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HomeU.S. Mortgage/Housing Market Has Split Personality
Posted by Larry Doyle on August 11th, 2009 11:52 AM |
To speak of the United States housing market in singular terms would be a huge mistake. The different regions of the country have their own housing dynamics. The strengths and weaknesses within the local economies have a huge impact on the strength or weakness of housing.
All this said, there is no doubt that the number 417 has the greatest impact on housing in the United States. Why and how? 417k is the cutoff for individuals looking to receive a conforming mortgage. Above that level, individuals enter the realm of the Jumbo market where rates are appreciably higher and credit standards are significantly tighter. Additionally, Jumbo product is not typically eligible to be underwritten or purchased by Freddie Mac or Fannie Mae. That restriction was waived and Freddie and Fannie have purchased some Jumbo product, but it has had no meaningful impact on the dynamics within the Jumbo space. Overall, the 417k level remains an enormous line of demarcation.
That line of demarcation is further defined by the ability to modify loans. Loan modifications for Jumbo mortgages are significantly more challenging to accomplish. On top of that, mortgage servicers are now under ENORMOUS pressure by Uncle Sam to produce increased numbers of mortgage modifications. Where is Uncle Sam targeting? Conforming mortgages.
While market analysts may believe housing is turning, they are not looking at the total picture. The Jumbo market remains under real pressure while the conforming market is showing signs of stability. Under the heading of ‘a picture speaks a thousand words,’ high five to our friends at 12th St. Capital (the leading mortgage broker-dealer on Wall Street) for providing an overview of the housing market in Los Angeles. One can see the ‘split personality’ based on sales volumes between the downtown neighborhoods and those in the upper incomes. Please click on the map to view year over year sales volumes in respective Los Angeles neighborhoods. A few miles makes a world of difference.
Would welcome insights and perspectives from people in other regions of the country on the split personality of their local housing markets as well.
LD
Be Careful of Fraud with Reverse Mortgages
Posted by Larry Doyle on August 10th, 2009 12:35 PM |
Given the current state of our economy, opportunities to access credit are diminishing. Where are more and more people going to gain credit? Their homes. What? With home values down so much and banks tightening credit standards, how are people utilizing their homes to get money? Welcome to the arcane world of reverse mortgages. In this world, people need to be EXTREMELY careful to avoid being taken. Let’s navigate.
From the website of The U.S. Department of Housing and Urban Development, we learn the Top Ten Things to Know if You’re Interested in a Reverse Mortgage. I will provide an overview and point out potential pitfalls where fraudulent activity may develop. That said, for anybody interested in a reverse mortgage, I strongly encourage you to fully review all of the details provided at the HUD site and work with a highly qualified and recommended lender. Additionally, a further resource can be found via Reverse Mortgage Alert. Let’s continue.
1. Definition: “A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence.”
2. Qualifications: “To be eligible for a FHA HECM (Home Equity Conversion Mortgage otherwise known as a reverse mortgage), the FHA (Federal Housing Administration) requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home.”
3. Eligibility: “your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.”
4. Difference between a Reverse Mortgage and Home Equity Loan: “With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.”
Sense on Cents RED FLAG: within these details lie the potential for true abusive, if not fraudulent, lending practices. How do you keep a mortgage lender honest? How do you make sure he is quoting competitive terms across all these variables (age, the effective interest rate of the reverse mortgage, the home appraisal, FHA-limits)? Never make a deal without getting a few competitive proposals. From there, check with a HUD-approved mortgage counselor. How? Contact the Housing Counseling Clearinghouse.
Other important information regarding the life of the loan, impact on your estate, total mortgage proceeds, and how to receive payments are also available at the HUD site.
Rest assured, there are plenty of quality mortgage brokers willing to help you with reverse mortgages. There are also plenty of unscrupulous mortgage brokers. Like who? The crowd at Taylor, Bean, and Whitaker.
Be careful and good luck!!
LD
Related Sense on Cents Commentary:
Fair and Fraudulent Mortgage Lending (August 5, 2009)
Fair and Fraudulent Mortgage Lending
Posted by Larry Doyle on August 5th, 2009 2:07 PM |
To think that fraudulent mortgage lending practices will simply go away because regulators want them to would be the height of naivete. In fact, given the challenging economic times, I think one could make a case that fraudulent mortgage practices may actually increase on a relative basis. How so? Desperate people will always do desperate things, including fraudulent and criminal acts.
Where can one go to receive a fair deal in the process of getting mortgage financing? What parts of the mortgage market may represent the next wave of fraud? Which firms may currently be involved in these frauds?
Major “high five” to KD and our friends at 12th Street Capital for providing tremendous perspectives on these topics this morning. KD writes:
From the Fair Mortgage Collaborative website . . .
The Fair Mortgage Collaborative is a nonprofit membership organization whose members are individually and collectively committed to providing low and moderate income and minority homeowners and homebuyers access to mortgages with the consumers’ best interests at its core, at a fair rate of compensation. Our approaches and standards work for all homeowners and homebuyers.
KD’s comment: While I certainly applaud their effort, I would make the friendly suggestion they should be looking at FHA lenders and Reverse Mortgage lenders in particular..for those are the bastions of future (and current) abuses.”
Sense on Cents will also not unilaterally bless this organization, but it may be a decent place to start in hopes of finding fair lending practices. Speaking of which, an organization you may care to avoid is Taylor, Bean, and Whitaker Mortgage as the following story from Bloomberg highlights. Obviously TBW, as with any individual or organization, is entitled to due process but until this case is adjudicated, consumers may fare better going elsewhere. KD highlights the Bloomberg story as follows:
Aug. 4 (Bloomberg) — Taylor, Bean and Whitaker Mortgage Corp., the Florida home lender that offered $300 million to save Colonial BancGroup Inc., was barred from making new loans guaranteed by the Federal Housing Administration.
The FHA, citing concern about possible fraud, plans to sanction two top officials at Ocala-based Taylor Bean for providing “false” information to the agency, according to an FHA statement today.
Agents bearing federal warrants searched Colonial’s Orlando offices yesterday, and the Ocala, Florida Star-Banner reported a similar search at closely held Taylor Bean. The firm ranked 12th among U.S. mortgage originators (KD’s comment: I think they were 3rd in FHA lending behind B of A and Wells) in the first half of this year with $17 billion of loans, according to industry newsletter Inside Mortgage Finance.
Taylor failed to submit a required annual financial report and “misrepresented that there were no unresolved issues with its independent auditor,” the FHA said. The auditor discovered “irregular transactions that raised concerns of fraud,” according to the FHA statement.”
KD’s comment: Here is the official HUD News Release on this topic. It is probably even more painful that TBW will be losing their $25bln FHA servicing portfolio and the word on the street is that it will be moved to Bank of America.
Thank you KD and 12th St. Capital for providing these awesome insights and helping us collectively navigate the economic landscape.
LD
Sense on Cents update @ 2:30pm: The Wall Street Journal reports Taylor, Bean to Cease Operations.
A Picture Is Worth A Thousand Words
Posted by Larry Doyle on May 29th, 2009 10:47 AM |
This video clip with graphs provided by the Financial Times addresses the surging rate of delinquencies, foreclosures, mortgage rates, and Treasury rates.
The historical view provided by these graphs gives us reason to pause and question the potential for a near term real economic recovery.
LD
Mortgage Refi Activity Is Driving Rates Higher
Posted by Larry Doyle on May 26th, 2009 7:17 PM |
In Wall Street terms, the wheels are coming off the Treasury bus. What does that mean in layman’s terms? Interest rates on U.S. Treasury securities are ratcheting higher. Why? I have addressed the massive supply of global government bonds that will be issued in order to finance the exploding deficits. For newer readers, you can find my thoughts on this topic in Is The Government Bond Bubble Getting Ready To Burst? UPDATE #2.
The dynamics of the massive supply of bond issuance to fund global deficits will not change. To wit, our market needs to absorb $60 billion in 5yr and 7yr notes tomorrow and Thursday. Long term interest rates in our U.S. Treasury market moved higher by another 10 basis points again today to a level of 3.55%.
Over and above that, though, there is another significant reason that is driving our bond market lower and interest rates higher. This reason is receiving little to no attention by the media or market analysts. In fact, the color allocated to this factor is strictly viewed as a positive. I am talking about the waves of mortgage refinancing precipitated by the Federal Reserve’s quantitative easing program.
How could refinancing activity further pressure the government bond market driving interest rates higher? Well, let’s accept the premise that any government program is never risk free or cost free. The quantitative easing employed by the Federal Reserve to purchase government and mortgage-backed securities has very real costs. The extraordinary volume of purchases of newly issued mortgage-backed securities by the Federal Reserve has allowed millions of homeowners to lower their mortgage payments. This is great for those benefitting. What are the costs? (more…)
Mortgage Magic or Mortgage Mayhem?
Posted by Larry Doyle on May 5th, 2009 7:02 AM |
Are the largest banks in the land ready to defy the rule of law and self-deal with Uncle Sam’s blessing in the name of providing mortgage relief to homeowners currently strapped by first and second mortgages? The WSJ reports How Big Banks Want To Game The Mortgage Mess.
Is this another game of chance in which Uncle Sam wants to prime the pump in hopes of luring private capital into the economy? No, anything but. In fact, this is no game at all. Uncle Sam is proposing legislation which would protect mortgage servicers from being sued for not performing their duty to protect the property rights of mortgage investors (including pension funds, mutual funds, insurance companies). What does all this mean?
Investors in mortgage securities backed by first mortgages are entitled and expect protection of their capital by the performance of mortgage servicers handling the monthly payment of mortgage principal and interest. In fact, if the mortgage servicers do not perform the investors will and should sue.
The investors or holders of second mortgages will only receive a return if and when the first mortgage is current on its payment.
Will Congress pass legislation which would unintentionally incentivize large banks, which also happen to be large mortgage servicers, to game the mortgage modification process for their own benefit but at the expense of investors holding the first mortgages? The WSJ highlights:
Given the current housing crisis, there is wide support for measures to make it easier for homeowners to modify their mortgages. That is understandable. Nobody likes seeing the wave of foreclosures. Plus, mortgage modifications may help stabilize home values.
But in the rush to do something, Congress is showing a regrettable willingness to adopt constitutionally suspect legislation that runs roughshod over the Fifth Amendment of the Constitution, which prohibits the taking of private property without just compensation. (more…)
Uncle Sam and State Brethren Are Now Mortgage Brokers
Posted by Larry Doyle on May 4th, 2009 11:56 AM |
Hat tip to KD for highlighting a recent article in the L.A. Times, States Taking Steps To Turn $8,000 Home Purchase Tax Credit Into Cash. I am a proponent of providing tax incentives for purchasing homes. Have Uncle Sam and his state brethren morphed into mortgage brokers, though, in the process?
My concern with this program is the discipline provided by lenders working with borrowers under this program. Is the government so desperate to support housing that it will forward a down payment in the form of a short term bridge loan to prospective buyers? If the borrower can not repay the bridge loan when receiving the credit next year, the loan becomes a second lien.
This program will support home purchases. However, irresponsible lending on behalf of unscrupulous lenders did the same. As the L.A. Times reports,
In recent weeks, at least 10 states say they’ve come up with ways to work this monetary magic. They have created innovative bridge-loan programs that advance credit-eligible buyers the cash they need for their closings. Generally the advances take the form of second mortgages — with or without interest charges — that become due and payable whenever buyers receive their credits in the form of refunds from the Internal Revenue Service.
In Missouri, which was the first state to create such a program, buyers can get a no-cost “tax credit advance” of up to 6% of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.
If buyers can’t meet that repayment deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate.
The idea that a prospective borrower may need a second mortgage within 12 months of a home purchase strikes me as an immediate red flag.
As we enter the brave new world of moral hazard and government control of industry, I guess I am going to have to get used to accepting that fiscal discipline and responsible lending aren’t what they used to be.
LD
IMF Issues Warning on Credit Losses
Posted by Larry Doyle on April 8th, 2009 7:11 AM |
Forecasted credit losses across the residential mortgage, commercial mortgage, consumer credit, and corporate credit markets have been widely estimated to triple – if not potentially quadruple – in certain sectors. What does that mean in terms of total dollars? The IMF sheds light on these losses in an article this morning in the Financial Times:
The International Monetary Fund is likely to raise its estimate of total credit losses on US assets from $2,200bn to about $2,800bn when it releases its Global Financial Stability report later this month
Those figures equate to an increase of 27% in losses and a total figure of $2.8 trillion, which equates to 20% of GDP!!! Is there any wonder why credit is so constrained in the face of these impending losses? The IMF also sheds further light on these projected losses here in the U.S., as well as in Europe, and globally:
The new estimate, while up significantly from January, will almost certainly be lower than a $3,100bn (€2,350bn, £2,111bn) figure circulating on Tuesday, which contributed to pressure on US bank stocks.
The IMF is also expected to release for the first time an estimate of total losses on European assets, which is likely to exceed $1,000bn. The fund is likely to put total losses globally at slightly above $4,000bn, including some additional losses on Asian assets. (more…)
