The law of unintended consequences and the HVCC
Monday, July 20, 2009
For the last several months we have been grumbling in this space about the Home Valuation Code of Conduct (HVCC) and the horrible impact it is having on the market. It's a poor deal for the consumers it purports to protect and it should be revoked. However, that has not stopped the impact it has had on the day to day activity here at America’s Mortgage Choice.
We used to spend time on appraisals. Lots of time. We never realized how much until the last few months. Here is what the appraisal process looked like before the passing of the HVCC:
- Check the comps with the appraiser in advance to make sure the transaction made sense and the consumer was not wasting $300 on an appraisal that would not accomplish their goal.
- Relay that information to the consumer who normally would also feel that this was a "commitment to value" on our part.
- Collect the fee for the appraisal from the consumer and pass it on to the appraiser.
- Ensure the appraisal got ordered from the individual that did the comp check.
- If there was a delay in the process, field the consumers calls on the question "the appraiser has not called me" as well as the calls to the appraiser on "what's the status of the appraisal since you were out there long enough that the report should be delivered".
- Relay messages of argument from the underwriter who felt the appraisal was "too aggressive" to the appraiser who felt that the underwriter was being "ridiculous, silly or unrealistic in their perception of the market"
- Argue with the appraiser that additional comps were a reasonable request.
- Argue with the underwriter that additional comps were an unreasonable request.
- Eat the costs for a second opinion (appraisal)
- Eat the costs for a review appraisal.
- Discuss with realtors and mortgage applicants why the appraiser did or did not use certain comps and thus did not "hit the number".
- Receive the blame when people thought that "our appraiser" was not getting the job done.
Now few of these (maybe number one and three) really were part of our job description but we were accepting all of the work and blame associated with the appraisal processes. Well no longer. In the name of consumer protection, all of this has been pulled from the mortgage broker.
In fact, now the rules prohibit us from comp checks so the homeowner's opinion of value, which is usually a bit high sets the preliminary numbers we work with. Realistic or not (and most folks have a slightly unrealistic view of their own home value) we have to start somewhere. Now the process looks like this.
- We guess at the value with the consumer up front.
- We place the consumer's information into the lenders appraisal ordering system.
- The lender's appraisal service (which they own a chunk of usually) charges the consumers credit card for $400-$500 bucks. Consumer protection is not cheap you know.
- We wait for the appraisal to show up.
- We send it to the lender, or don't when they show up with low ball values.
We no longer find ourselves in the middle of arguments. It's nice that we have freed up all of this time but it's hurting consumers by reducing values (since the banks now want conservative appraisals), and eliminating the help that everyone was supposed to be getting when the Obama Plan to reduce rates and liberalize the ability to refinance bad financial situations was introduced.
The bottom line is that until the HVCC is revoked or otherwise eliminated several problems will not go away:
- Foreclosures. If people with problems cannot refinance they will lose their homes.
- Housing Market. Will not improve if HVCC prevents buyers and sellers from doing business at agreed upon prices.
- Economy. Will not recover if the people who earn a living in it have their closed transactions reduced by the deal killing HVCC.
- More Economy. Non distressed borrowers cannot refinance and save. Savings that they could spend which would help the rest of the economy becomes money they must spend on debt service and thus the big banks win again.
Consumers are being damaged by this and we welcome our problems back anytime.
posted by Dylan Kramer @ 9:33 AM,
Industry Bands Together in Opposition of HVCC
Monday, June 29, 2009
Two Congressmen have introduced legislation that would place an 18-month moratorium on the Home Mortgage Valuation Code of Conduct, a Fannie Mae/Freddie Mac edict that - among other things - bans loan brokers and loan officers from directly ordering appraisals. The bill specifically directs the Federal Housing Finance Agency to suspend the HVCC that went into effect May 1 for 18 months. The National Association of Mortgage Brokers claims the HVCC is delaying closings and costing it business. Brokers also have complained about being forced to pay high fees to appraisal management companies.
"This ill-thought out code is basically damaging the economy. It will rob consumers of the low rates that are available now," said NAMB executive director Roy DeLoach. However, it's unclear where the bill goes from here. The legislation was introduced on Thursday night by Rep. Travis W. Childers, D., Miss., and Rep. Gary G. Miller, R., Calif.
"The introduction of this legislation is a victory for consumers and members of the industry alike," said NAMB President Marc Savitt, CRMS. "We thank Congress for recognizing the need to address the issue of appraiser coercion without causing undue harm to borrowers or diminishing competition in the marketplace."
NAMB has taken an active stance against the HVCC since its introduction in March of 2008. "We urge Congress to pass H.R. 3044 as soon as possible to ensure that more borrowers will not be negatively impacted by this de facto rule," stated Savitt. "In the period of time since its implementation, the HVCC has increased costs to consumers and decreased the quality of appraisals and has provided a level of uncertainty in an ailing housing market. Tens of thousands of consumers have already been robbed of their opportunity to enjoy historically low rates by Attorney General Andrew Cuomo's rule."
The NAMB has stated they look forward to working with Members of Congress as this legislation progresses.
posted by Dylan Kramer @ 10:56 AM,
Watch The Mortgage Apps
Monday, June 22, 2009
As mortgage professionals, we are often in the position where market forces impact what happens on a week in, week out basis. We see rates jump and we go from working all weekend to having more free time than we planned.
Or worse, we end up with urgency imposed by the market that though we tell our clients, suppliers and lenders they don't always share. This can cost in terms of lost rate locks for customers and revenue opportunities for our company.
The bottom line is that interest rates, and mortgage rates in particular, matter a great deal.
A great story on how this impacts everyone involved in the mortgage process as well as the economy as a whole is here.
Labels: current market
posted by Dylan Kramer @ 8:31 AM,
A Growing Garden of Green Shoots
Friday, June 19, 2009
Professor Nouriel Roubini--he of the sometimes harsh "tell-it-like-it-is" school of economists--weighed in recently on the growing awareness of improvements in our economy. These glimmers of light, most of which are examples of things getting "less-worse" than of things actually getting better, have been hailed as "green shoots," with the assumption that they are harbingers of a recovering economy.
Roubini warns that hopes that green shoots of recovery may be springing up here have been dashed by plenty of yellow weeds. "The consensus view that the global economy will soon bottom out has proven-once again-to be overly optimistic," he asserts, noting that the signs of recovery throughout the world are very shaky, indeed. And he offers the following helpful history lesson.
"After the collapse of Lehman Brothers in September 2008, the global financial system nearly melted down and the world economy went into free fall. Indeed, the rate of economic contraction in the fourth quarter of 2008 and the first quarter of 2009 reached near-depression levels.
"At that point, global policymakers got religion and started to use most of the weapons in their arsenal: vast fiscal-policy easing; conventional and unconventional monetary expansion; trillions of dollars in liquidity support, recapitalization, guarantees, and insurance to stem the liquidity and credit crunch; and, finally, massive support to emerging-market economies. In the last two months alone, one can count more than 150 different policy interventions in the world.
"This policy equivalent of former US Secretary of State Colin Powell's doctrine of 'overwhelming force,' together with the sharp contraction of output below final demand for goods and services (which drew down inventories of unsold goods), sets the stage for most economies to bottom out early next year."
Ah, a green shoot of good news from Professor Roubini! We'll probably see the bottom of this recession "early next year." But that doesn't mean the economy will snap back to a vigorous state. Instead, the recovery will continue to be slow, grinding its way to relative health-and with a great many potential pitfalls along the way. We will need somehow to know when it is time to focus on minimizing future inflation. We will need to continue helping those who lose their jobs, for there will be many more of them deep into 2010. (Roubini predicts an unemployment rate of 10% or higher.) Retailers will need to be able to hold on as consumers continue to pay down debt rather than taking on new debt and spending freely. And we will need to be sensitive to the big imbalances in current-account deficits throughout the world. (Frankly, the professor's list extends far beyond this.)
But the green shoot remains. Beyond the next six months of slow improvement we will see a bottom, probably even for home prices. And beyond that, more slow improvement... with a need for careful steering in Washington and, perhaps even more crucially, at state and municipal levels.
posted by Dylan Kramer @ 10:16 AM,
Here's A Conundrum for You
Monday, June 15, 2009
When we look at the so-called subprime mortgage crisis - if we look at it deeply enough - what we see suggests a difficult principle that we might call the "true cost" of debt.
Let's say that the "true cost," for lack of a better term, is today's real price for borrowing money at a fixed rate, with no bells and whistles and shortcuts written into the loan. Thus, if the markets are pricing, say, the ten-year Treasury note at about 3.8% and demanding a 2% spread over that if fixed mortgages are to be acceptable to investors, then about 5.8% is the moment's true cost of financing a home purchase.
Trouble is, we often reach the point where 2% over the 10-year note isn't affordable for a great many buyers, so we - viewing their problem with compassion, and with a desire to make further origination fees - develop loan programs that, one way or another, fudge on the "true cost" principle. (We also have to deal with hikes to the 2% spread when investors shun fixed-rate mortgages.) The early VA and FHA loans, writing in the value of government guarantees, seemed to lower the "true cost" for borrowers. The early adjustable rate mortgages were first invented because there was no way borrowers could afford the true cost in the early 1980's (when a fixed-rate loan bore an interest rate of about 18%).
We developed loans of temporary expedience, based on the reasonable idea that interest rates would come down some day. For example, I once had a loan whose effective rate (far from the true cost) was 13%. That was the interest rate my monthly payments were based on. But the true cost at the time, as I mentioned, was about 18% - so the unpaid interest ("negative amortization," a term only its mommy could love) was folded back into the loan, which grew rather than being paid down.
There isn't room here to trace the history of the many loan programs that we've developed with the specific intention of overriding the "true cost" principle somehow and allowing a borrower to afford a loan - at least temporarily - but readers will realize that this was indeed the way most subprime programs operated.
The conundrum that I see before us now is simple... and we may have to come back to it repeatedly as we follow what is and is not working in today's loan market. Specifically: what do we have if a government program alters an existing loan to give a borrower, temporarily, a lower monthly payment but maintains the existing loan balance? Sounds like another evasion of true cost to me. So, in fact, does any other of the many ways the government is currently trying to make today's loans (and therefore homes) even more affordable than they already are. A salient example - thankfully retired, at least temporarily - was the $7,500 tax break that you get today but have to repay over the coming fifteen years.
Clearly, the true cost represents the real value of a home today. Could it be that we continue to create the same old credit problems - excessive foreclosures, tentative and temporary home ownership, and currently, debilitating fears of entering a real estate transaction at all - with our manipulations of true cost? And could it be that the only genuine answer is for real estate values to come down to what may be considered their true value, given current conditions in the credit markets, rather than trying to lower the true cost from the financing end, a task that seems always to employ smoke and mirrors, eventuating in generally unforeseen future problems and crises? Or - who knows - perhaps we could invent a new standard home mortgage and let the 30-year fixed-rate fade. Hmmm.
by: Bill Fisher
Labels: current market, loan modification
posted by Dylan Kramer @ 7:14 AM,
That crash you thought you heard?
Monday, June 8, 2009
Was exactly that, a crash. Over the last two weeks mortgage rates have crashed in to a wall, fallen through the floor, broken through resistance or any other negative spin you want to put on it. For the moment, the refinance wave is over. For most folks, it's likely that you are not going to get a rate today where is makes sense for you to lock in a rate.
However, that does not mean that you should not move forward. Over the last six months, we have had some "steady as she goes" mortgage rates. Rates would stay in a range for weeks on end. Now they are going up every day. The fact is with mortgage rates though, they go up with a rocket, and come down with a parachute.
If you are considering refinancing, this will be a time to get paperwork in and your loan approved so that you can get a 7-15 day lock when rates next dip and close in a hurry at a great rate. This means a little uncertainty relative to the final rate but there will likely be windows of opportunity over the next several months.
If you are considering purchasing, it's a little more challenging. The reason is that this increase in rates is at least in part to the idea that the economy in general, and the housing market in particular have hit the bottom and are turning around. If this is true, if you wait for interest rates to decrease, you may no longer be able to get a great deal on the property you are interested in. More buyers may step into the market. Economics 101 says that if there are more buyers for the same number of houses, prices go up.
We have a philosophy at America's Mortgage Choice. You know the old saying "don't let the tail wag the dog"? The mortgage is the tail, the house is the dog. Don't let trying to get a good deal on a mortgage rate prevent you from getting a great deal on a house!
posted by Dylan Kramer @ 9:43 AM,
What in the world?
Friday, May 29, 2009
So I went on vacation last week and felt pretty good about it. Rates were at 4.75% and we were talking with plenty of people about the market, refinancing, reducing the terms of their loans and saving money in the long run. Additionally, we were having a great closing month as well and were happily moving loans to the closing table at a good pace.
I walked back into the office on Wednesday after a vacation that included lots of family time and no email, to a surprise. Rates had risen over .50%. Then on top of that rates went up again on Thursday. All of a sudden rates are at 5.5% in the blink of an eye!
Will they get better? Likely so. Rates never really move up or down in a straight line. However, they are unlikely to get near the bottom very quickly. The market is very worried about all of the debt created by the stimulus plan and financial rescues. This means that though the selloff is an overreaction, the change in sentiment is for rates to start rising.
If you have been considering refinancing, get your paperwork in. Pick your target rate and be ready for an interesting ride!
posted by Dylan Kramer @ 7:45 AM,