At first this may seem like an audacious idea, a violation somehow of the free market absolutism preferred by so many businesses and industries — at least until they need a special rule, tax break or handout from Uncle Sam.

In fact, it was not too long ago that Uncle Sam actually set mortgage rates for government-insured loans. For instance:

• Until November 30, 1983 HUD set interest rates for FHA mortgages. The practice ended with passage of the Housing and Rural Recovery Act of 1983.
• Under the Veterans Home Loan Program Amendments of 1992, the VA is allowed to set the maximum interest rate that can be charged for a VA loan as well as the maximum number of points. Today, the VA still has the right to set mortgage rates for vets but has elected not to do so.

Imagine what would happen if the government set daily mortgage rates for FHA and VA loans. Each day at 9 AM the daily rate would be made available online. Every borrower would have an opportunity to see the available rate for qualifying borrowers. Borrowers could compare the FHA and VA rates with rates for conventional financing — meaning there would be no need to set conventional interest levels, though if we wanted that could also by done through the Federal Housing Finance Agency.

The rates would be show at “par” — meaning with zero points — and with points so that borrowers could see a number of rate-and-point combinations. For instance, today a loan might be at:

• 3.75 percent and 1 point.
• 4 percent and 0 point (par pricing)
• 4.25 and -1 point (borrower gets a cash credit at closing or lender pays some or all closing costs).

In a marketplace filled with openness and clarity borrowers would have more of a chance of getting a fair deal.

Alternatively, we could go back to 2006.

The Wall Street Journal says in 2006 that 61 percent of all subprime loans originated that year went to borrowers who actually qualified for FHA, VA and conventional mortgages. Think how much borrowers could have saved if only they had known their real financial position. Think how many foreclosures could have been prevented. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007).

And while lenders might object to HUD and the VA setting rates for their insured loan products, they certainly have not complained with new rules which have benefitted mortgage companies.

For instance,  HUD limits on lender fees for FHA borrowers were ended in November 2008 — just two weeks after the presidential election. The Bush Administration said it decided to “remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan.”

While many lenders have acted fairly and in good faith, some have not. That’s why better regulation is needed and that’s why the government should publish daily loan rates that anyone with Internet access can see.

Should Government Set Mortgage Rates? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Okay, what does this mean and why should borrowers care?

When you sell a home and list with a real estate broker that broker works for you as an agent. When you engage a real estate broker as a buyer broker that broker works for you as your agent.

The term “agent” is very important, it means that the individual must put your interests first, even if it means a smaller real estate commission.

With lenders, we’re told, the obligation is to serve the best interests of an investor — and not the borrower. With the huge exception of the UpFront Mortgage Brokers Association, lenders have repeatedly said they do not and cannot represent borrowers.

One result is that borrowers looking for the best rates and strongest mortgage quotes have often gotten loans with higher costs and worse terms than could be justified by their income and credit.

As an example, according to the Wall Street Journal 55 percent of all subprime borrowers qualified for FHA, VA and conventional financing in 2005, a figure which rose to 61 percent in 2006. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007)

New Licensure Law

For the past year or so the states and the federal government have not moved to force an agency obligation onto lenders, instead they have required lenders and loan officers to register under the NMLS. Each registrant, in turn, gets a nice, shiny number which they must attach to loan packages under the Wall Street Reform Act.

The registration number is important because there’s only a single permanent number per lender or loan officer. One result is that if you lose your license to lend in one state you cannot open shop elsewhere.

No less significant, if a given number has a high foreclosure level relative to a local area then investors might want to reject loans from that registrant for a mortgage-backed security (MBS).

Is the new FHA requirement good for borrowers? The answer is yes — after all, registrants with lousy records will be forced out of the business over time. That’s not as good as requiring an outright fiduciary obligation, but it’s a start.

FHA to lenders: Show us your license is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Now, with this session of Congress drawing to an end, the chance of a hearing, consideration or a vote has dropped to just about zero.

Where’s The Note?

Sponsored by Rep. Marcy Kaptur (D-OH), the legislation would require lenders in a foreclosure situation to identify the actual owner of the mortgage note, the originating mortgage lender and all subsequent loan owners. In other words, in the same way a title search is used to assure that property owners actually have the right to sell a house, the Kaptur bill would require lenders to show they have title to a loan before they can foreclose — a requirement which is supposed to already be part of every foreclosure claim.

This should not be a big deal. After all, we plainly know who originated the mortgage — that would be the lender who sat with you at closing and collected a fee for their work.

And if the loan was sold then surely someone, somewhere has a record showing the date of sale and the purchase price each time the loan was sold and re-sold. After all, we know who owns 100 shares of IBM no matter how many times it has been traded.

Or maybe not. There was, after all, the New Jersey mortgage broker who allegedly took in $11 million by repeatedly selling the same loans to Wall Street.

Unfair Terms

The Kaptur legislation would require lenders to detail whether any terms of the mortgage were unfair or deceptive. That’s necessary because the Federal Reserve has the authority as a regulator serving the public to prohibit “unfair and deceptive acts or practices” under the Home Ownership Equity Protection Act of 1994. However, it did not bother to do so when option-ARMs and interest-only mortgages were first marketed. Such loans, of course, are at the heart of the mortgage meltdown, the foreclosure crisis and lender losses on Wall Street.

The Kaptur bill would also force lenders to state as part of the foreclosure process whether any material misrepresentations were made to borrowers when a loan was originated and whether borrowers actually benefited when refinancing in terms of a lower rate, smaller monthly costs or more stability, such as going from an ARM to a fixed-rate mortgage.

Subprime Borrowers Overqualified

The misrepresentation requirement is important because huge numbers of subprime borrowers — the borrowers with the steepest foreclosure rates — in fact qualified for conventional, FHA and VA financing. Conventional, FHA and VA mortgages are cheaper and less toxic than the subprime loans borrowers were sold, and traditional loans are not loaded with prepayment penalties, huge payment increases and other hazards. According to the Wall Street Journal, 55 percent of all subprime borrowers qualified for better financing in 2005, a figure which rose to 61 percent in 2006. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007)

Kaptur — a Democrat who swam against the Tea Party tidal wave and won re-election with 59 percent of the vote — can try again in the 112th Congress, which starts next year.

The mortgage foreclosure legislation Congress won’t touch is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy,– Coakley said. “Our extensive investigation revealed that Morgan Stanley not only backed loans for homeowners that they should have known were destined to fail, they also caused additional damage in the subprime marketplace. Through today’s action, we have secured significant relief to help keep hundreds of people in their homes and also recovered nearly $20 million for Massachusetts taxpayers.”

The state reports that “as a result of a lengthy investigation, the Attorney General’s Office alleged that Morgan entered the subprime arena in Massachusetts by offering funding to retail lenders that specialized in loans to less-qualified borrowers. Morgan provided billions of dollars to subprime lender New Century, which used Morgan funds to target lower-income borrowers and lure them into loans that consumers predictably could not afford to pay. These loans often were unsustainable because of payment shock or poor underwriting, but were lucrative for subprime lenders, who generated fees and could expect that borrowers would have to refinance in the short term or face foreclosure. Some Morgan Stanley investment bankers referred to New Century as Morgan’s “partner– in the subprime lending business.”

The question, of course, is whether attorneys general in 49 other states will now investigate to see if compensation is due to their borrowers and investors.

The Massachusetts release is below:

Morgan Stanley to Pay $102 Million for Role in Massachusetts Subprime Mortgage Meltdown Under Settlement with AG Coakley’s Office

BOSTON — Investment giant Morgan Stanley (Morgan) will pay $102 million to affected Massachusetts homeowners and the Commonwealth following an investigation by the Attorney General’s Office into Morgan’s role in the securitization and financing of Massachusetts subprime loans, Attorney General Martha Coakley announced today.

Under today’s agreement, filed today in Suffolk Superior Court, Morgan will provide substantial relief to affected parties in Massachusetts, including $58 million in relief to more than 1000 Massachusetts homeowners, $23 million to the Massachusetts Pension Fund for investment losses, and $19.5 million in taxpayer money to the Commonwealth’s General Fund.

“This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy,– AG Coakley said. “Our extensive investigation revealed that Morgan Stanley not only backed loans for homeowners that they should have known were destined to fail, they also caused additional damage in the subprime marketplace. Through today’s action, we have secured significant relief to help keep hundreds of people in their homes and also recovered nearly $20 million for Massachusetts taxpayers.”

As a result of a lengthy investigation, the Attorney General’s Office alleged that Morgan entered the subprime arena in Massachusetts by offering funding to retail lenders that specialized in loans to less-qualified borrowers. Morgan provided billions of dollars to subprime lender New Century, which used Morgan funds to target lower-income borrowers and lure them into loans that consumers predictably could not afford to pay. These loans often were unsustainable because of payment shock or poor underwriting, but were lucrative for subprime lenders, who generated fees and could expect that borrowers would have to refinance in the short term or face foreclosure. Some Morgan Stanley investment bankers referred to New Century as Morgan’s “partner– in the subprime lending business.

In addition to the $102 million in financial compensation, the settlement also requires Morgan to change its business practices going forward and to provide information and materials needed in the Attorney General’s ongoing investigation of the subprime securitization marketplace.

Today’s settlement is the latest in a series of actions brought by the Attorney General’s Office in response to the economic and lending crisis. AG Coakley’s Office has been a national leader in bringing actions on behalf of homeowners and taxpayers against companies relating to their role in the subprime marketplace, including Goldman Sachs, Fremont General, Countrywide, and State Street Bank. As a result of these actions, AG Coakley’s Office has secured more than $130 million in relief to investors and borrowers, ensured mortgage relief to more than 15,000 homeowners in Massachusetts, and recovered more than $50 million in taxpayer funds returned back to the Commonwealth.

Allegations in the Assurance of Discontinuance, filed today in Suffolk Superior Court, include that Morgan provided funding, known as “warehouse lending– services, to New Century, which New Century in turn used to fund an ever increasing number of subprime loans. After New Century made the loans, Morgan would place the loans into a securitization pool, and then act as the underwriter selling investments backed by the subprime loans in the pool.

As part of this securitization process, Morgan employed third party due diligence providers to review the quality of New Century’s loans. During this review, Morgan learned:

• New Century repeatedly violated the Massachusetts Division of Banks’ “borrower best interest– standard when it made subprime loans, and thus made loans that violated Massachusetts law.
• New
  Century calculated the Debt to Income (DTI) ratio for borrowers based only on the initial “teaser rate– for the loans, rather than the fully indexed interest rate that would kick in after the teaser period expired. When calculated using the fully indexed rate, almost 40% of the loans failed Morgan’s own internal underwriting standards for whether the borrower could pay them.
• The large majority of New Century loans failed the basic test of their own underwriting guidelines and could only be approved as “exception– loans, which required the presence of “compensating factors.” Sample reviews by Morgan vendors showed that many of these loans violated the guidelines in several different ways, and about one-third of the randomly sampled loans lacked compensating factors to justify the extension of credit.
• Appraisals used by New Century to value the collateral backing the loans (the homes) were often significantly different from the Broker Price Opinions ( “BPOs–) that Morgan obtained to check New Century’s figures. Appraisals are important because home value and the resulting loan-to-value ratio are key factors in assessing the riskiness of loans. Inflated or inaccurate appraisals create a heightened risk that the loans are prone to failure.
• New Century originated a large number of “stated income loans.” These are loans that lack basic supporting paperwork to document the income and other figures often placed on loan applications by mortgage brokers, borrowers, or originators. New Century relied significantly on these loans. In fact, a Morgan employee noted that New Century overused stated income loans to the point of abuse.

All of these due diligence discoveries underscored the riskiness and/or uncertainty relating to New Century’s loans and whether borrowers would be able to pay them back. It is illegal under Massachusetts law to make loans without reasonably assessing a borrower’s ability to pay the loan according to its terms.

In late 2005 and early 2006, Morgan began rejecting greater numbers of New Century loans as a result of the due diligence findings. After New Century suggested it would shift its business elsewhere, Morgan began again to include a wider range of New Century loans in its purchase pools. A Morgan Stanley senior banker purchased loans that Morgan’s own internal due diligence team initially rejected, and Morgan waived vendor concerns regarding a substantial number of the New Century loans identified as having material problems.

Moreover, as New Century finally spiraled towards bankruptcy, its risky lending practices exposed to the public, Morgan Stanley continued to lend money to the subprime originator even when other banks would no longer provide New Century with cash. During early March 2007, Morgan Stanley provided millions of dollars that New Century used directly to finance a last round of unsustainable predatory loans in Massachusetts.

Throughout 2006 and the first half 2007, Morgan continued to securitize New Century’s predatory subprime loans, and sold investments to two Massachusetts state entities–the Massachusetts Pension Reserves Investment Trust (PRIT) and the Massachusetts Municipal Depository Trust (MMDT). This led to state funds being used to fuel predatory subprime lending, and to significant losses for PRIT and the MMDT.

Under the terms of today’s settlement, Morgan will make the following payments and conduct reforms:

• Pay $58 Million in principal reduction and related relief to over 1000 Massachusetts subprime borrowers
• $19.5 Million payment to the Commonwealth
• $23.4 Million to PRIT and the MMDT
• $2 Million to non-profit groups throughout the Commonwealth to assist victims of subprime foreclosure
• Not fund unfair subprime loans in Massachusetts
• Make additional disclosures to Massachusetts investors regarding its future subprime securitizations
  Provide documents and information to the Attorney General’s Office in its ongoing review of industry subprime securitization practices.

The resolution follows a similar matter in May 2009 against Goldman Sachs, in which the Attorney General’s Office recovered $60 million in relief for the Commonwealth and over 700 affected Massachusetts homeowners. Also in 2009, the Attorney General reached a settlement with Fremont Investment & Loan, which included a permanent injunction restricting foreclosures and a $10 million payment for consumer relief, civil penalties and costs, and in March 2010 agreed to broad borrower relief with Bank of America concerning Countrywide-originated loans. The Attorney General’s Office has previously completed other investigations relating to the current economic crisis, and in 2008 recovered over $75 million from resolutions with UBS, Morgan Stanley, Citibank, and Merrill Lynch regarding their sale of auction rate securities to Massachusetts towns, cities, and governmental entities. The Attorney General’s Office also worked jointly with the SEC on a review of State Street’s undisclosed subprime investments in 40 State Street Bond Funds, resulting in a nationwide recovery of over $300 million for investors.

Homeowners with questions about today’s settlement should contact the Attorney General’s Insurance and Financial Services Hotline at 1-888-830-6277.

The Morgan Stanley matter is being handled by the staff of Attorney General Coakley’s Insurance and Financial Services Division, including Division Chief Glenn Kaplan, and Assistant Attorneys General Aaron Lamb, Amita Singh and Peter Leight, as well as Legal Analyst Matt Gendron, Economist Bryan Lincoln, Mathematician Burt Feinberg, and Paralegals Cassidy Fitzpatrick and Brian Daly, and Investigator William Mackay.’

Morgan Stanley To Pay $102 Million For Mortgage Role In Massachusetts is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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What’s going on here? A few things:

First, FHA reserves are falling. The insurance program needs more money. What happens when insurance programs need cash? They raise premiums. In the case of the FHA they want to move from 1.75 percent up front to 2.25 percent.

Second, the FHA says if your credit score is below 580 you should not be among the annointed and allowed to borrow with just 3.5 percent down. Instead, borrowers with woeful credit will need 10 percent. The question, of course, is why the FHA does not offer 10% for investors.

Third, the FHA is concerned that owners are offering seller contributions which are forcing up home prices artificially. In other words, without a seller contribution — a credit to the buyer at closing of as much as 6 percent of the sale price — the sale price would actually be lower because the owner would not be trying to re-coup dollars being credited to the buyer. The FHA will limit seller contributions to 3 percent of the sale price, a common lender norm.

fourth, with the subprime market sunk, loan officers who once offered tasty toxic loans to unknowing borrowers now want to sell FHA mortgages. The FHA, with very good reason, wants to track lenders with far greater care than in the past given the influx of subprime loan officers and companies. In essence, if they break the rules even a bit the FHA is threatening to dump them.

The Details

Below is what the FHA says specifically:

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending

The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.

If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing

The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.

2. Update the combination of FICO scores and down payments for new borrowers.

New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.

This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.

This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.

3. Reduce allowable seller concessions from 6% to 3%

The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.

This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

4. Increase enforcement on FHA lenders

Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.

Enhance monitoring of lender performance and compliance with FHA guidelines and standards.

Implement Credit Watch termination through lender underwriting ID in addition to originating ID.

This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.

Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process

Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.

HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:

Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite

Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

FHA To Borrowers: Gimme More! is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“The U.S. mortgage giant Freddie Mac said it would no longer buy those high-risk home mortgages that it deems to be the most vulnerable to foreclosure. The surprise move came amid a deteriorating market for subprime loans affected by slumping home prices and rising interest rates.” (See: Freddie Mac tightens home mortgage standards, The International Herald Tribune, Feb. 28, 2007)

But the fact is that home prices are not slumping in some local markets and interest rates are plainly at the low end of historic norms. Such factors are simply not the root cause of today’s mortgage instability.

Instead, problems in the subprime mortgage market — and a growing sense of problems in other parts of the mortgage universe — are the result of dicey loan concepts that turned out to be exactly what any lucid person would expect: risky beyond reason.

Who could have known such things? Anyone with common sense, including readers of this column.

Let’s begin with interest-only loans. These are mortgages where borrowers do nothing to reduce the principal for the first several years of the loan. Once the interest-only “start period” ends then the loan must be repaid at the fully indexed and fully amortizing rate. Given that most interest-only loans are adjustable, and given that fewer years remain after the end of the start period, it follows that such financing will inevitably require higher monthly payments.

“There’s no doubt,” it said here in 2004, “that the newest trend in real estate financing is the interest-only loan, a trend which needs to be examined with care by anyone who prefers to avoid poverty.”

Moreover, said the column, “with an interest-only loan your initial monthly cash payments each month will be — and be sure to read the rest of this paragraph — lower than with a self-amortizing loan of the same size and with the same rate and terms. However, the interest-only borrower has more debt for a longer period and thus higher total costs. And if rates rise, monthly costs and overall interest costs could be substantially larger than with fixed-rate financing.” (See: The Beauty Of Interest-Only Loans — And The Beast, November 30, 2004.)

The reality is that buying homes with little down has always been risky, something that should neither shock nor surprise anyone. Just look at what the New York Times wrote — in April, 2000.

But what happens if housing values or the economy head south — particularly if a homeowner has a huge mortgage and no appreciable equity? Experts like Peter G. Miller, author of ”The Common Sense Mortgage” (Contemporary Books), warn that buyers who suddenly need to sell will face brokerage fees and related costs that they will have to pay out of pocket. ”Where do you get the cash?” he asked. (See: PERSONAL BUSINESS; Zero Down, And Maybe Something To Gain, The Sunday New York Times Business section, April 2, 2000)

Home prices have risen substantially since 2001 and thank goodness. While those in real estate prospered the stock market largely took a snooze during the same period. The catch, as noted in 2005, was that “the only way we’re supporting high real estate prices is by fudging traditional rules. We allow people to buy at levels that would have been unaffordable under past lending standards.”

“Playing mortgage roulette is fine as long as everyone realizes there are massive opportunities to lose.” (See: Are We Facing A Recession? September 13, 2005)

Is anyone “surprised” that a number of lenders are now in trouble — and that their backers are also taking losses? Why? Some of the risk represented by “non-traditional loans” can be offset by rising home values. But two years ago it was pointed out that if home values do not rise — and they plainly have not in many areas during the past year — then “lenders may be using ARMs to offset future rate risk, but what about future asset values? Is it worth originating loans today which may sink lenders tomorrow? A large number of foreclosures won’t look good on anyone’s books, reason enough to tighten ARM loan standards.” (See: Wrong-Way Borrowing Threatens Borrowers, Lenders, June 7, 2005)

One of the most widespread of the new financing concepts seen during the past few years has been the use of “stated-income” loan applications.

In the summer of 2004 it was explained that “stated-income loans represent too much risk for lenders — and too much temptation for borrowers. Perhaps a little rigidity in the lending process is not so bad. After all, how hard is it to produce tax returns and pay stubs? (See: Should Lenders Dump No-Tell Loans? July 27, 2004)

“What’s obviously best is to get the numbers right when making a loan application,” it said here in November 2004. “It’s equally obvious that ’stated income’ mortgages open the vault to temptation. Such no-tell loans ask borrowers what they earn and the borrower then puts down a number. Unlike a typical mortgage application, the lender usually does not verify the figure with tax returns, pay stubs or calls to employers.”

Of course, if it happens that those self-estimates of income are off a touch then lenders will have problems.

“With a growing number of stated income loans on the books, financing with exaggerated numbers could quickly become a lender concern if home values dip, the economy slows and monthly payments don’t show up. That’s the point at which stated income loans will come home to roost.” (See: How Much Is Too Much? November 16, 2004)

It’s hard to look at the tough times now facing the mortgage industry without mentioning the worst of the worst, the option ARM combined with little or nothing down plus a stated-income loan application.

Here’s a loan concept which gleefully allows borrowers to make payment after payment that will not even cover interest costs. Obviously — no “surprise” here — the loan must be repaid at some point which means that monthly costs must rise if the loan is held past the start period.

As stated here in 2005:

“In the next two to four years we’ll see elective payments end for many option loans. Then we’ll find out who should not have bought and who should not have loaned. Don’t be surprised if a lot of cheap real estate floods the market — and don’t be shocked if the value of your home is impacted as a result. As to lender share prices and dividends, how attractive will such companies appear when huge numbers of loans are unpaid, especially if in many cases the size of the debt exceeds the value of the underlying properties?

“Alternatively, if we restrict option loans now by regulation or lender choice, the pool of buyers will shrink and home prices will be under far less pressure to go up. We will see less appreciation and even price declines in some local markets. Acting now we may face moderate and tolerable declines in market activity, an opportunity which should not be ignored in the face of the financial calamity which looms ahead.” (See: The Case Against Too Many Options, June 28, 2005)

The growing number of loan failures has produced a rising volume of foreclosures. RealtyTrac.com reports that foreclosure actions rose from 885,468 in 2005 to 1,259,118 in 2006 — a 42 percent increase.

The huge number of foreclosure means that we have a growing supply of distressed properties, properties which are often available at discount. Even a small number of foreclosures can drag down local real estate prices.

“To believe that an increasing number of foreclosures will not have a marketplace impact is neither logical nor believable. Just ask the people in the subdivisions and condo projects where developers have recently cut prices on just a few units. (See: Foreclosures — No Worries, No Vision, May 5, 2006)

At this writing we have evidence that home values have fallen in about half of all major metro areas. The problem, of course, is that we really do not know the extent of value declines and thus cannot project future loan failures and foreclosure levels.

“While unit sales are easy to track, data regarding recorded prices is less certain. If you have a strong sellers market you can bet that sale prices are indeed what people paid because sellers have no need to offer discounts and buyers will not pay any more than required. But if you have a market that’s losing steam, the same assurance is not plausible.

“The problem with slowing markets is that sale prices may not tell the whole story. Sale prices may be discounted, and the extent of those discounts cannot be reliably estimated.” (See: A Time For Yellow Flags, November 28, 2006)

A major part of the problem has been the untenable view that home prices only rise. Does anyone believe that? Apparently a lot of people did, which is unfortunate:

The prevailing theory seems to be that higher monthly costs are not a problem because one can just sell the underlying property. But such thinking assumes that property values will rise — and that is not guaranteed. If property values merely stay the same large numbers of people in the next few years will be both unable to make monthly payments and unable to sell for enough to pay off growing mortgage debt. (See: Exit Strategy: What If There Is No Way Out? November 1, 2005)

The news today is concentrated on the subprime market, but guess what? This is not a problem that can be contained to poor and marginal borrowers. A lot of well-funded entrepreneurial people bought with toxic loans and they too will be facing tough times as required payments rise and in too many cases property values fall.

“We now have a large percentage of loans that involve negative amortization and potentially huge payment increases. It’s impossible to believe that some portion of these loans — and perhaps a large portion — will not result in financial disaster.” (See: Toxic Loans Threaten Home Values, February 14, 2006)

In fact, it’s not just borrowers and lenders who suffer when loans fail, it’s also neighbors and communities who suffer. How? Just think about what will happen to the value of your home if a neighbor is foreclosed. As I said in a 2006 speech to the Association of Real Estate License Law Officials (ARELLO):

A growing number of recent property owners will find that they have homes and investments which cannot be sold at a profit — as well as homes and investments which cost too much to carry. The fruits of this impossible dilemma will be more properties for sale, more supply, more pressure to moderate if not lower prices, more foreclosures and more bankruptcies. Even those without a mortgage may find that the value of their home will drop as neighbors who financed imprudently rush to dump their properties on the market.

If “nontraditional” mortgages are so great, how come loan buyers and regulators are now demanding a return to long-time lending standards? More importantly, why did they accept such risky concepts in the first place? Surely no one will be “surprised” if lawmakers start asking pointed questions as foreclosure rates rise and increasing numbers of lenders fail.

————————

Published originally by Realty Times on March 13, 2007 and posted with permission.

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Good luck, folks.

Fannie Mae and Freddie Mac are now being blamed for following the instructions they received from the federal government. For example, in 2000 the minority loan purchase goal for the two companies was set by HUD at 42 percent. By 2008 the quota under the Bush Administration had reached 56 percent.

The equation being made in some quarters is that minority loans are automatically bad loans. This is nonsense. Just look at the foreclosure figures below.

Truth is Fannie Mae and Freddie Mac have done enormously well by the measures that count.

First, they maintained the secondary market that buys loans from local lenders. The marketplace has not been closed for a single day since the foreclosure crisis began.

Second, Fannie Mae and Freddie Mac have extremely low foreclosure rates. According to the latest report from the Federal Housing Finance Agency, the two companies have had 71,559 foreclosures in 2009. This sounds like a lot, but remember that these two companies hold 30.2 million mortgages. If the rest of the mortgage sector did this well there would be no mortgage meltdown and no foreclosure glut.

Third, the companies rarely bought subprime loans until forced to do so by the federal government in April 2007.

The real issues with Fannie Mae and Freddie Mac concern politics and money. Let’s hope any changes to revise the companies do not make them worse, because if they cannot effectively buy local loans you can expect mortgage rates to soar.

Mortgages: Do Away With Fannie Mae & Freddie Mac? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: Fannie Mae, Freddie Mac, minority, mortgage, subprime

The Institute for Luxury Home Marketing says that of 40,252 luxury properties available during the past week, the typical price was $1,156,708 and the cost per square foot averaged $324.

Just as interesting, 41 percent of the properties had seen price decreases and the typical luxury home is on the market 172 days — almost six months.

it’s worth remembering that the mortgage crisis was originally described as a “subprime” problem; you know, something that invovled poor people and those with marginal credit. Now we find that, whoops, we’re all in this together and that even the rich are getting stuck.

The universality of the mortgage problem has been obvious for the past five years. You can’t have a local real estate market which suffers in part while other slices of the marketplace are untouched because all segments of the market are tied together.

Example: You need first-time buyers — about 40 percent of the market — to purchase homes because that allows current owners to move up — thus it makes sense to support the FHA and VA loan programs.

Thus it also makes sense to support efforts to reduce foreclosures and to keep families in their homes.

Is there any good news on the luxury front? Just a touch — the ILHM reports that 3 percent of the luxury homes for sale were re-priced up, meaning owners were asking for more.

Oh to be among the lucky 3 percent….

For the full report, please go to the ILHM Luxury Housing Report.

Luxury Homes Wilt On The Market is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: credit, FHA, Foreclosures, home institute, luxury, market, subprime

Better than most news reports might suggest.

Testifying before the House Financial Services Committee, the chief regulator of Fannie Mae and Freddie Mac, James Lockhart, testified that the two companies own or guarantee 56% of the single family mortgages in this country or $5.4 trillion.

Lockhart also said for both companies that “first quarter net losses were $23.2 billion at Fannie Mae and $9.9 billion at Freddie Mac. The provision for credit losses — to build loan loss reserves — remains a primary driver of net losses at both Enterprises. Loan loss reserves at both Enterprises increased substantially in the first quarter to reflect higher expectations of credit losses from increasing mortgage delinquencies. Loan loss reserves increased by 70 percent at Fannie Mae to $42 billion and by 50 percent at Freddie Mac to $23 billion.”

Translation: The loss reserves were increased so, for accounting purposes, there was a “loss” at each company. However, loss reserves are a guess, they are NOT actual losses. Who decided how much the loss reserves should be? The federal government which took over the two companies last year.

The Fiction of Loss Reserves

In other words, by increasing loss reserves the government also creates accounting losses that are reported to the public.

But how are Fannie Mae and Freddie Mac actually doing? On page 22 of his 23 pages of testimony, Lockhart offered the delinquency chart below. Here’s how the delinquency picture actually looks:

Subprime ARMs Seriously Delinquent: 36.5%
Subprime Loans Seriously Delinquent: 24.9%
All Loans Seriously Delinquent: 7.2%
Prime Loans Seriously Delinquent: 4.7%
Fannie Mae Delinquencies: 3.2%
Freddie Mac Delinquencies: 2.3%

Anybody notice something curious here? Fannie Mae and Freddie Mac have far fewer delinquencies than lenders in general. Less than half the rate for all mortgages. Far less than even prime mortgages.

Unlike loss reserves, delinquency counts are real and objective. Hmmm. Makes you wonder why Fannie Mae and Freddie Mac were taken over by the Bush Administration….

Fannie Mae & Freddie Mac — How Are They Really Doing? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: billion, delinquences, Fannie, Freddie, losses, Mac, Mae, prime, subprime

“If late payments and foreclosures are rising for well-qualified borrowers, then you can expect interest rates to climb and mortgage standards to harden for everyone,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties. “In effect, the marketplace will say there are fewer well-qualified borrowers and therefore rates for all borrowers should go up.”

Residential financing can generally be divided into three layers. At the top are prime loans, financing with the lowest rates for the best-qualified borrowers. At the bottom are subprime loans, high-cost mortgages for those with weak credit. In the middle we have “Alt-A” financing, loans for those who may not have the credit needed for prime mortgages or who want riskier loans.

In a typical year mortgages worth about $3 trillion dollars are originated nationwide. Of this total, according to a recent Credit Suisse study entitled Mortgage Liquidity du Jour: Underestimated No More, about 57 percent ($1.71 trillion) are prime loans, 20 percent ($600 billion) are subprime, 3 percent ($90 billion) are government financing such as FHA and VA loans while another 20 percent ($600 billion) are “Alt-A” financing.

As to Alt-A financing, Credit Suisse says “delinquency rates are trending well above historic levels throughout the Alt-A market, and even on 2006 vintage prime ARM products.”

Credit Suisse adds that when compared with loans originated in 2003 and 2004, delinquencies and foreclosure rates for recent Alt-A adjustable loans are “3 to 4 times” higher.

A 2007 MarketPulse report found that “delinquency rates on subprime and Alt-A mortgages have roughly doubled within the past year and show no signs of moderation.” In particular, the report found that Alt-A interest-only loan delinquencies were up four times when compared with similar mortgages from 2003 and 2004.

What Credit Suisse and MarketPulse found pretty much describes basic real estate thinking:

1. When home values rise and interest levels fall there are fewer foreclosures because monthly costs are affordable, loans can be easily refinanced and the option to bail-out by selling properties is readily available. In such markets the “foreclosure discount” is small and sometimes nonexistent.

2. If local markets slow and interest rates rise, then foreclosure levels will increase because borrowers no longer have easy options. If borrowers refinance they face steeper monthly costs because rates have increased while recent buyers often cannot sell at a profit. In such markets the “foreclosure discount” can be significant, meaning that many homes can only be sold at substantially reduced prices.

The news that delinquency and default rates for Alt-A loans are increasing has now begun to change marketplace dynamics. The first responders will be mortgage investors who equate higher default rates with greater risk and thus seek higher interest levels as a result. According to the Securities Industries and Financial Markets Association, individuals and institutions bought mortgage-related securities worth nearly $2 trillion in 2006.

You can already see changes in the marketplace. As one example, M&T Bank — a multi-state bank with assets of more than $56 billion — says that it’s cutting back on Alt-A loan originations. Why? Because “at a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected.”

“Investors who buy mortgage securities are taking a new and tougher look at the marketplace,” says RealtyTrac’s Saccacio. “The result is that it’s increasingly difficult for mortgage lenders to re-sell non-traditional loan products, whether or not they’re subprime mortgages. For many borrowers, the shift in marketplace preferences means that the era of easy qualification standards for financing and refinancing is largely passing.”

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Published originally by RealtyTrac.com during April 2007 and posted with permission.

Are Foreclosures Only A Subprime Problem? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: Alt-A, equity, Foreclosures, home, loan, mortgage, subprime