Oregon Mortgage Market

More thoughts on RESPA reform

2010-01-11T11:48:00.000-08:00

In my conversation with Mr. White from VA about how to disclose unallowable fees under the new RESPA, he mentioned to me that they were struggling just like we were to figure it out. He also asked me my thoughts on the new regulations, and I thought I would share my reply:

You asked about my thoughts on the new RESPA, and my main criticism is that it was written by people who clearly have never worked in the industry, at least not at the ground level where borrowers and loan officers actually do the work. In fact, much of our RESPA training was spent listening to the attorneys venting about how RESPA conflicts with other federal regulation like the Truth-In-Lending act. It was their position that in some circumstances a lender couldn't help but violate one or the other because what one requires the other prohibits.

The fact that they never considered how RESPA would interact with VA loans is further evidence that these rules were written in a vaccuum. Regulators need to understand the complex interactions of the differenct federal regulations that come into play so they don't create compliance conflicts. Many of these issues are so obvious that it's clear there was nobody at the table who had ever actually originated a loan.

The other big issue is the way the new RESPA favors the banks over brokers. For background, brokers have always had to disclose any SRP (which when abused results in a higher rate, but is nearly always present to some extent even when locking the best available rate) while banks have not. The logic is that banks release the servicing a day or two after closing so the SRP is not part of that transaction - even though it is part of their rate lock just like for brokers. Anyway, the new RESPA transfers that money to the borrower instead of the broker. Banks and brokers typically make 1.25% to 1.5% on each loan with 1% being paid by the borrower and the rest in SRP. We never know exactly what we'll make until we lock the rate, but the borrower does know what they'll pay. Now if a broker wants to make 1.5% on a loan they must charge that amount on the GFE and then hope to get the 0.5% back for the borrower in SRP. Banks do not have to change anything, so in a scenario where both loans close with the exact same costs, the broker's initial Good Faith Estimate will look worse by 0.5% of the loan amount, which is a significant amount for anyone shopping around.

This provision also fundamentally shifts the risk from the broker to the borrower. We used to charge a 1% fee and hope to make more when we lock. Now we have to charge more and hope to get it back for the borrower when we lock. So now we know exactly what we'll make up front, but the borrower doesn't know exactly what they'll pay until the loan is locked. Brokers are used to taking that risk, but borrowers are not going to be comfortable with such fuzzy numbers, especially when it comes to closing costs.

The one good thing about the new RESPA is that it does away with bait-and-switch tactics. Once you issue a GFE you can't change your fees. Lenders who engaged in those tactics were certainly a problem and should be removed from the industry. Of course, HUD could have accomplished this goal by simply sticking with the old forms and regulations but adding the provision that once you disclose your fees you can't change them, but that would have been too easy.

The old GFE would, in fact, work better for this purpose because the borrower actually signed it. There is no signature line on the new 3 page GFE and, in fact, HUD has specifically prohibited us from having the borrower sign it. What good is a disclosure that you "can't change after issuing" if the borrower doesn't sign it? How will auditors be able to tell how many times that form was changed as long as they remember to get the old ones out of the file? I know that dishonest people will always find a way around any regulations, but in this case HUD seems to have given it to them on a silver platter. This part is so unbelievable it seems to go beyond simple incompetence. What were they thinking?

Anyway, I apologize for the long-winded rant, but you did ask...

More on VA under the new RESPA

2010-01-11T10:56:00.000-08:00

VA issued a circular on January 7th giving some guidance as to how to handle VA's unallowable borrower fees under the new RESPA. You can read it here: http://www.homeloans.va.gov/circulars/26_10_1.pdf

It seemed somewhat encouraging but not completely clear, so I e-mailed William White for clarification. From our discussion, it seems that it is VA's position that on a refi we would itemize the fees from "our origination charge" on a separate sheet and also itemize which of those fees are being paid by SRP on a separate page of the HUD and, by doing that, be able to pay the unallowable fees using SRP like we always have. This is great news because if you read my earlier posts you'll see that we would all be out of the VA refinance business without some provision like this.

Of course, now the challenge is to get the wholesale lenders to see it that way. One I spoke with thought that VA was wrong about this and would change their mind shortly, and of course they don't want to be stuck with a pipeline full of loans that can't be closed. His argument was that since SRP is now credited to the borrower it's the borrower's funds, and those fees can't be paid by the borrower's funds. I ran that argument by Mr. White from the VA and he said that they were OK with doing it that way. He also stated that they were struggling to figure out how to deal with the new RESPA just like the lenders are. The difference is that at least VA seems to be trying to make it work.

HUD's response to my question

2009-12-30T09:56:00.000-08:00

Well, I got a response from HUD, but it wasn't the most helpful thing in the world. It looks like they haven't thought about, and don't intend to think about, the way their new rules interact with the existing rules of other federal agencies like the VA. This is unfortunate since these interactions are critical to the way things actually work in the real wold. Of course, the problem may be that the people making the rules don't actually work in the "real world" of mortgage finance.

Here is the exact quote in answer to my questions from my last post:

"It is recommended that you discuss the VA guidelines with their office, HUD cannot interpret regulations promulgated by another federal agency."

It's very frustrating when you have two federal agencies making rules that are in direct conflict with one another and that somehow both have to be applied in the same transaction. I wonder if I should take this question to VA... or will they just respond that they don't interpret HUD's regulations?

VA Loans under the New RESPA

2009-12-22T13:32:00.000-08:00

If you've heard anything about the new RESPA rules going into effect in January 1, 2010, you've undoubtedly heard that there are issues. One issue that jumps out at me is the handling of the VA non-allowable closing costs. I was all over HUD's RESPA site and VA's website and could find no answers, so I wrote an e-mail to HUD's RESPA questions address. Since I know I'm not the only one with this question I'll be sure to post any reply I get as well. Here's what I wrote to HUD:

I'm wondering how to handle "non-allowable" borrower fees like the ones in a VA loan. Certain fees, such as underwriting, processing, and the buyers part of the escrow fee for example, are "non-allowable" borrower fees in a VA loan. Traditionally these are paid by the seller in a purchase and paid with rebate pricing by the lender in a refinance.

First, on a purchase do we still disclose those fees even though the borrower cannot by law pay them? The FAQs say we should include the owners title policy in the GFE even though the seller traditionally pays that, so is it the same with the non-allowable fees? Is there a way to show seller paid closing costs on the new GFE at all?

Second, on a refinance those non-allowable fees are typically paid by the broker/lender using SRP or rebate pricing because there is no seller to pay them and the borrower is not allowed to pay them. Since any rebate must now go directly to the borrower that option is no longer available. Consider the fact that VA limits the origination fee to 1% of the loan amount and the fact that VA non-allowable fees are usually between $1,000 and $1,300. If the loan amount is anywhere near $130,000 the originator would be doing the loan for nothing, which is obviously not going to happen. If I'm reading the new rules correctly, VA refinances will be a thing of the past as of January 1st.

Since I'm sure your intent was not to deprive veterans of the opportunity to refinance or purchase a home, I'm assuming there is some exception or workaround that I'm not aware of. For VA loans the new GFE is unclear and leaves the originator in a position where they may end up covering those non-allowable fees, which is not a risk I think any of us are willing to take.

Thank you in advance for your response.

RESPA Reform effective January 1, 2010

2009-12-14T12:10:00.000-08:00

Here are highlights of the new RESPA rules:

Standardized Good Faith Estimate form that all lenders must use. You can view the new three page GFE at http://www.hud.gov/content/releases/goodfaithestimate.pdf. It will be worthwhile for you to familiarize yourself with this form since it is what all everyone will be using.

This new form groups fees into subtotals rather than itemizing each one. The idea is that buyers can compare the total of the fees rather than adding up the various individual fees and trying to determine which ones vary from lender to lender.

New HUD-1 Settlement Statement corresponds to the GFE allowing buyers to easily compare the quoted fees to the actual fees at closing.

Certain fees, including all lender fees, can not change (0% tolerance) once they are quoted unless there is a change in circumstances (loan amount, down payment, etc.) or a change requested by the borrower (loan term, etc.). Even in these cases, only the charges directly affected by the new circumstance can change.

Even third party fees that are required by the lender, like title and escrow, must be accurately disclosed to within a 10% tolerance. Ideally these tolerances will finally put an end to the “bait and switch” tactics employed by some lenders.

The new GFE also makes the loan terms very clear right on the first page. It includes “yes or no” checkboxes for things like variable rates or payments, negative amortization, balloon payments, and prepayment penalties.

We've been creating regulations like this for almost as long as lending has been around, and so far they still haven't come up with a way to keep dishonest lenders from cheating unsuspecting borrowers. I don't have much confidence that they've finally figured it out now either. These new rules certainly aren't perfect and certainly won't prevent all predatory and dishonest lending practices, but they are the reality we have to deal with for now.

For more information you can go to the 51 page FAQ section of HUD’s website at http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf

A Vast Anit-Consumer Conspiracy

2009-07-30T10:17:00.000-07:00

Today another new disclosure law goes into effect. This one is called the Mortgage Disclosure Improvement Act, or MDIA, and it really doesn't add much except additional time to the process. You must wait so many days after each set of disclosures to move on to the next step such as ordering the appraisal, signing loan docs, and so on. The MDIA doesn't actually improve the disclosures as the name would suggest, it just adds some waiting periods to the disclosures we already have.

This new regulation got me thinking about the sheer number of disclosures that are required in any loan package. I won't go into all the details, but I can assure you that anything that anyone thinks is important will show up on multiple forms and that every minute detail is covered ad-nauseum on densly packed legal size forms. The stack of papers that a borrower must sign at escrow typically exceeds one inch in thickness.

I'm sure that each form, taken by itself, has some value. I can see how the rulemakers, who are perhaps too isolated from the real world, might think that each one is vitally important. However, the actual effect of all these required disclosures is that borrowers aren't reading any of them. They are simply overwhelmed by the sheer volume of paper and most just sign and hope.

With a good loan officer that's fine. However, if anyone wanted to slip something in or change loan terms without anyone noticing, what better opportunity than to bury it under mounds of meaningless paperwork? I begin to wonder if it could all be part of a vast anti-consumer conspiracy. Are all these forms part of an industry effort to make sure borrowers don't really know what they're getting and what they're paying? Could they be intentionally overwhelming and confusing borrowers while making it look like consumer protection?

When you think about the money some of the largest banks in the country made by selling loans to borrowers who didn't understand them, you can see where my suspicions come from. I can't count the number of homeowners, especially older folks, I've talked to who are just now realizing what the "Payment Option Arm" they were sold really is. They were the wrong borrwer for that loan, they never understood it, and now they're upside-down in their homes with payments about to skyrocket. These loans were sold over the phone by big banks like Countrywide, and the scary details were hidden in the reams of paper the borrowers were asked to sign.

The greatest service we could do for consumers is to junk all the forms and start over. With just a note, a trust deed, and a few choice disclosures to sign, borrowers would actually have a chance to understand what they're getting. If the documents were easy to understand, most of the exotic loans with negative amortization, balloon payments, etc. would never have been done. Of course, our legislators and the big banks who own them probably realized this long ago. . .

It's HVCC Day

2009-05-01T10:17:00.000-07:00

Today is the day that the Home Valuation Code of Conduct goes into effect. This is the set of rules designed to keep fraudulent lenders and appraisers from conspiring to inflate appraisals. The actual effect is more likely going to be to harm the real estate market and consumers.

The main change is that loan officers can no longer order appraisals or communicate with appraisers. For mortgage brokers this means that the wholesale lender will order the appraisals through an Appraisal Management Company, or AMC. These AMCs have been around for some time and can be useful for lenders who do business out of their local area. You can simply contact one of these AMCs and let them find the appraiser.

Unfortunately, the result is often an inferior appraisal with an inflated fee. The reason is that these AMCs are taking a cut out of the appraisal fee, so it costs the consumer more than it would if ordered directly and the appraiser is paid less than they otherwise would. Up until now appraisers would only accept AMC work if they weren't busy with local lenders. Why do the same work for less money? So basically if the lenders who know you don't want to hire you, you take work for less money from people who don't know you. Not exactly a recipe for selecting the best appraisers.

Even now with the HVCC in place, a small bank exception will still allow good appraisers to do work for local lenders for higher fees than the AMCs pay. So who's left doing these appraisals ordered anonymously through AMCs? Are they any good? Will they be done on time? In my experience, the answer is too often "no."

Another problem is that these appraisals will be ordered by the lenders, not the brokers. This is fine if everything goes smoothly, but sometimes for one reason or another a loan needs to be moved. There is a procedure for this, but it remains to be seen how cooperative lenders will be and how much extra this will cost the borrower.

By far the biggest issue with the HVCC is that it simply won't work. Large lenders like Countrywide and Wells Fargo are simply using AMCs that they own and control. These AMCs in turn have increased influence over appraisers because of the market share they control. The HVCC was clearly written by people too far removed from the real world of real estate to understand what they were doing.

People determined to commit fraud will always find a way no matter how many new rules pop up. Things like the HVCC only make it more difficult for the honest people. The only way to fix the problems that exist in the real estate/mortgage market is to aggressively pursue and weed out the bad actors one at a time.

Save Oregon's 1031 Exchange

2009-03-09T09:59:00.000-07:00

This week in Salem the 1031 Exchange tax deferral is coming under fire. The 1031 Exchange is a way for investors to defer paying capital gains tax on the sale of an investment property when they use the proceeds to buy another "like property."

The 1031 Exchange is not a true waiver of the tax like the one you get when you sell your owner occupied home. The taxes are simply deferred until you finally cash the property in when you sell and keep the money. This deferment essentially pushes investors toward buying more real estate whenever they sell.

The ability to sell one property to buy another is obviously something we don't want to inhibit in economic times like these. I understand that the state is hard up for cash and looking for ways to increase revenue, but anything that hurts the already reeling real estate market is a huge mistake.

If you're reading this you at least have some interest in the real estate market, so I probably don't have to work too hard to convince you that this is a bad idea. What is needed is for you to contact your representatives and make sure they understand what a bad idea it is. There is a hearing on Tuesday, March 10th at 8:00 in Hearing Room A for any of you who can make it. Tell your representatives to vote no on House Bill 2696.

Financial Stability Plan Details

2009-03-06T09:48:00.000-08:00

The details of Obama's Financial Stability Plan are officially out, but there are still unanswered questions. The official website is up with the specifics of the two plans, one for high loan-to-value refinances for good borrowers and the other providing modifications for borrowers in danger of losing their homes.

The basic idea is to first find out if you are eligible by following the steps on the website, next call your loan servicer, and then be patient. The servicers are no doubt being inundated with more requests than they have the ability to deal with.

You'll need patience since it sounds like even the refinancing part of the plan is to be run through the servicers. Typically servicing loans, i.e. opening envelopes and posting payments, is a completely separate operation from originating loans, i.e. evaluating income, assets, credit and appraisals. Many lenders specialize in one or the other function while a few of the big ones do both.

Those large lenders who do both are going to be overwhelmed with applications, and it wouldn't surprise me to see refinances taking two or three months to complete. Interest rates are low right now, but they're also volatile. Hopefully borrowers won't start the process with rates in the 4%s and end up in the high 5%s because it takes so long. A much more efficient way to do these refinances would be to offer this program through all Fannie/Freddie lenders and let the existing force of loan officers and underwriters close the loans.

The other thing that is still not clear in all this is the pricing. Politicians who are far removed from the real world can say things like "market rate" without really understanding what that means. In today's mortgage market there is no such thing as a single rate on any given day. Most important is the fact that rates are partially based on loan-to-value, and there is no pricing for a 105% loan. In fact, the rate often gets better just over 80% LTV because the presence of mortgage insurance decreases the risk to the lender. Will there be MI on these refinances? We still don't know, and these are the details that determine whether the program will be a success.

On the modification side, the only question I still have is how to get the investors to go along. One thing that will help is the passage in congress of the mortgage bill allowing bankruptcy judges to modify loans. Hopefully it won't come to that, but having that "stick" to go along with the financial "carrot" already announced should help motivate lenders to play ball.

The difficulty is knowing who really owns these loans after they've been converted, shuffled and repackaged. A recent Time Magazine article gives a great glimpse into the complexities of mortgage bonds and CDOs. Anyone wanting to understand the challenges to loan modification and how a relatively small number of foreclosures can wreak so much havoc in the financial world should take a moment to read this story.

Even with the poor performance of modifications to date, with as many as 59% already being back in default, it still remains the best option we have for troubled mortgages. This new plan's success rate should be better since it includes debt-to-income guidelines that should work for most families. People who really can't afford their mortgage at any interest rate will not be able to modify. Even if the success rate is the same, stopping 41% of the foreclosures is a lot better than doing nothing and should have a positive effect on the housing market.

The New Mortgage Fraud

2009-03-03T13:04:00.000-08:00

Unfortunately mortgage fraud has not fizzled out along with the real estate market. It's just changed. The new mortgage fraud preys upon desperate homeowners threatened with foreclosure, and these tough economic times are creating plenty of potential victims.

The Foreclosure Rescue Scam is probably the most common and one that I have fielded many calls about. These companies offer to help negotiate with your lender to avoid foreclosure and modify the terms of your loan. First of all, there's nothing that even a reputable firm can do that a persistent homeowner can't do themselves. You're better off calling yourself to negotiate a modification. The real problem, however, is that the scammers will collect money up front and then do little or no work. Homeowners end up still facing foreclosure and out hundreds or even thousands of dollars.

The Mortgage Elimination Scam is another popular one today. In this scenario the scammer prepares paperwork that appears to eliminate the mortgage. There is, of course, a fee for this service and, of course, it doesn't actually work since the only way to eliminate your mortgage is to pay it off. The homeowner stops making payments and by the time they receive notice that they're in default the scammer is long gone.

The Equity Theft scam is essentially a version of the foreclosure rescue scam. To avoid foreclosure homeowners are convinced to execute a quitclaim deed transferring the property to the scammer for very little money. The scammer promises to rent the home back to the homeowner with the option to buy it back down the road. Of course, these promises are never in writing and the scammer proceeds to evict the former owner and sell the property. This one only works if the owner has significant equity.

The newest scams involve the Federal Stimulus Bill and other mortgage relief legislation. Basically these are the same basic scams, but by invoking the legislation or government agencies we've all been hearing about on the news they lend themselves instant credibility.

Scam artists will continue to come up with newer and more clever ways to commit mortgage fraud as long as there's money to be made. However, there are some basic guidelines that should keep most homeowners out of trouble. The oldest piece of advice on the topic is still the best, "If something seems too good to be true, it probably is." If you keep this one concept firmly in mind, you will be very difficult to take advantage of.

The other big one is to be wary of anyone who requires payment up front. Also avoid anyone who wants to rush you into things and won't allow time for you to check it out. Another common red flag is being told not to contact family, friends, attorneys, financial advisers, etc. Desperate people make the easiest victims, so take a step back to be sure you understand everything. When in doubt, take the time to check with the Better Business Bureau or the State Attorney General's office.

New Reverse Mortgage Limit

2009-02-26T12:46:00.000-08:00

As part of the recently passed Economic Stimulus Bill, the loan limits on Reverse Mortgages have been raised to $625,500. The previous limit was $417,000 based on the Fannie Mae/Freddie Mac conforming loan limit. The new limit is set at 150% of the Fannie/Freddie limit, so it will adjust with the conforming loan limit.

This is a huge jump for us here in Josephine County where the limit has gone from about $271,050 to $417,000 and finally to $625,500 in a matter of months.

What this means is that seniors can access more of the equity in their homes. In our area it seems that many of the most expensive homes are owned by retirees, and the previous loan limits represented a small fraction of those values. Now more people can get a reverse mortgage large enough to pay off their existing loans and maybe even leave them with some extra cash.

While this improvement won't do much for the housing market, the extra cash it frees up for seniors could translate into much needed consumer spending in the larger economy. Also, a reverse mortgage can be a great tool for avoiding foreclosure, and the higher limit makes that option available to more people.

Obama's New Mortgage Plan

2009-02-19T13:26:00.000-08:00

Yesterday President Obama unveiled his new Homeowner Affordability and Stability Plan. Giving money to the banks to encourage lending has been a complete failure, so this new plan aims to help individual homeowners instead. Helping homeowners will, in turn, help the banks and the overall economy. That is, of course, if it works.

This plan has two main parts. The first is designed to allow homeowners to refinance at today's low rates even if they've lost much of their equity to declining home values. The other is aimed at struggling homeowners and involves modifying loans and subsidizing payments to bring them in line with the borrower's income.

To me the first part is the most exciting as previous efforts at modifying loans have not been very successful. According to one report 58% of loans that were modified are right back in default within six months. Maybe with government subsidies the modifications will be significant enough to really make a difference.

In fact, the goal seems to be to bring the housing payment down to 31% of the borrower's income, which sounds like a good target. Hopefully they will also look at the total debt-to-income ration and not just the house payment. If another 31% of income is going out to car loans and credit cards then you're up to a 62% debt-to-income ratio, which is not sustainable. Unfortunately the people who buy more house than they can afford are often the same ones who overindulge in other credit as well. These are the details that we haven't heard yet and that will determine whether or not this part of the plan is effective.

Many important details are yet to be announced on the first part of the plan as well. They say it will allow people to refinance even if they owe more than 80% of the value of their home. We can already do that right now. The only issue is that you pay Private Mortgage Insurance (PMI) if you borrow more than 80%, and that can often make the refinance less attractive. So will this plan remove the requirement for PMI on high loan-to-value loans? What would the rate be on a mortgage that is 105% of the value of the home? What kind of income, assets and credit would be required? Who will process and underwrite these loans?

Details aside I think it's the right approach. People who's only mistake was buying at the wrong time deserve the help at least as much as those trying to hang on to a house they probably shouldn't have bought in the first place. Also, allowing 4-5 million homeowners to lower their house payments is a great stimulus for the economy. A refi to a lower rate will save the average family a lot more than any tax cut, and all that money will be available to go back into the economy right away.

The basics of the plan and it's goals are great: help struggling homeowners avoid foreclosure, help responsible homeowners impacted by sagging home values, and stimulate the economy at the same time. Hopefully the details and execution of the plan allow it to live up to it's potential.

Finally, Regulation that Makes Sense

2009-01-26T11:53:00.000-08:00

I've never liked the argument between more regulation and less regulation. Neither of those is the answer. What we need is better regulation that actually addresses the problem without bogging down the industry. I've written plenty about new regulations I don't like, but now I've found one that really seems to make sense.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, announced the new rules last week. Starting in January of 2010 individual mortgages will include loan-level identifiers on the lender, loan officer and appraiser who were involved. This means that we will be able to track the performance of individual loan officers and appraisers. Loan officers and appraisers with high default rates or incidents of fraud will be easily identified.

This computerized information will make it possible to finally weed out the bad actors in the industry. All the education requirements and additional forms in the world won't improve the industry or protect consumers nearly as much as simply getting rid of those individuals. People who want to commit fraud will find a way around most regulations, but if they're doing bad loans this system will catch them.

Of course, the real test is going to be what is done with the information. We can't simply compile information and do nothing with it. It is critical that the information gathering be accompanied by strong enforcement actions. Lenders and appraisers are licensed professionals, and the bad ones need to have those licenses revoked.

This new regulation won't single-handedly fix the mortgage industry, but at least it will give us the tools to go after the root of the problem.

Where's My Bailout?

2009-01-16T16:58:00.000-08:00

For months we've been seeing bailouts for companies and individuals who made bad investments. The financial institutions get $750 billion, AIG gets $85 billion, the automakers get some, and homeowners threatened with foreclosure get their loans modified with lower rates and even lower principal balances.

Through it all the biggest objection has been from people who made sound decisisions. Why should my neighbor who got in over his head get his balance reduced while I still have to pay back what I borrowed? Plus, it's generally the people who aren't in trouble who end up paying the taxes that fund the bailouts. Doesn't seem fair, does it?

To all those who have made sound decisions and paid their bills on time, here's your bailout... Fixed rate mortgages are in the mid to high 4% range. I'll leave it to the advertisers to gush about how rare and wonderful a sub 5% mortgage is, but the point is here is a benefit reserved solely for you, the fiscally responsible.

I thought that we'd see first time homebuyers coming out of the woodwork when rates fell below 5%, but we haven't. It also hasn't helped the people who are in over their heads and need some relief. In fact, only people with good credit and equity are able to take advantage.

I've been shocked at the ratio of refinances to purchases, and I'm not the only one. Everyone from the big wholesale lenders to small local banks to real estate appraisers tell the same story. It's been all refinances and almost exclusively for strong borrowers.

So if you've only borrowed what you could afford, paid your bills on time and resent footing the bill for the mistakes of others, here's your bailout!

The Next Threat to the Housing Market

2009-01-09T09:51:00.000-08:00

It's beginning to look like unemployment may be the next big threat to the housing market. Today's numbers were, once again, not good. 524,000 people lost their jobs in December for a total of 2.6 million in 2008. People without jobs can't buy houses, and people who fear losing their jobs don't buy much either.

The headlines say this is the worst since World War II, but that's a bit of an over-dramatization. It is true that this is the largest annual job loss since 1945 when 2.75 million people lost their jobs. However, in a growing country you can't just compare numbers like that without adjusting for the size of the workforce. The US population was less than half what it is now, so 2.75 million was a lot more back then.

The scary detail in these numbers is that 1.9 million of the 2.6 million total were lost in the last four months of the year. The job losses will likely get worse before they get better, and it could be a while if we're only four months into it.

Unemployment is really more of an indirect threat to our local real estate market. We don't have any good jobs to lose in Grants Pass. The people moving here, however, have to sell their old homes to someone, and that someone usually needs a job to afford that house. Great rates and low prices are all very nice, but they won't be enough to fix the market without jobs.

New Appraisal Rules

2009-01-05T12:40:00.000-08:00

On December 23rd the final Home Valuation Code of Conduct was released. The HVCC is a new set of rules designed to prevent undue influence on appraisers by lenders, mortgage brokers and realtors. While inflated appraisals may or may not be a significant problem (see my earlier post ), these rules are definitely not the solution.

The most significant change is that virtually all appraisals will have to be ordered through Appraisal Management Companies, or AMCs. These AMCs are essentially middlemen who take orders from lenders and assign them out to appraisers. This firewall is seen as a way to prevent appraisers from feeling pressure to hit a specific value.

Of course this assumes that lenders are bad and the AMCs are above reproach. The irony of the situation is best expressed in an article by Dave Biggers, "This massive push toward AMCs is all the more surprising given that the original lawsuit by the Attorney General was filed against eAppraiseIT, an AMC, accusing it of inflating appraisals to satisfy Washington Mutual's demands."

Even if we assume that appraisers were inflating values in response to pressure from their clients, this solution takes us in the complete wrong direction. If an appraiser is pressured by a loan officer, the worst that can happen is that they'll lose that person's business. Is one client really worth risking your license over?

Once all the appraisals are ordered by a small handful of national AMCs that becomes a whole different question. Can any appraiser afford to piss off Landsafe, LSI, or eAppraiseIT when they become the Wal-Marts of appraisal ordering? The potential for abuse is much higher in a world where there are only a few large clients ordering all the appraisals.

Scapegoating the Appraisers

2009-01-05T10:48:00.000-08:00

We've been looking for someone to blame for the crash of the real estate market since the beginning. Maybe it was the homeowners borrowing more than they could afford. Maybe it was the subprime lenders selling those adjustable rate loans. Maybe it was the big investment bankers with their insatiable appetite for exotic mortgages. Or maybe it was the appraisers for inflating the values and allowing people to borrow more than their houses are worth.

I've heard this argument, that appraisers are to blame for people owing more than their house is worth, even from "respectable" news sources like Bloomberg. This is just ridiculous. Certainly there are bad actors in any profession and those individuals should be rooted out, but that's not why people owe more than their homes are worth.

The real estate market is like any other market, like the stock market for example. My stocks are worth a lot less now than they were six months ago. Does that mean that they weren't really worth that much when I bought them? I don't think so. Values go up and down, the difference here is that people are highly leveraged in their homes. If you took out a 100% loan on your home a year ago you now owe more than the house is worth, period. It doesn't matter what it was worth back then, it's going to be lower now because values are down.

If we all borrowed money to buy stocks we'd be in the same situation because of the stock market collapse. As it is we lament the money we've lost in our retirement accounts, but nobody looks to blame someone else for having paid too much. We accept that this is the way markets work and hope it recovers soon. We all need to take a deep breath and realize that the same is true of the housing market. Or should we go after our stock brokers for allowing us to pay too much for shares we bought a year ago?

If you got the house you want and a payment you can afford, who cares what the value is now? Most people aren't in default because of the value. They're in default because they can't afford their payments. Of course if values were still going up many of those people could have bailed themselves out by selling, but that still wouldn't have made it a good idea to take that loan in the first place.

For the most part those "inflated appraisals" were simply a reflection of the inflated home prices at the peak of the market. In addition, inflated appraisals aren't even the big issue when it comes to mortgage fraud. According to Fannie Mae's Fraud Update on loans done in 2006 and 2007, inflated values account for a whopping 5% of all mortgage fraud. Compare that to 30% for misrepresented income and 26% for doctored up liabilities and you see that appraisers are not the root of the problem after all.

Obviously there are appraisers committing fraud for their own gain, and those individuals should be punished. Appraiser's are licensed, and the licenses of bad appraisers should be revoked. The unethical will always find a way around whatever new rules we throw at them. The best solution here is to spend some time finding and removing the bad ones instead of coming down on the whole industry.

Home Sales in the West Still Strong

2008-12-23T09:17:00.000-08:00

Once again the nationwide Existing Home Sales numbers are grim, and once again the West is moving in the opposite direction. The headlines say that last month saw the sharpest decline in home sales on record and that the prices are also down by 13.2%, the largest percentage since they began keeping track.

A closer look at the data shows two very different trends blending together to give these numbers. The West was the only region to show an increase in existing home sales once again. In fact, the single family numbers in the west are up 19.8% over last year, which is actually pretty impressive.

Of course a lot of this is the result of dramatically lower prices as bank owned properties begin to move. Single Family Home prices were off by 25.5%, which is by far the most for any region.

Once again this looks like a "first in, first out" scenario. The super heated California markets that crashed first seem to be about a year ahead of the rest of the country and, hopefully, are already moving toward a recovery.

Once those markets burn through some of their inventory and find some stable footing, our own little market should bounce back as well since most of the new buyers in Southern Oregon are the sellers from California.

Rates Hit 37 Year Low

2008-12-19T14:20:00.000-08:00

If you've been paying attention this week you know that mortgage rates fell to some pretty impressive levels. For a few hours on Wednesday you could lock in a rate lower than 4.5%, which is certainly something I've never seen. Apparently I'm not the only one. This weeks average is the lowest since Freddie Mac began tracking it in 1971, so it's definitely a big deal.

The interesting thing is that the amazing rates seem to be confined to the 30 year fixed. I don't know why lenders even show the hybrid ARM rates anymore. Why get a loan fixed for three to five years if the 30 year fixed rate is more than a point better?

Even the 15 year fixed rate is no better than a 30 year in this market. 15 year rates are usually at least 1/2% better than the 30 year, but this week there have been days where the 15 was actually worse.

This may reflect the secondary market's aversion to anything that isn't a traditional 30 year fixed rate loan. The interest only, adjustable, negative amortization type loans that have been making all the headlines have soured investors appetite for anything out of the ordinary. When some of the more exotic loans started going bad investors fled to the more conventional.

Fortunately for us, the 30 year fixed really is the best loan for most people in most circumstances. This week the phones are ringing with people wanting to refinance into a lower rate. Hopefully this will also bring some new buyers into the market, but even if all it does is to save homeowners a lot of money it might end up being a much needed stimulus for the economy.

Doom + Gloom = Time to Buy?

2008-12-16T10:47:00.000-08:00

Once again all the economic headlines today are glum. The Consumer Price Index was down 1.7% and flat when you exclude food and energy. This is the largest decline since they started seasonally adjusting the number in 1947. Housing starts also set a record today by dropping 18.9% to the lowest level since they started keeping track in 1959.

Of course this is all bad news for the larger economy. However, there are some glimmers here for housing. First, the CPI numbers hint at deflation and certainly show no signs of inflation, which is the best possible news for mortgage rates. Rates have been falling lately and this news makes it likely that they will continue or at least hold steady at these low levels.

Housing starts indicate that builders are not very confident, and less construction will mean painful job losses. In the long term it also means fewer new houses going into an already glutted market. Inventories of unsold homes are a big part of the problem with the housing market, so fewer new homes means at least we're not adding to the problem.

All this gloom does create an opportunity for buyers. Prices are low, there's plenty of selection, and mortgage rates are great. If these factors are enough to bring first time buyers into the market it could go a long way to fixing the housing market. Locally we are starting to see some of the first time buyers who had been priced out of the market during the peak.

Years from now I imagine people will be looking back thinking "if I'd only bought back then..." Aside from the investment angle, housing is actually affordable again for people living here in Southern Oregon, which was really not the case when prices were high. Sure, people who owned a home could sell it and buy another, but the new buyers were almost all from out of state. Now, between the prices and the rates, may be time again for renters to become buyers.

4.5% Mortgage Rates?

2008-12-08T13:59:00.000-08:00

By now everyone has heard that the Treasury Department is considering plans to push mortgage rates to 4.5% in an effort to stimulate the housing market. While this sounds like a good idea, there are some real problems with it.

The biggest problem is that the government doesn't control mortgage rates. Mortgage rates are set by the market based on what investors will buy and sell mortgage backed securities for. It's kind of like the government saying they plan to move the Dow Jones back over 10,000. Maybe they could do it by buying enough stock, or in the case of interest rates buying enough mortgage backed securities, to move the overall market. Maybe that would work, but maybe it wouldn't. It's not like the Fed Funds rate that can be arbitrarily set.

Beyond that you have to wonder how much it would even help. Mortgage rates are already hovering around 5%. Would an extra 1/2% (about $60 a month on a $200,000 loan) really be enough to bring out the buyers? If you can't afford a $1,200 PITI payment, would $1,140 make a difference?

This plan was floated as a way to help struggling homeowners, but apparently the 4.5% is only for new purchases. People who need to refinance to be able to stay in their homes won't benefit, unless of course some new buyer comes along to save the day.

Of course, as a mortgage broker I am all in favor of lower rates. I just don't think lower rates will fix the housing market. Rates have actually been pretty good through this whole crisis. I'm sure a 4.5% rate wouldn't hurt, but I don't think it's worth the cost in taxpayer dollars.

Borrowing and spending money the government doesn't have is not only expensive, it leads to inflation down the road, which is a real long term threat to interest rates. I also have some concerns about what happens when the crisis is over and the Treasury Department decides to dump all these securities. It seems like there's the potential to do a lot of long term damage for a potentially insignificant short term gain.

Another Solid Month for Home Sales

2008-11-24T10:24:00.001-08:00

The October existing home sales numbers look a lot like September: flat overall but with big gains in the west. Across the country existing homes sales were down 1.6% versus last year and were flat at 0% for single family homes only. However, the west saw a 37.5% increase overall and 38.8% for single family homes.

Of course this means that the rest of the country is doing worse than they were at this time last year, but we're focusing on Oregon so we'll call it good news. Last month's numbers were very similar, so now we have two solid months of sales growth in a row.

There's still a lot of inventory out there, but these are the kind of sales numbers we need to burn through it. Prices are still down significantly, but once again selling through the inventory is the only way to bring the market back in balance to where we can see prices recover.

It seems possible now that the volatile markets out west that were the first to fall may also be the first to recover. Let's hope the trend continues as the big California markets are a good part of what drives our small Oregon market.

New Good Faith Estimate

2008-11-21T14:08:00.000-08:00

In an effort to help consumers better understand the terms of their mortgages before they close, HUD has come up with a new standardized Good Faith Estimate for everyone to use by January of 2010. The goal is to make sure that all the terms of the loan are clearly disclosed.

Here is a link so you can see the proposed form for yourself.

This new form includes everything from the old GFE plus a lot of other information already disclosed on other required forms. There are check boxes to indicate if your loan is adjustable or has features like a balloon payment or a prepayment penalty. It also groups different categories of fees in ways that make more sense and further clarifies the total amount of broker compensation.

One new bit of information is the Tradeoff Table. This table compares the loan you are actually getting to two other available options. First is the same loan with lower fees (and therefore a higher rate), and the other is the same loan with a lower rate (and therefore higher fees). It's an interesting comparison and will help to demystify the famous "no-fee" loans by clearly showing how you pay those fees through a higher rate.

While I'm certain the regulators mean well, they clearly haven't spent enough time in the real world with actual borrowers to be able to do it well. If the problem is that consumers are taking loans that they don't fully understand, adding more paperwork is not the solution.

Anyone who has been through a package of loan documents can tell you that the reason people don't read and understand everything is that there is simply too much of it. Many concepts, like the need to maintain homeowners insurance, are covered by at least three separate forms. There are disclosures on everything imaginable, including my favorite form which advises borrowers that failing to make payments on time may result in negative information being reported to credit bureaus. Wow! Who knew!

The only way to make sure that borrowers are getting loans that they understand and that are the best loans for their particular circumstances is for them to work with a trustworthy loan officer. Since that's impossible to legislate, we have to make due with better disclosure. However, more paperwork does not necessarily result in better disclosure.

A better solution might be to get rid of 90% of the current pile of required forms in favor of 5 or 10 new ones that are clear, easy to understand, and cover all the important issues. That way critical information wouldn't be buried under an endless stack of disclosures. I'm interested to hear your thoughts on this.

What is Yield Spread Premium?

2008-11-21T09:47:00.000-08:00

Yield Spread Premium (YSP) is a fee paid by the lender to the originator when a loan closes. There has been a lot of talk lately about this once obscure topic as regulators look for ways to reign in predatory lending. While YSP can be abused, it is not always bad and has many consumer-friendly uses.

First, it's useful to understand the way mortgages are priced at the wholesale level. There is no such thing as "the rate" on any given day. Here is a sample of an interest rate grid for a conventional 30 year fixed mortgage:

The numbers to the right of each rate represent the cost (discount points) or rebate (YSP) for that rate and lock term (15 or 30 days) expressed in points. A point is one percent of the loan amount ($1,000 on a $100,000 loan). So at it's simplest, the rate today would be 6.375% if you were to lock for 30 days. The zero in that column means that there is no cost or rebate for that rate. If you wanted to buy your rate down to 6.0%, you would have to pay an additional 1 point as a discount fee at closing. If, on the other hand, you were to lock at 6.75%, the originator would have 1.125 points rebate to play with.

Of course, nothing is ever as simple as it seems. There are nearly always pricing adjusters having to do with the particulars of each loan. Some examples of factors that can affect pricing include loan-to-value ratio, credit score, loan amount, occupancy, and many others. Those pricing adjustments are given in points as well, so one good use of YSP is to offset those adjustments. The non-owner-occupied adjustment, for example, is 1.75 points, which can be several thousand dollars on an average sized loan. Most borrowers would prefer to take the 7.125% interest rate, which pays that 1.75 point fee, rather than paying it out of pocket.

Another legitimate use can be offering a "no-fee loan." No-fee loans are not for everyone, in fact they are not for most consumers, but that's a topic for another day. A no-fee loan is where you pay a higher interest rate and that YSP, the negative numbers on the chart above, is used to pay some or all of your closing costs.

The problems arise when you pay the higher rate and don't get any benefit. In these cases it's the loan originator who pockets the money. On the chart above, for example, if you paid your 1 point origination fee and still got a 7.0% rate, that lender would gross 2.5 points total on your loan. This can create an incentive for unscrupulous loan officers to sell higher rates than the borrower qualifies for which, of course, is a real problem.

I'll leave ideas on how to solve this problem for another day. For now I think understanding what Yield Spread Premium is and how it works is enough for one post, and of course this is just a very basic outline. I welcome your comments and questions.

Record Decline in Key Inflation Index

2008-11-19T09:27:00.001-08:00

The Consumer Price Index was down by a full 1% for October. This is the largest decline since the government began keeping records in 1947. Much of the decrease is attributed to the drop in gas prices, but even the core rate, which excludes volatile food and energy, was down by 0.1%. The drop in the core rate is significant since it's the first time that index has declined since 1982.

This news follows the Producer Price Index's own record drop of 2.8% on Tuesday the 18th. The Consumer Price Index along with the Producer Price Index are two of the main indicators of inflation, and inflation is among the most significant factors that influence mortgage rates.

Inflation eats away at the value of fixed rate investments like mortgages. It's easy to see why nobody wants to lend money at 5% if inflation is 6%. In economic times like these, inflation is typically not a concern and long term rates tend to benefit.

So while today's news may not be good news for your stock portfolio, it's great news if you're looking to lock in a low fixed rate. Sure enough, this morning's mortgage rates are looking better than they did yesterday. The threat of deflation and the damage it can do to the economy is likely to be the headline today, but the combination of lower prices and lower interest rates can actually be a boon to potential home buyers.

Home Sales Rise, Especially in the West

2008-11-18T14:44:00.000-08:00

The existing home sales figures put out by the National Association of Realtors had some good news last month. The overall sales figure was up 1.4% versus the same month last year. While that's not exactly a huge increase, it is a positive number.

The better news comes from a closer look at the data. While most regions of the country actually saw a decrease, in the West the increase was 34.4% over last year. Now that is something to get excited about.

Granted, Southern Oregon is a very small part of the West. However, if the big markets in California can mount a recovery, that will certainly be good news for us. Other good news is starting to trickle out of California. Unsold inventories are dropping as well, which only makes sense when sales are up. Inventories are down 21% in San Diego, 21.6% in Orange County and 32.1% in Sacramento.

One month's worth of sales figures is not enough to really call it a recovery, but if this keeps up we could be seeing light at the end of the tunnel for our local market as well. Check back here for next months existing home sales figures which are due out on November 24th.

Was That The Bottom?

2008-11-18T14:43:00.000-08:00

Everyone knows that housing prices have been pummeled lately. Whether the falling prices are causing the foreclosures or the foreclosures are causing the drop in prices is really just academic at this point. The fact is each problem is feeding the other in a vicious cycle that won't end, well, until it ends.

In the long run, real estate values will recover and continue to climb. Our population continues to grow, and people have to live somewhere. Or, in the famous words of Will Rogers, ''The best investment is land, because they ain't making anymore of it.'' The question is really when will the market turn around.

Accurately predicting the bottom can be very profitable. "Buy low, sell high" is still the best investment advice ever written. On the other hand, missing the bottom can be a disaster. Just ask anyone who bought too much house a couple years ago hoping to sell for a tidy profit in a few short months. That's why they call it speculation...

That being said, trying to time the real estate market is really no better than timing the stock market. Market timers typically lose in the end. Once again, see the last two years. The real question investors need to ask themselves is "can I afford this?"

Whether you're buying a home for your family to live in or an investment property to rent or sell for a profit, you need to know that you can make the payments. Investing based on the assumption that you can sell it next year is a great way to end up as the latest foreclosure statistic. While that kind of investing may work out, you need to go into it with the assumption that it won't. If you plan based on getting stuck with the property, you can't lose.

This is especially true for owner occupied homes. You have to pay to live somewhere. If the payment works for your budget, then it really doesn't matter what the value is. Whether you make money or lose money when you sell is really irrelevant if you're buying again in the same market. The money you make on the sale is just funny money if you're having to spend it all on the house you're buying. It's the same if you lose money selling but get a screaming deal on the buy. Unless you're moving out of the area, making or losing money on your own home is just numbers on paper. Which is why, once again, the main priority needs to be whether or not you can afford it.

As to the question of when we will see (or have seen) the bottom, for most of us that is the wrong question. Leveraged investing based on assumptions about the future of the market is what created the current crisis. If you bet on a bottom and miss or simply can't afford to ride it out, you lose. Don't try to time the market. Invest based on what you can actually afford and you will make money no matter when the bottom hits.

New FHA Loan Limits

2008-11-18T09:22:00.000-08:00

New limits for FHA loans are going into effect January 1st of 2009. The new limits are higher than the old base limits but, in most cases, lower than the temporary limits put in place during 2008. We can still use the old temporary limits as long as we have a loan approval, purchase contract, and FHA case number in place before the end of the year.

The new loan limits for counties in Southern Oregon are as follows:

Josephine: $271,050
Jackson: $279,450
Douglas: $271,050
Klamath: $271,050

For Douglas and Klamath Counties the limits are unchanged. The temporary loan limit in Josephine County is $325,000 and in Jackson County it is $422,500 through the end of 2008.

In the current mortgage market, FHA has emerged as one of the most aggressive loan programs available. Buyers with less than perfect credit can buy a home with a 3% down payment, and even that 3% can be a gift. FHA is also a good option for refinances as the loan to value ratios are very flexible and you can even refinance a house that has been recently listed for sale. The property requirements have been relaxed recently and sellers are no longer required to pay any buyer's closing costs. Throw in fixed rates that often beat conforming - especially at higher loan-to-value ratios - and you can see why FHA is more important than ever.

When Should I Lock My Rate?

2008-11-17T14:43:00.001-08:00

As a mortgage professional, I am asked all the time by clients if they should lock now or wait. Unfortunately, there is no easy answer. Interest rates are determined by the market and can change frequently. The market has been particularly volatile in these last few weeks and months with all that's going on in the mortgage market.

Mortgage rates come from the sale of mortgage backed bonds like Fannie, Freddie, and GNMA (for government loans) bonds. Typically bonds and stocks move in opposite directions, so a bad day for stocks may be a good day for bonds and, therefore, rates. This year with all the drama in the mortgage market there have been many days where both stocks and bonds do poorly, but it's still a good general rule. Another good rule is that mortgage rates are hurt by inflation. Anything that suggests inflation is on the way will typically be bad for rates, so if you want to pay close attention to the market to time your lock, look for news that hurts stocks and beware of the hint of inflation.

In this volatile market, the best rule on when to lock is to lock as soon as you can if you can get a rate you like. Rates can change dramatically in a short time, sometimes within hours. Some people are gamblers and like to wait to pounce on the best possible rate while others prefer to play it safe and lock early. The question one must ask, in the immortal words of Dirty Harry, is "Do I feel lucky?"

As a borrower, you have plenty of time to decide. Any time between the point when you know your closing date and when you order loan documents is your window. If you enjoy playing the market and can afford to lose, then go ahead and do it. If you're more conservative and don't want the risk, lock early.

One advantage of using a mortgage broker is that they have more than one lender to choose from. Most lenders pricing on conforming loans will be within 0.125% on any given day. The real advantage is that you can lock early and then, if there is a significant improvement in rates and enough time before closing, switch to a different lender to get the better rate. Once you lock with one particular bank or lender you're locked, but by switching lenders a broker can provide the safety of an early lock with the flexibility to take advantage of market changes.

The most important thing to keep in mind is that it is really your decision. Nobody can predict where rates will be tomorrow, not your mortgage broker, investment advisor, realtor or any of the talking heads on TV. Assuming you don't have a good psychic, your decision on when to lock should be based more on your tolerance for risk than on which way you think the market is going.