Fuel, But No Fire

While the Feds have finally targeted lower mortgage rates as fuel to jump start the flagging housing industry, Fannie Mae (now a government agency) has all but dampened the flames by taking on an anti-investor policy.

Investors have long been required to pay higher fees and make larger down payments to buy rental property. Guidelines in place for conforming loans were sound precautions against overly-levered, risky speculation in home loans. During the boom, things got out of hand - not with agency-sponsored mortgages, but with non-conforming loans that allowed "investors" to buy with no money down and in unlimited quantities.

Now Fannie Mae has turned off the spigot. In many cases, the fees for financing or refinancing investment property has doubled from 1.5% to 3% of the loan amount. More draconian (since investors can absorb fees by raising rents) is the limitation of property ownership to a total of four (4) financed units, from the old limit of ten (10) units.

You may say, "Who cares about investors, they caused this whole problem anyway."

Well that is not true (as the Blog says, I caused it). Investors did not cause the problem. Speculators caused the problem. Investors put their money on the line. Investors buy low and hold rental properties for the long term. Investors revive slow housing markets and create opportunities for renters and eventual homeowners.

Fannie has got it all wrong. Instead of cutting them off, they should be encouraging prudent investment by requiring sizable (20%) down payments and market-based fees. Because it is the investor that will turn the market, not the first-time buyer. The investors have the cash ready and are willing to buy at these low prices. The first-time buyer is scared stiff.

Want to light a fire, Fannie? Light a match to the investor class.

Happy Thanksgiving!

Yesterday the Fed and Treasury served up a hot, heaping helping of holiday cheer to the mortgage industry. Their massive action to lower mortgage and other borrowing rates came as a much needed gift to hungry homeowners, buyers and (let's face it) guys like me in the mortgage biz.

Here's what happened: The government stepped directly into the mortgage market by announcing a purchase of up to $500 billion in mortgage-backed securities. These are essentially pools of loans that have already been made and securitized by Fannie Mae and Freddie Mac. By buying them up, the government frees up money for more direct lending.

The effect of this action was a stunning drop in mortgage rates - as much as a full percentage point on the 30-year in a single morning. While this doesn't help folks with falling home prices or a recent pink slip obtain a better mortgage, it certainly helps home buyers pick up a new home at an even better value.

What does this all mean for you? Bottom line, a 1% drop in mortgage rates on a $400,000 loan equates to about $3,100 in annual payment reductions. Now that is an economic stimulus! And, it makes for a happy, happy holiday.

Real Estate Trends

It's Tuesday again already. I'm feeling lazy today so I'll send you straight to the weekly real estate report.

Click here to read the Real Estate Report - November 25, 2008.

Scandal of the Week

This story goes to show that just because you are old, doesn't mean you are smart. It also shows that some people in this industry are real scumbags.

A former Phoenix mortgage broker, Rick Thomas McCullough, was given a 42 month federal prison sentence, seven years probation and a $343,811 restitution order for duping four senior citizens for more than $400,000 in a residential mortgage loan scam.

McCullough, while working as the president of CactusCash in 2005 and 2006, used his stature to convince four seniors to refinance their homes through him for substantially higher amounts than the balance of their existing mortgages.

The unknowing victims entrusted McCullough with their assets after he assured them their money would be invested in real estate and personally guaranteed loans even though he lacked the assets to back them up.

McCullough would use the funds for personal purchases such as a $42,000 ring for his wife instead of making monthly payments as promised.

Go Sheila! Go Sheila!

Yesterday, Congress grilled the Big Three - not the Big Three automakers, but the Big Three players in the financial rescue plan: Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke and FDIC Chairwoman Sheila Bair.

While Paulson's testimony regarding the changes to the TARP program was received as well as a fart in church, Sheila Bair stole the show with her remarkable success story with the FDIC's proactive loan modification program put in place in the IndyMac Bank resolution.

While Paulson has stubbornly refused to actively participate in direct help to homeowners, either through loan modifications or debt forgiveness through the TARP program, Bair has directed the FDIC to take an active role. Paulson feels that Treasury's sponsorship of voluntary programs like the Hope Now Alliance (a dud), is sufficient.

Bair has broken from the administration and created a model to proactively (that is when the Bank calls you to start the process) modify thousands of mortgages that became the property of the FDIC when they took over IndyMac Bank earlier this year. Her model combines interest-rate reductions and principal forgiveness in order to keep homeowners from foreclosure.

The IndyMac model is simple and it is working. It is directly helping homeowners while not costing the government billions of dollars. I say Go Sheila, Go!

Real Estate Trends

If it's Tuesday, it must be time for the weekly real estate report.

Click here for Real Estate Report - November 18, 2008.

TGIF

What a week. Even shortened by the Veterans Day holiday, there was enough news and notes to get me through the rest of the month. There was a staggeringly bad jobless claims number, which should have made rates go down, but they went up. Fannie and Freddie announced gigantic losses for the quarter, which means more money from the Treasury. There was talk of an auto-industry bailout from the TARP (Troubled Asset Relief Program) and then the news that the TARP itself was no longer going to be used to buy "toxic" mortgage assets after all.

What does all this boil down to? More uncertainty, more market volatility, and more stress. Today at least rates are down. At some point, we will have seen the worst and things are likely to boomerang towards better days. With all the money being thrown at the problem, it had better improve! My advice: close your eyes and jump. Not out the window, but into the market. You have nothing to lose but your shirt, and then the government will buy you a new one.

Broke is the New Rich

I just got off the phone with a friend of mine who told me about his deadbeat aunt who was just offered a mortgage modification from her bank. Let me set this up: this is a woman who hasn't made a payment on her mortgage in 18 months. She lives in a rat rap of a home which she bought with no money down, refinanced to take cash out for other bills she wasn't paying, and is in debt as deep as she ever was.

The bank offered her a new mortgage with a rate of 4.000% and no costs to her at all. The kicker is she is considering it. She wants even better terms, as if one could imagine better terms than an offer to stay in your home at below-market rates. This is a travesty.

Yesterday, a group of bankers testified in Congress about the success and failure of private lending initiatives to modify loans and avoid foreclosures. It turns out that even when borrowers are offered more lenient terms (and by lenient, we are talking about the deal I just mentioned), the borrowers end up back in default within a matter of months.

Is this surprising? Why pay your mortgage when you can go into default and extract better terms later. What is the cost to you to do that? Seems like a pretty good deal to me.

Back in the old days, before the turn of the century (I am talking about the 20th Century), people were expected to pay their bills. It was shameful and embarrassing to be tagged as a deadbeat dad, a check bouncer or a tax evader. Similarly, if you were to default on your home, you would suffer the ultimate set of public humiliations: foreclosure, tax sale or eviction.

Today, there seems to be no shame in mortgage default or foreclosure. Television news features hapless homeowners telling the story of the new deal they got by modifying their loan. Conversations overheard at restaurants center more around how to get out of paying one's debts, rather than how to make money investing in real estate. These are the same people, motivated by greed when the market was going up, who now, motivated by greed still, try to profit from the market downturn.

Government intervention will not help people who don't pay their bills. Nor will it prevent greed from ruining the system again. People need to pay their bills. Let's start promoting responsibility and thrift, rather than rewarding bad behavior.

Good News for a Change

Here is some good news that was printed in the Standard-Speaker (Hazleton, PA) earlier this week. It is anecdotal evidence that things are not as bad as some would think, as long as you live in a market where housing prices have not taken a severe hit.

The article points out what I have been saying for some time now: This is the best time to buy a home or investment property, because prices and interest rates are low and money is available from many lenders.

There is plenty of money to lend. People hear a lot in the press that money is tight, and there's no money to lend, when the opposite is true. There are a lot of loan products that open the door for people to get into a property. That seems like a good reason to trust a broker to find the best available product for you.

Despite the failure of the Fannie Mae and Freddie Mac federal loan programs, there are more government loan programs still in place. We are seeing a lot more FHA (Federal Housing Administration) programs, along with a surge in loans guaranteed by the Veterans Administration (VA). Both of these programs had fallen out of favor in years past, but are now the only options for a lot of folks with spotty credit or limited down payment.

One of those government programs is the U.S. Department of Agriculture Rural Development guaranteed housing loan program. This type of loan provides many benefits to the prospective home buyer: up to 100% financing for the and no mortgage insurance required.

Just keep thinking positive: It's a great time to buy a home. Rates are low, prices are low, and there's a lot of good homes on the market.

Real Estate Trends

I'm taking the day off in honor of Veterans Day, but since it is Tuesday, here is my weekly real estate report.

Click here for Real Estate Report - November 11, 2008.

Fannie: Low Credit Score? Pay Up!

Even after daddy took her car keys away, Fannie is still behaving badly. Mortgage-giant-turned-government-agency, Fannie Mae, announced new fees for loans to borrowers with less than perfect credit scores. Changes affect a variety of loans, but I'll point out the most common you are likely to see.

If you need to refinance your home, and take cash out to payoff a second mortgage or other debts, you will pay a fee of 1% if your credit score is less than 700. That works out to be a cost of about $4000 for the average borrower.

If your score is less than 660 (just one point lower) then you will have to fork out a whopping 2.25% penalty, or $10,000 in fees to get the same loan that your friend with a 700 score got for free.

Not to belabor the point, but this is just another one of the costs of the current mess that is being passed along to average American homeowners. So what can you do about it? Here are a couple of tips:

• Know your credit score. There are a number of web sites that allow you to retrieve your score. I personally use MyFICO. They let you retrieve your reports, plus your scores, and allow you to track changes in your score over time. Keep in mind that Lenders use the middle score out of the three provided by Experian, TransUnion and Equifax. These may vary, and it is important to know all three.
  
• Repair negative credit. You can do this yourself, but it is a pain in the butt. Any information on your report that is inaccurate should be removed right away. Many older items can also be removed through a dispute process that takes time. In light of the costs though, it is worth retaining the services of a reputable credit repair company. I recommend Veracity Credit Consultants, which is a member of the NAMB and has done wonders for many of my clients.

Attention Wal*Mart Shoppers: It's My Fault

I love shopping at Wal*Mart because I really get to see how a great number of rural Americans live their lives. Usually, I overhear bits of conversations that involve sports, family, and local gossip. Sometimes, like today, I get into a conversation with one of my West Virginia neighbors.

Today as I was returning to my car, I stopped to help an older woman put her groceries into her trunk. When she saw the tag on my car, which was parked next to hers, she looked at my vanity plate (which reads "LOANSTAR") and asked what that meant. I told her I was a mortgage broker, and her reply was, "Oh, so it's your fault."

"Yes, ma'am," I replied, "but not all my fault."

She raised her voice just a tiny bit and scolded, "Well it wasn't my fault at all and I'm gonna have to pay for it!"

Touché! This seemingly average American woman, Joe Sixpack's mom, made the point. She and I and her family and mine will all pay for it. It is this simple and direct observation that should make anyone stop and think before trying to game the system again.

When lenders or brokers fudge some numbers on a loan application, or gloss over certain terms for a borrower; or when a buyer lies about the source of a deposit or accepts a little kickback from a seller; or when any one of countless little wink-and-nod events that happen in the course of business occurs, then someone gets hurt. Someone pays, or we all pay.

Scandal of the Week

Here's a fun story I came across this week. It seems we have a long way to go to change bad habits that got us all into this mess.

Taxpayers Pay For Luxurious Golf Outing of Fannie Mae Execs

Three weeks after the company was bailed out by the federal government, Fannie Mae used taxpayer dollars to treat 14 executives to a luxurious afternoon of golfing that included a $1,700 buffet, a $555 bar tab and a mango towel service.

Taxpayers picked up the $6,279.26 tab for a golf outing that included 14 executives from Fannie Mae and at least six other golfers, according to a report by Dallas-Fort Worth television station KTVT.

According to documents obtained by the station, the cost for the golfing alone was $3,316 at the Cowboys Golf Course in Grapevine, Texas. In addition to golfing, the executives were treated to roughly $2300 in food and drinks, along with a mango towel service.

"I'm not even sure what mango towel service is,” said U.S. Rep. Jeb Hensarling (R-TX), “but I know the taxpayers of Dallas County and America shouldn't have to be paying for it.”

Talking About Rates

For a loan originator, the most frequently asked question has to be "how are rates today." I always respond, "Rates are great!" And that is always true, but it is a relative thing. If the market rate is higher than your rate, or the rate that you were hoping to get, then it might not seem so great.

Ultimately, economic conditions determine market rates for mortgages. In the past week, we heard a lot about rates because both the Federal Reserve and the European banks lowered their target lending rates. But these moves affect short-term rates - the sort that apply to lines of credit, auto loans and the like. We often see long-term rates move in an opposite direction. Therein lies the rub: consumers are told that rates were cut, but their lender tells them that mortgage rates are now higher!

If you want to know if rates are truly great, look at the rate relative to inflation. To oversimplify a bit: When the expectation for inflation or a heated-up economy is high, then long-term rates will go up. Conversely, as the economy turns towards recession and things look bleak, rates go down (as they are right now).

So is now the best time to lock in a rate? Maybe so. The market seems to have priced-in the worst case scenario. Certainly a turn will come soon though. As the economic picture improves, as government stimulus kicks in, and as the housing market rebounds, rates will increase at a pretty rapid pace. You might be looking back in a few months saying, "Boy, those rates were great!"

Real Estate Trends

Every Tuesday, I will provide a link to my weekly "Real Estate Report." The report provides economic commentary, a weekly interest rate overview, and real estate news. It offers an insightful recap of the week past and a possible glimpse into the future.

Click here for Real Estate Report - November 4, 2008.

I Caused the Mortgage Meltdown

Well, not really. But with so many fingers pointing at "disreputable" mortgage brokers and "predatory" sub-prime lenders, sometimes I can't help feeling responsible.

The fact is, there are a lot of folks to blame. Mortgage brokers certainly played a role - they play a role in nearly two-thirds of all home loans originated in the United States - but so do big banks, Wall Street investors, and homeowners themselves. Complicit (to name a few) were the federal government, the GSEs (Fannie Mae and Freddie Mac) and even well-meaning not-for-profit home ownership organizations.

But this blog is not going to re-hash the past or lay the blame on any one source. My goal here is to share with readers some of the lessons I have learned since I entered the industry in 1989 (recall the S&L crisis?), apply those lessons to the current challenges facing the industry, and, most importantly, make these lessons relevant to the average person reading these posts.

So you know what to expect, the posts here will run the gamut between consumer-oriented news and information, advice and insights for home buyers and borrowers, and some industry-insider type stuff just to keep it interesting and illustrate that I am, in fact, an expert in the industry (*smile*). I will also introduce an "Ask the Expert" sections in order that I can reply to any questions readers might have.

Thank you for visiting. Please feel free to ask questions, leave comments or make suggestions. If you have not already done so, please visit www.LouPatierno.com for daily mortgage rate information, market commentaries and useful libraries of mortgage-related information.