Federal Foreclosure Initiative Review
Wednesday, February 18, 2009
Interesting announcement from President Obama today on the foreclosure crisis don't you think? I believe that if executed correctly, this could be a winner and get us on the road to recovery.
In case you missed it there are four key points to the plan and the biggest point made is that "everyone will not be saved". There are homes that will go to foreclosure, especially investors, speculators (both borrowers and lenders), folks who were pretty sure they could not make the payments but took the loan anyway will not likely benefit much.
But for many, this program will be a lifeline. If the program can be executed and that execution accomplished quickly, that is. Let's break down the four big objectives.
- Four to Five Million upside down mortgages may be eligible to refinance. If the mortgage loan is owned or guaranteed by Fannie Mae or Freddie Mac.
This is huge because currently there is no way for people to take advantage of lower rates available today. This will save people hundreds of dollars per month and lower payments will create an incentive to stay in the home. - Incentives to Modify. The government will be setting loan modification guidelines. This appears to be a statement to the banks who to date, have not shown a willingness to book losses through modification to get with the program. Federal guidelines limiting payments to 31% of existing income will force lenders to step up. Borrowers will have accountability. These guidelines will be official in the next two weeks and I will post them here.
- The government will keep rates low. This promise may be the toughest one to keep. With the admission that up to $200B of the Federal TARP funds may be dedicated to the purchase of Mortgage Backed Securities, the administration is making a statement that they want people to be able to secure mortgage financing at low rates. The question is, will the market agree and keep rates down?
- The threat of the Bankruptcy Cram Down. The carrot, or stick depending on your point of view is legislation allowing bankruptcy judges to "write down" principal balances on mortgages. It appears that this is currently only a threat but if the efforts to modify loans that banks are making don't improve, we will see this enacted and it will not have good results for the banks, or home buyers going forward as rates would rise because of it.
Overall, this effort is rather impressive. The program seems to address some of the critical issues out there today creating an opportunity for people to improve their situation. Also appreciated is the accountability tone. Too often in the foreclosure/housing debate borrowers, banks, investors and Washington have been pointing fingers instead of trying to find a solution. This program could be a great step in the direction of true solutions and answers.
Watch the full announcement right here, on AmericasMortgageBlog.com
Labels: current market, government announcement
posted by Dylan Kramer @ 12:20 PM,
How forcing rates lower can solve the foreclosure crisis.
Monday, February 16, 2009
One of the great things that we have seen from President Obama is his ability to get everyone "onto his agenda". During the campaign, he convinced us (not that it was that hard) that we needed change. He defined this change very loosely. Some would argue that he did not define it at all. Now that skill is being applied to the stimulus plan and bailout of the financial sector.
Nobody can deny the scope of the problem. This is easily the most challenging economy since the recession of 1981-1982. The most interesting thing about this as opposed to other economic crises of the past is that people have pulled back dramatically. Consumers want to see what happens before they make their next move. Oddly, the rhetoric in Washington by both the White House and Congress is causing people to adopt this wait and see attitude.
What are they waiting for though? Those with mortgages in trouble seem to be waiting for the bailout. Often the borrowers are hoping that they can forestall foreclosure until Uncle Sam rides to the rescue. Banks have been horrible at modifiying the existing troubled loans because they don't want to reduce principal balances, cut rates, or forgive arrearages. Finally people who are in no trouble at all have bought into this rhetoric and are sitting on the sidelines, slowing the economy further.
So I have a proposal. Often the government manages to set "quotas". How many people in a group have been given school lunches, scholarships or government contracts? What if we put that to use on the housing situation? I would propose that every person that was "upside down" on their house but current on their payments be allowed to refinance to 4.0% on a 30 year fixed rate loan. This rate would not be subsidized by the government. With the cost of funds down under 1.0% each loan would make 3.0% on the spread for the lender as well as provide the opportunity to pick up about $1000 in fees. However, it would be below market financing. Why would the bank do this? Because each loan that a "current" borrower refinances they get a credit in the program.
This credit can be traded for insurance to cover the losses on loans that get modified that are behind. Those loans would be modified to 4.5% but must qualify at a 31% debt to income ration. Again, the banks make money if the loans perform on the spread. The credit goes to cover the losses currently being experienced by the bank or the end investor. The bank would now have more incentive to modify the loan because they could pass on the past losses.
The rest of the loans would have to go to foreclosure. It stinks but at some point there are three pools of loans. The good borrowers resent the help that those in foreclosure are benefiting but they are not. The challenged borrowers can pay their mortgage and are motivated to pay, but not with the existing terms of their mortgage. Finally, there are the bad borrowers. Some people will say it's callous but there are people that have stepped into the market over the last few years that are not qualified to have a mortgage. They don't pay their bills, they don't have a history of consistent income and they are horribly upside down in most cases. They need to go back into the rental pool.
The framework of this proposal would have the following impact. First, all those who were to refinance to lower rates would have more safety and security than they have today. Additionally, those who feel that they are being taken advantage of by this bailout and not benefiting would benefit. The savings would find its way into the economy via spending and would allow people to increase spending without giving up the increased savings rate adopted over the last six months. The banks would have loans that perform back on the books. The non performing loans would qualify for bailout funds. Finally, not every loan currently on the path to foreclosure would end up there. This would have the effect of reducing the inventory of homes for sale, stabilize the prices of the homes on the market and get us the path to economic recovery.
I am sure the details are more complex, but in spirit it seems workable on the surface.
posted by Dylan Kramer @ 11:42 AM,
The Death of the No Closing Cost Loan
Monday, February 2, 2009
If you have financed more than one mortgage in your lifetime you are likely aware that one of the marketing "tools" that those of us who sell mortgages have had is the no closing cost refinance. It has been a tried and true method of managing your mortgage if you are a consumer and managing your database of closed clients if you sell mortgages.
If you are not familiar with the no-cost refi, or need a refresher, let me explain it briefly.
Your mortgage is a liability to you but is an asset to the bank or broker that is creating it. The asset is the right to collect your payments, which is sold at the closing. If on any given day, a mortgage rate is 5.5% with zero points and $2000 in closing costs, there used to be a rate of 5.75% or 5.875% available with no closing costs as illustrated in the chart below.
So what happens to the costs in a "no cost" loan? The short answer is nothing. The costs remain but the broker pays them. The title company, appraiser and other third parties do not waive their fees. The bank also collects an underwriting or funding fee on every loan. None of the service providers waive their fees for the consumer.
The way that the broker pays the costs is to increase in the fee paid to the broker for the right to collect the payment called the Yield Spread Premium (YSP). Simply put, using the sample we gave before, the broker sells the loan at the higher rate to the bank. The bank pays roughly $2000 more for the loan at the higher rate. The broker uses the $2000 to pay everyone the closing costs and the mortgage now is "no cost" to the consumer. The broker nets the same amount for their work in securing the mortgage so they are happy to make this deal.
The choice for you as the consumer was do I take the lower rate and pay the fees or do I take the higher rate and payment but pay nothing up front. In the example above, do you take the $40 per month higher payment and save $200 in cash, which would take 50 months or over four years to break even? Usually it made sense for most folks to take the no cost option as rates were falling and the option of refinancing multiple times over the course of a year or so was made prohibitively expensive because the closing costs had to be paid in cash each time. This is also known as financing the costs into the rate.
This brings us to the death of this loan and the trouble it is causing in todays' busy mortgage market. Banks have stopped paying any significant amount of YSP to the broker for the right to collect the payments. Here is a sample comparing a rate sheet from last spring when we had a very brief drop in rates to one since from last week with similar rates using the same $250,000 loan example.
This drop in what banks are paying for mortgages can be attributed to several factors.
First is that more loans than expected are going to foreclosure. With the uncertainty in today's economy, you may feel comfortable about your income prospects but lenders don't. It's not personal; they feel that way about everyone. Second, if rates drop more later, (a big "if" that I address here) banks will get crushed because all of the loans that they are spending money to purchase today will pay off long before the collect many payments. Third is that after two years of falling profits and rising losses on mortgage portfolios banks are overwhelmed by refinance demand. Just like any business, if you can sell all you have at today's prices, why would you cut your prices (or pay more for them).
As you can see by the chart, it is now difficult if not impossible for brokers to do what they did before: pay the closing costs from the extra YSP if you wanted a 5.75% rate instead of 5.5%, the YSP would only provide an additional $250 toward your closing costs. To get anywhere close to the YSP needed to pay all the closing costs on a loan, the rate needs to rise to 6.375% where it would not likely make sense to refinance.
In today's market, the reality is that the best deal is likely to include the customer paying their closing costs. It is a shift in mentality but one that each consumer must understand is critical to getting the best deal to secure their financial future.
Labels: current market, mortgage truths
posted by Dylan Kramer @ 9:16 AM,