at 966 days on average for properties foreclosed in the second quarter, followed by New Jersey at 944 days and Florida at 676 days. Texas posted the shortest foreclosure timeline, at 92 days for properties foreclosed in the second quarter, followed by Virginia at 106 days.
U.S. REO properties that sold in the second quarter took an average of 178 days to sell from the time they were foreclosed, up slightly from 176 days in the first quarter and up from 164 days in the second quarter of 2010. REO properties took the longest to sell in New York, at 309 days, followed by New Jersey at 285 days and Minnesota at 268 days.
U.S. properties in the foreclosure process that sold in second quarter (typically short sales) took an average of 213 days to sell from the time they entered the foreclosure process, down from 228 days in the first quarter but up from 195 days in the second quarter of 2010.
Military members live on the go.
From domestic reshuffling to extended overseas deployments, service members and their families face frequent relocation. Hassles and headaches can easily follow.
All that moving can take a toll on finances and credit health. But serving overseas doesn’t mean military members have to hold off on their pursuit of a home purchase.
Qualified borrowers can secure financing and complete the purchase and financing process from thousands of miles away.
The key: Power of Attorney
Most service members are probably familiar with the phrase. This is basically where you give a spouse, loved one or other trusted person the legal ability to sign contracts and other binding documents in your place.
Those who possess Power of Attorney can fill out loan documents, take care of a Certificate of Eligibility, enter into a purchase agreement and handle the closing. For VA loans, the agency requires the lender to verify the veteran or service person is still living and not missing in action.
It is also required that the veteran’s written consent is procured because it is, after all, the service member paying the mortgage.
From the outset, it’s important to determine with a lender whether a specific or a general Power of Attorney is necessary.
In some cases, a general power of attorney will suffice, so long as the veteran or active duty service member has signed both the sales contract and loan application. But, in other circumstances, a specific POA that identifies the actual property and clearly addresses the borrower’s entitlement is required.
Lenders often require their own specific POA, which is something to keep in mind for borrowers who are shopping among multiple rates and companies.
The process is designed to protect service members and ensure they’re aware of an impending real estate transaction that will result in a mortgage obligation and use of VA home loan entitlement.
There are also hardship exemptions available that can relax requirements for service members.
About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, from Lenderama and Bigger Pockets to the Huffington Post and Motley Fool. A former newspaper and magazine writer, he is also content director for a leading VA lender. Follow him on Google+.
There’s been a lot of talk claiming that new mortgage rules will soon require borrowers to put down 20 percent if they want to buy a home. Such talk is nonsense.
The alleged culprit in this matter is the Dodd-Frank Wall Street Reform and Consumer Protection Act. Having failed to prevent its passage, the lending industry is now trying to undo it piece by piece.
So what’s the big deal?
Wall Street reform establishes conditions under which lenders can be sued by borrowers. However, the law also says if lenders play by the rules they are protected against such suits if they make loans inside the safe harbor specifically created by the new rules.
The Safe Harbor
Loans inside the safe harbor are called qualified residential mortgages or QRMs. Despite claims that borrowers will soon only be able to finance with at least 20 percent down, the QRM rules say exactly the opposite.
To understand why you need to know which mortgages are inside the safe harbor. These loans include:
- FHA loans with 3.5 percent down.
- VA loans with as little as nothing down.
- Conventional loans with as little as 5 percent down; that is, loans sold to Fannie Mae and Freddie Mac.
- Portfolio loans, mortgages originated and held by lenders.
Not only will there be some loans available with little down under Wall Street reform, MOST loans — about 80 percent — will be available with little down. How do we know? Laurie Goodman with the Amherst Securities Group has testified before Congress that in total our mortgages are worth $10.6 trillion. Of these, $5.4 trillion are insured by Fannie Mae, Freddie Mac or Ginnie Mae and another $3 trillion are in lender portfolios.
The problem for lenders concerns the 20 percent of all loans outside the safe harbor. When high-risk loans are made outside the safe harbor lenders must set aside 5 percent of the loan amount as a reserve. Money in a reserve generates less income then would otherwise be possible, and that’s a huge issue for lenders.
In essence, lenders want the right to make high-risk, high-profit loans with little or no reserve set-aside. That requires changing the rules under Wall Street reform so that more financing will be available without the possibility of borrower suits or that irritating 5 percent set-aside. This can be done by gutting Wall Street reform or by changing the definition of a QRM to the point where virtually all mortgages are within the safe harbor, including whatever high-cost financial swill lenders can dream up.
So the next time someone wails and moans about the “new” 20-percent down requirement for mortgages you can safely say there’s good news: Such fears are unjustified because huge numbers of loans with little down are available under Wall Street reform. You might also mention that the real issue is lender profits and the right to make high-risk mortgages.
You know, like the toxic mortgages at the heart of the financial meltdown, lower home values and massive numbers of foreclosures. Loans that for the moment do not meet QRM standards. The very loans that generated vast profits for big banks and brokerages and huge executive bonuses for top corporate leaders. And for you, what did you get?