Because of the problems that contributed to the "sub-prime" crisis
and have a large number of borrowers facing default and foreclosure,
the House passed bill 3915 in an effort to limit abuses and bad
business practices in the mortgage industry.
The proposed legislation would include:
- Require a nationwide licensing system for mortgage
brokers and bank loan officers called the Nationwide
Mortgage Licensing System and Registry.
- Ban lenders from making loans that borrowers don't have
the ability to repay.
- Prohibit lenders from steering homeowners into refinanced
mortgages that don't provide benefit to the borrower, or
into mortgages that are at a higher rate than what the
borrower truly qualifies for.
- Prohibit the financing of points and fees and practices
like balloon payments that increase the risk of foreclosure.
(See MY COMMENTS below regarding these items).
The proposal is designed to prevent a recurrence of granting
loans to prospective borrowers with poor credit at low initial
interest rates that would reset to higher, unaffordable rates and
payments in the near future.
Opponents to the bill are concerned that congressional intrusion
could make things worse. They reasoned that the bill could make
it harder for borrowers to reset at higher interest rates, and make
the default problem deeper and more severe than it needs to be.
"Congress does two things very well: one is nothing and two is
overreact," said Rep. Tom Price, R-Ga. "While we have had a
period here where some credit, some loans, were unwisely given,
but allowing individuals, allowing Americans to purchase homes
and realize their American dream is a good thing."
Republicans voiced displeasure with the concept of lenders being
responsible for knowing whether borrowers can actually pay back
the loan. "This kind of murky language would invite litigation from
every borrower who misses a payment," said Rep. Ed Royce, R-CA.
The bill will go to the Senate, where a similar bill has been stalled
for weeks.
White House comment indicated that they were concerned that
the bill as drafted would unduly restrict access to credit for potential
homebuyers and reduce refinancing opportunities.
MY COMMENTS:
Requiring a nationwide licensing system for mortgage brokers
and bank loan officers may not be the best solution. In California,
we are licensed through the California Department of Real Estate,
and there are many safeguards for consumers to check for
complaints filed against their mortgage broker. It would seem
that each state could do a more effective job of legislating their
mortgage process and protecting their constituents.
Banning lenders from making loans that borrowers don't have the
ability to repay, although well-meaning, is probably impossible
to determine. Whenever I encounter a borrower that does not
meet the published lending guidelines, one of the first questions
that I ask is how they plan to make things work for themselves.
I may find that they have support of family members, roommates,
funds coming from an unseasoned, but still reliable source, or
plans to take on a second job to make it all work. Do they have
the ability to repay? On paper, I probably couldn't prove it to the
lender's satisfaction, but the borrower is confident it will all work
out. They are probably as well qualified as most borrowers who
are one layoff away from a catastrophic financial circumstance.
Prohibiting lenders from steering homeowners into refinanced
mortgages that don't provide benefit to the borrower, or into
mortgages that are at a higher rate than what the borrower
truly qualifies for may be difficult to determine in some cases.
There are many situations where a borrower will accept a higher
interest rate if they can benefit from lower payments. Or will
opt for higher payments to shorten the time they will have the
loan. Are higher interest rates or higher payments working
against the best interests of the borrower? The key would be
that the borrower is making an informed decision and under-
stands the tradeoffs they are making. And I think that is what
the legislation is trying to arrive at: give the borrowers enough
information to understand their benefits, their costs, and their
alternatives. With education, borrowers will make a decision
that serves their interests, and not allow a mortgage person to
make a sale of a loan product that earns themselves a fee, but
hurts the borrower.
Prohibiting the financing of points and fees and practices like
balloon payments that increase the risk of foreclosure is a mixed
bag. I can tell you from experience that if borrowers were not
allowed to finance points and fees, that it would severely limit
their opportunity to refinance. As an example, most borrowers
would prefer to pay an extra $35 per month by financing their
fees than they would to come up with $5000 in closing costs.
Most borrowers do not have $5000 set aside for this purpose
and it would stop them from moving forward. Balloon payments
are not a good thing for a borrower. It is too risky for the borrower
to be put in a position that as of a certain date they will be forced
to pay the loan in full and that there will be acceptable financing
available to help them accomplish that. It is too risky for the
borrower to be put in that position.
It is probably good that Congress is trying to find acceptable
solutions. But, in their interest to protect consumers, they may
be creating unintended problems and obstacles that will keep
the mortgage industry from meeting the needs of borrowers.
Wednesday, November 21, 2007
Wednesday, November 7, 2007
It's A Great Time For A Mortgage Loan-As published in Barron's
I was interviewed and included in an article by Mike Hogan
that appeared October 15, 2007 in Barron's. Here is the
text of the article:
Things are so, so bad that some wag has created the Mortgage Lender Implode-O-Meter to count lender defunctions. What a great time to borrow or refinance.
Widespread pain in real estate makes for one of those classic situations where cash is king -- or, in this case, a decent down payment and credit score, at least, gets you into the castle. Its dark humor aside, the Implode-O-Meter lists survivors and dishes daily updates on this turbulent market for the benefit of borrowers and investors alike.
Not every lender’s business was built on subprime loans. Alt-A or “low-doc/no-doc” loans are just a narrow slice of the portfolios of deep-pocket institutions like CitiMortgage, Wells Fargo, Wachovia and Washington Mutual. They still have to keep the lights on, offsetting losses to subprime defaults with loans to qualified borrowers.
“If you fit the Fannie or Freddie guidelines, they’d love to make you a loan,” says Doug Brennecke, a mortgage broker with San Diego’s Mike Dunn & Associates. “Conforming loans are very available with rates and fees in the low-to-moderate end of the spectrum.”
“Guidelines” refer to standards lenders must follow before Fannie Mae or Freddie Mac will buy conforming loans within the $417,000 legal limit. Already-low rates on most conforming loans have been trending lower since the subprime meltdown began, reports Brennecke. And while rates and other terms are incredibly variable, you can drill down on offerings in your town at HSH Associates, a nationwide database updated daily. Likewise, Bankrate.com’s encyclopedic data bank shows a nationwide average of the benchmark 30-year fixed-rate falling from 6.30% in July to 6.05% in early October.
Chase Mortgage increased its loan originations 41% in the second quarter, reports spokesman Thomas Kelly, including subprime and jumbo loans that can’t be layed off on Freddie or Fannie. Qualifications are stricter and prices higher than for conforming loans. But Chase views the current market distress as an opportunity to increase market share, explains Kelly, and is willing to carry the paper until investors warm up to mortgage-backed securities again.
Plummeting home sales have resulted in a stunning lack of demand. The 21.5% year-to-year decline reported by the National Association of Realtors in September is only the latest in a long string of sales declines. In response, Countrywide Home Loans, the nation’s largest mortgage lender, is sending 7,000 home loan consultants to open houses and real estate sales offices nationwide, looking for borrowers. Having lost $595 million to defaults during the first half of the year, Countrywide also has mobilized an army of home retention specialists to help delinquent borrowers keep their homes. The lender claims to have saved 40,000 mortgages from foreclosure so far this year, including 17,000 through mortgage rate modification.
Other forms of outreach include Bank of America’s No Fee Mortgage Plus, which subsidizes loan origination, title and a dozen other closing costs. BofA claims it can save a borrower $3,000 or more on a $200,000 home loan. These costs vary widely by state, but a recent Bankrate.com survey found a national median of $2,692.
There are many such offers, but they bear close scrutiny. It’s common practice to simply offset some of these saving with a higher interest rate. You should be able to suss out real loan costs through careful examination of the preliminary Truth-in-Lending statement. The Federal Trade Commission also is a wellspring of tips, definitions and other consumer protection information.
Although lending standards have tightened considerably, lenders are still more flexible than they were before the subprime craze took them afield, says Brennecke, who has 30 years matching borrowers and lenders. All loans are individual negotiations but, generally, lenders look for borrowers with steady employment, a debt-to-income ratio of about 40%, a 640 or better FICO credit score, and a 10-to-20% downpayment.
The more cash down or lower loan-to-home value when refinancing, the higher your FICO score, the better your bargaining position. myFICO offers two FICO reports a year for $90. It also sponsors a free ballpark estimator on Bankrate.com. Alternately, everyone is entitled to one free credit report a year from all three credit bureaus via AnnualCreditReport.com.
Despite gory headlines, real estate pain is very localized. Most defaults are found in Nevada, Colorado, California, Arizona and Florida, states that were the loci of speculation, notes RealtyTrac. After roughly doubling in 5 years, the national median price of an existing home is virtually unchanged from a year ago -- $224,500 in NAR’s most recent survey.
Unless you foresee prices crashing permanently in your town, now might be a good time to lock in a low cost on your real estate investment.
that appeared October 15, 2007 in Barron's. Here is the
text of the article:
Things are so, so bad that some wag has created the Mortgage Lender Implode-O-Meter to count lender defunctions. What a great time to borrow or refinance.
Widespread pain in real estate makes for one of those classic situations where cash is king -- or, in this case, a decent down payment and credit score, at least, gets you into the castle. Its dark humor aside, the Implode-O-Meter lists survivors and dishes daily updates on this turbulent market for the benefit of borrowers and investors alike.
Not every lender’s business was built on subprime loans. Alt-A or “low-doc/no-doc” loans are just a narrow slice of the portfolios of deep-pocket institutions like CitiMortgage, Wells Fargo, Wachovia and Washington Mutual. They still have to keep the lights on, offsetting losses to subprime defaults with loans to qualified borrowers.
“If you fit the Fannie or Freddie guidelines, they’d love to make you a loan,” says Doug Brennecke, a mortgage broker with San Diego’s Mike Dunn & Associates. “Conforming loans are very available with rates and fees in the low-to-moderate end of the spectrum.”
“Guidelines” refer to standards lenders must follow before Fannie Mae or Freddie Mac will buy conforming loans within the $417,000 legal limit. Already-low rates on most conforming loans have been trending lower since the subprime meltdown began, reports Brennecke. And while rates and other terms are incredibly variable, you can drill down on offerings in your town at HSH Associates, a nationwide database updated daily. Likewise, Bankrate.com’s encyclopedic data bank shows a nationwide average of the benchmark 30-year fixed-rate falling from 6.30% in July to 6.05% in early October.
Chase Mortgage increased its loan originations 41% in the second quarter, reports spokesman Thomas Kelly, including subprime and jumbo loans that can’t be layed off on Freddie or Fannie. Qualifications are stricter and prices higher than for conforming loans. But Chase views the current market distress as an opportunity to increase market share, explains Kelly, and is willing to carry the paper until investors warm up to mortgage-backed securities again.
Plummeting home sales have resulted in a stunning lack of demand. The 21.5% year-to-year decline reported by the National Association of Realtors in September is only the latest in a long string of sales declines. In response, Countrywide Home Loans, the nation’s largest mortgage lender, is sending 7,000 home loan consultants to open houses and real estate sales offices nationwide, looking for borrowers. Having lost $595 million to defaults during the first half of the year, Countrywide also has mobilized an army of home retention specialists to help delinquent borrowers keep their homes. The lender claims to have saved 40,000 mortgages from foreclosure so far this year, including 17,000 through mortgage rate modification.
Other forms of outreach include Bank of America’s No Fee Mortgage Plus, which subsidizes loan origination, title and a dozen other closing costs. BofA claims it can save a borrower $3,000 or more on a $200,000 home loan. These costs vary widely by state, but a recent Bankrate.com survey found a national median of $2,692.
There are many such offers, but they bear close scrutiny. It’s common practice to simply offset some of these saving with a higher interest rate. You should be able to suss out real loan costs through careful examination of the preliminary Truth-in-Lending statement. The Federal Trade Commission also is a wellspring of tips, definitions and other consumer protection information.
Although lending standards have tightened considerably, lenders are still more flexible than they were before the subprime craze took them afield, says Brennecke, who has 30 years matching borrowers and lenders. All loans are individual negotiations but, generally, lenders look for borrowers with steady employment, a debt-to-income ratio of about 40%, a 640 or better FICO credit score, and a 10-to-20% downpayment.
The more cash down or lower loan-to-home value when refinancing, the higher your FICO score, the better your bargaining position. myFICO offers two FICO reports a year for $90. It also sponsors a free ballpark estimator on Bankrate.com. Alternately, everyone is entitled to one free credit report a year from all three credit bureaus via AnnualCreditReport.com.
Despite gory headlines, real estate pain is very localized. Most defaults are found in Nevada, Colorado, California, Arizona and Florida, states that were the loci of speculation, notes RealtyTrac. After roughly doubling in 5 years, the national median price of an existing home is virtually unchanged from a year ago -- $224,500 in NAR’s most recent survey.
Unless you foresee prices crashing permanently in your town, now might be a good time to lock in a low cost on your real estate investment.
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