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. . .
Thursday, July 30, 2009
Friday, May 1, 2009
It's HVCC Day
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.
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.
Monday, March 9, 2009
Save Oregon's 1031 Exchange
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.
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.
Friday, March 6, 2009
Financial Stability Plan Details
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 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.
Tuesday, March 3, 2009
The New Mortgage Fraud
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.
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.
Thursday, February 26, 2009
New Reverse Mortgage Limit
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.
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.
Thursday, February 19, 2009
Obama's New Mortgage Plan
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.
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.
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