Borrowing in 2008 is like living in 1984

um, isn't that Orwell and not Huxley?

Hi Rona,
Definitley more scrutiny on the appraisals. Which in our market it is a very good thing. To comment on an earlier post about mortgage fraud, the appraisers involved in these shady deals are equally to blame. Some never went inside the property. They were grossly overvalued and the appraisers were comparing apples to oranges. Unfortunately the lenders were 2000 miles away and had no idea that the market changed dramatically within a half mile in Dorchester.

There is also more scrutiny on the source of down payment funds and longer seasoning requirements.

Other buyers are having a hard time getting the property to conform to FHA guidelines, particularly condos in associations under 4 units.

Overall, all of my buyers have been financed, but I find that I am working harder to stay on top of the underwriting process and making sure we receive clean commitments on time.

RE:
These are the financing issues I am seeing:

1. Weird rate trends.
2. Appraisal scrutiny.

1.
The current mortgage rate trends are due to uncertainty in the current world markets . (Just look at the DOW and the major fluctuations recently)
2.
The underwriters / Banks are much more cautious on loan files specifically
appraisals due to the height in foreclosures. EXP: If a Lender is reviewing a loan file with 5 or 10% down they in many cases would be that much more cautious on the appraised value as to (The Risk Based Factor in todays volatile market.)

With regards to 15 year fixed rates being higher the 30 year fixed rates: The 15 year fixed rates are still below the 30 year fixed rates.

Fluctuations in economy can occur for a number of reasons that economic analysts attribute to a number of reasons. Some analysts believe that fluctuations in the economy are caused by uneven government policies whereas others believe that these same government policies are responsible for balancing fluctuations in the economy that are caused by the inherent nature of the market. Regardless of the reason, fluctuations in the economy are now a natural part of life. Political responses to these economic fluctuations are also now a part of modern life and it is possible for prospective homebuyers to take advantage of both the economic conditions and their political responses to purchase a home for a good price.

Here is an overview of how mortgage companies set daily pricing. There is much disinformation that exists on the subject. In fact, daily price changes for FHA/VA and conventional loans are very simple to calculate.
1) Where pricing is concerned, a mortgage company must minimize risk without compromising production volume. When a company sets daily pricing, it is in effect taking a position against the market. In other words, the company is offering a rate to a borrower while market prices are still fluctuating. Loan Officers face the exact same dilemma. Interest rate quotes to consumers must be competitive in order to drive production, however the price can’t be so low that the loan is originated at a loss. In addition, when a Loan Officer quotes a price, there is always a danger that the market may move and a price change occurs.
2) There is an inverse relationship between the price of bonds and the movement of interest rates. As interest rates rise, the price of bonds falls and vice versa. For example:
Bond Price Discount points to consumer
98 2.00
99 1.00
100 None
101 1 rebate

As bond prices rise, the number of discount points the borrower must pay decrease. When the media speaks to a rally in bonds, they are indicating that bond prices have risen which pushes interest rates lower.
3) As loans are originated they are packaged and sold as mortgage bonds or mortgage-backed securities (MBS’s). The amount of money that an investor will pay for a mortgage bond depends on the interest rate paid by the mortgagor and current market conditions. Ginnie Mae bonds are common, daily prices for different pools can be found in most newspapers. Whenever a borrower makes a mortgage payment, a portion of the payment is passed on to the holder of the Ginnie Mae security. It is the daily price fluctuations in the forward mortgage-backed security market that cause mortgage companies to change pricing daily.
4) Treasury bonds represent Government debt and not mortgage debt. Thus, mortgage interest rates are not determined by the price or yield of either the 10 or 30-year Treasury bond. Often there is a large disparity between the amount of movement of Treasury bonds when compared to mortgage-backed securities in any given trading day. Watching the Treasury market to determine daily changes in discount points is impossible. Period.
5) Most mortgage companies watch market activity for over an hour each day before setting daily pricing. Mortgage companies commonly set daily pricing based on the bond levels at 10:00 am eastern. Daily price changes are the difference between prices of the mortgage-backed securities from 10:00 a.m. ET. By subtracting the price of the mortgage backed security from the price at 10:00 a.m. ET the day before, you derive the net movement in discount points.
6) The Treasury market opens at 8:30 a.m. ET and the mortgage-backed securities begin to trade at approximately 8:40 a.m. ET each day. Many economic reports are released at 8:30 am eastern time, so wide price swings are not uncommon directly following the market open. It is imperative to know when important economic data is scheduled for release.
7) Mortgage bonds are priced in 32’s. Each 1/32nd is equivalent to 3.125 basis points. It takes 4/32’s to see pricing improve by 1/8th etc.32nds. Depending on how your company prices, you may see daily price adjustments for a movement as small as 1/32nd or 3 basis points.
8) Mortgage companies make money originating and servicing loans, not by “playing the market”. Bond traders make a living trading bonds, but the secondary marketing personnel of mortgage companies trade bonds to displace risk. In fact, when regulators audit mortgage companies, large, consistent trading gains are viewed negatively.
9) Daily rate changes for loan programs other than standard fixed rate loans are more difficult to track. Often investors such as Banks and Savings and Loans will price adjustable rate products based on asset/liability needs, therefore the daily price changes do not necessarily track changes in bonds.

Oh, my. I guess I have to give up my status as a recovering English major. You are right, it is Orwell.

I have been tell you all that I am working too hard lately.

Imagine that, due diligence on a mortgage. What is the world coming to? They should go back to not scrutinizing appraisals so we can keep home prices inflated beyond fundamentals.

Yeah, and if things keep going like they have been for the last few months in the credit markets, home prices will be like they were in 1984.

If these small spikes in interest rates are causing trouble now, wait until the bond market collapses and interest rates skyrocket. Then we'll see the real crash in real estate.

I have an appraisal company and there is no doubt that appraisals are getting way more scrutiny, a little too late in my opinion. From 2002-2006 they didnt even read them, all they did was look at the final value and if it wasnt what they needed we got barraged with phone calls asking why we couldnt 'hit the number'------didnt matter if all our comps were on the same street or in the same building for a condo, they just didnt care.

The problem now with the scrutiny is that a lot of the people reviewing our work are from out of state with no local knowledge and they use their set parameters no matter where the house is.

They will ask for comps within a mile and 3 months if the subject house is in Chelsea or Brimfield, where sometimes there may not have been a sale within a mile in years----------------these requests for non-existent comps can drag on for weeks----

I will fully admit that a lot of scammers and frauds ruined the appraisal process, there are still many out there. The problem is that those are the people that the brokers and banks liked and still use the most because they 'get the deal done'----the busiest and profitable appraisers are generally the biggest scammers!

... and it isn't really Orwell either. To quote Orwell it would be these examples:

WAR IS PEACE
FREEDOM IS SLAVERY
IGNORANCE IS STRENGTH.

It's not about up and down, black and white etc.

May be if we had "Appraisal scrutiny" to begin with, our economy would not be in a recession: Or perhaps if some genius hadn't thought of the "No Income, No Documentation loans" most home owners wouldn't be facing foreclosure today.

Well, our ingenious bailout is an attempt to keep banks awash with cash, so that they can continue to have confidence to lend to people that in all probability won't pay it back. Problem is, this gets even riskier and defaults happen much faster when unemployment is rising, and prices are sinking. In what is clearly a deflationary environment, one should be very happy about the prospect of living in their home for a long time. In terms of investment, you will most likely see negative returns for at least 3 years.

Dear RRSafety and others,
OK. I admit to pushing a comment into a cute title. But the "up is down" "black is white" language is associated with that novel. If it wasn't it actually in the book, it is still associated in popular writing.
Rona

If you deal with a mortgage company, good luck to you my friends! Stay local with a COMMUNITY BANK, and you should have no problem. Local community bank's give loans to people that should get loans; plain and simple. If you are chasing rates, or trying to avoid money down; then you don't have any business owning a home.

What an interesting place to find this word nerd sort of argument. It seems the part of the problem is the attribution of "More is Less. Less is More. Black is White." to an actual quotation. It may be an example of "Newspeak" (not double-speak, Rona, sorry) but it's not, apparently, an actual quotation.

It really is like 1984 right now:

WAR IS PEACE
How true is that when this country is spending $10bn engaging in wartime activities in the name of promoting peace? Or when the war on foreclosures requires taking tax money from renters to "keep people in their homes"?

FREEDOM IS SLAVERY
How true is that when homeownership is promoted as the only way to be free to choose the color of the walls and the landscaping instead turns into an albatross around the underwater neck of the borrower? Too broke to make the mortgage payments, too broke to take money to closing, too broke to move. If that's what you call freedom, I don't want it.

IGNORANCE IS STRENGTH.
How true is that when the NAR keeps publishing reports that insist that homeownership is the only path to wealth when in reality wealth is the only path to homeownership; when the NAR insists that "on average" homes appreciate 6% a year on average and double in prices every ten years; which are true but only if you look at the 1995-2005 time period and are grossly false if looked at otherwise.

Welcome to 1984.

Though what Rona said was a paraphrase, not a quote, its not a big deal - it does in fact capture the essence of the books language usage in that sense.

Lets not make this minor thing into a big deal, it's one thing if she was attempting to mislead, but she clearly wasn't. The meaning remains, she just "mis-spoke"

A more timely Newspeak utterance might be "We have never been in a housing-price bubble".

...or for the more literal, "We have never been at war with Iraq".

I'm an underwriter, and we absolutely are looking at appraisals much more closely than at any other point in the past 10 years, possibly longer. We're being given tools to see what else has sold nearby, so when the appraiser who is in the pocket of the broker (note: not all appraisers are, I'm referencing the kind who are) tells me that a sale outside a mile from the subject home is a good indicator of the value, I can see that 5 homes within 1/10th of a mile that are the same size sold for half that. It's not perfect (our tools don't differentiate between a ranch and a colonial, for example) but it's helpful. The problems I'm seeing are appraisers who stamp their feet and refuse to even answer my questions in writing because I'm not an appraiser. They don't understand that the investors pull an AVM and heaven help you if the appraisal came in over 10% above an AVM. Bad idea? Sure, but the investors don't care. This is not the market to be a prima donna.

It's a brutal market, but the values have been overinflated for years now and this is the result.

I thought that quote was from the Bizarro episode of Seinfeld.

Well, Rona, you apparently have a stronger spirit than I.

If I read what that person wrote, I'd quit on the spot, but only after sending the person a private email telling him what I really thought.

Who would waste their time spewing such hatred? What's the point of it?

All it does it ruin it for the rest of us.

Hi all,

Thank you, defenders. I have already offered to return my B.A. to my university, but there is no pleasing some people. I generally don't get mad because it is easy to be mean-spirited when writing anonymously.

In between the garbage, there is a good conversation going on which confirms that what I am seeing is not specific to me and my clients. Lending practices are returning to due diligence. It's a change and I am glad for it. The days of "hit the number" are over.

It takes a tough woman to write a big-hearted blog! Hate is love.

Rona

Kate - excellent points from a very valid perspective.
Rona,

I can confidently say that borrowing is more like 1998 that 1984. It is still easier to get a loan now that in was in 1997 or earlier. Its the people who are not appropriately qualified for financing that are having difficulty.

That said,

Bear with me while I try to explain what is happening with appraisals in general…

As for appraisal scrutiny, this is now commonplace in the industry. What is happening is that investors do not want bonds or mortgage bonds, and are being picky. Fannie and Freddie’s automated systems may give you an approval that allows for an exterior-only inspection, but there are few to no investors that will allow that. Expect and plan for more appraisal scrutiny to be the norm from this industry for quite some time going forward.

So here’s what I’m seeing happen. My realtors call me all the time with questions exactly like yours. Invariably, they have clients who had a preapproval letter from some non-pro mortgage person, usually some mortgage broker, who ran it through the automated system, got the DO/LP findings, and then fired off the letter. You’re preapproved! The problem is that the broker did not take the time to do their homework – if they had, they would have known that even though Fannie and Freddie may allow for exterior inspections, the big national banks (not to say any one here in particular does or does not)are more and more requiring full inspections even though the agencies do not require it.

As for the multiple new comps required…it has to do with lenders/investors being picky and choosy. After being way to lax for way too long, now they only want the cleanest and best loans. There are two primary parts to a mortgage approval, the borrower and the property. The borrower – if they meet guidelines, they should be approved. Credit score, job history, assets, income, appropriate documentation and explanations etc…ok great. The other part – the property – that’s the subjective part, and this is where the additional inspections and/or comps are being required. If the loan is being done by a national direct bank/lending institution, then it’s them being choosy about loans. If it’s being done through a broker – same thing, since a broker has *no* control or authority over the lending decision whatsoever, and they are just another set of hands on the file acting as a go-between.

What also may be happening, if it’s a non-bank lender (independent mortgage company that is a lender, not a broker) (not talking table-funded here aka assigned immediately at the closing, talking about a true correspondent lender that funds loans themselves and sells the loan days or weeks later) is a higher level of documentation and review to avoid future repurchase of loans. If a correspondent lender approves and funds a loan, and then after the fact sells the loan to a different lender, and the purchasing entity is choosing to take an overly risk-averse position that day, they may be looking for excuses to refuse a loan. That means that if the appraisal is not perfect, the lender who funded the loan has to buy it back. It doesn’t affect the borrower, but the originating lender now has to buy that loan back and will most likely incur *huge* costs for carrying it, re-carrying it, and more than likely will have to sell it to a different investor at a substantial loss. (The borrower in the meantime has no idea, nor should they, because it doesn’t affect them.) So there is a significant impetus for originating lenders to underwrite loans, including the appraisal, thoroughly from the beginning. (imagine that, do your job right the first time..hmm…..novel concept….)

The best thing you can do to serve your clients – buyers and sellers – is to make sure any preapprovals you get are recently updated (I would define that as within the last week), and that any preapprovals you get are coming from a loan officer from whom you know you can count on the quality of their answers. If that means telling your buyers to get a pre-approval from someone else – do it. It’s in their best interest and yours. If that means that you tell an agent that brings you an offer to get a better preapproval letter than the one they provided to you..do it. It’s in your sellers and your best interest. Believe it or not, there are still a substantial number of people who are in the lending business who are not thorough, do not know what they are doing, and are not staying current with ever-changing guidelines.

This has been an interesting thread. Thanks all and Rona.

Dana & Robin Bain,

Great post. I am a big advocate of financial literacy and you did this board a great service putting the post together.

I was hoping you could clarify something for me. You said:

"For example:
Bond Price Discount points to consumer
98 2.00
99 1.00
100 None
101 1 rebate

As bond prices rise, the number of discount points the borrower must pay decrease. When the media speaks to a rally in bonds, they are indicating that bond prices have risen which pushes interest rates lower."

As a former bond trader (mortgages & agencies), I am not familiar with the framework you presented of discount points paid by the borrower. When you say borrower, you are referring to the issuer of the bond and the consumer is the bond buyer correct?

> When bond prices rally, the borrower/issuer does not pay more, subsequent borrowers pay more. (Unless it is a floating rate bond.)
> "Bond Price Discount points to consumer" suggests that the bond buyer is getting a bargain. The price of a bond is the sum of the present value of all the cash flows and the interest rate (or yield) is the rate of return on all of the cash flows. They move inversely because if the investor pays less for a bond, the rate of return goes up and if the investor pays more for the bond, the rate of return goes down. The components of a bond price are the amount the bond pays at maturity (or face value); periodic interest (coupon) paid by the bond issuer; and, the current rate of return of bonds with equivalent risk.
> If a bond pays interest greater than what equivalent risk bonds pay, it will trade above 100. If a bond pays less than what equivalent risk bonds pay, it will trade below 100. If a bond pays exactly what comparable bonds pay, it will trade at 100 or par. If it pays less than what comparable bonds pay, it will trade less than 100. However, all four versions will have the same rate of return (yield) if the bonds are comparable.

Lastly, investors that buy Mortgage Backed securities are effectively loaning the home owner money. (There can be steps along the way.) This is how the vast majority of home loans are funded.

In general, the investors wish to buy exposure to the specific area the loans were made i.e. census tract 36 061 317.13 - OR - a specific set of credit quality i.e. >700 credit score with >15% LTV - OR - some combination thereof. What they do not want is exposure to the general movement of interest rates. One way to hedge against the movement of interest rates is to buy and sell treasury bonds or their equivalent. I agree that it is very difficult for even well above average educated consumers to monitor intraday mortgage rates using the treasury market. However, the two are inextricably linked and their relationship can be generalized to effectively monitor mortgage rates over half-days, days, weeks, or months. In fact, one of the most common ways to quote a mortgage backed security is not in terms of price or yield, but by the spread to 10 year mortgage.

In fact, one of the most common ways to quote a mortgage backed security is not in terms of price or yield, but by the spread to 10 year mortgage.

Should read

In fact, one of the most common ways to quote a mortgage backed security is not in terms of price or yield, but by the spread to 10 year TREASURY.

One other thing, as the yield of treasury bonds increases, the mortgage rate goes up. If the mortgage rate doesn't increase, that means that investors can earn relatively more for the significantly less risky treasury bond. Therefore, all mortgage rates are priced off the yield curve. Still, it is very hard for mere mortals to track on an intraday basis.

When I bought my condo back in 1988 that was at the end of a market run up that had started around 1984. Also when we got a mortgage it did not seem strange or mean that we had to show them paystubs to get the loan. Before that I was a credit reporter verifying info on mortgage applications we ALWAYS had to verify employments & salaries. This was the normal thing at the time. If only the mortgage lenders had kept doing this we would not be in this bind now.

To: WSJevons

RE:

As a former bond trader (mortgages & agencies), I am not familiar with the framework you presented of discount points paid by the borrower.

On a very basic level a point is 1 percent of the total amount loaned in the mortgage. There are two types of points that you may pay when you get a mortgage:

Origination points:

Also called the origination fee, origination points are the fee or cost that is paid to the lender for obtaining the loan. This is where your mortgage broker makes their money. This is often one of the biggest parts of the closing costs. Sometimes the origination fee may include other closing costs like document preparation costs or notary fees. The portion of the origination fee or points that is charged specifically for obtaining the loan is often tax deductible, but you would need to check with your mortgage broker and tax advisor to be sure.

Discount points:

These points make up the amount of prepaid interest you can make on the mortgage. Each point is one percent of the loan. For example, if you got a $100,000 loan with 1 � discount points you would need to pay $1000 up front interest. The reason for this is that it can lower the interest rate on the rest of the loan. This can give you lower monthly payments. It also can save you money over the life of the loan. Each situation if different, but people usually buy mortgage discount points when they plan to live in a house and stay with the current mortgage for a long time. ********You typically wouldn't want to pay the up front interest if you are going move soon or if you plan to re-finance the mortgage in the short term. ********

Here is an example of how pricing works.

EXP $100,000.00

30 Year Fixed Rate Mortgage

RATE ---------- PRICING MODEL---------- Example:

5.25% ---------- 98.00

5.50% ---------- 99.00

6.00% ---------- 101.00

6.25% ---------- 102.00

In the example above if the consumer wished to go with the 5.50% interest rate and the mortgage company wanted to net 1% of the loan amount the consumer would pay 2 total points or $2,000.00. 1 point or $1,000.00 would be the discount point paid to the Lender or Bank and 1point $1,000.00 origination point paid to the mortgage company.

This is just an example as pricing can vary in 32’s.

PAR would be 100.00 also as an example.

Great explanation of mortgage discount points.

Sorry if I am being obtuse, but what do mortgage discount points (new post) have to do with Bond Discount Points (old post)? Are they the same? What are Bond Discount Points? I do not know that term. I know discount, par, premium, as the function of price to par e.g. a bond trading at 98 in the secondary market is trading at a discount or Ford recently issued 12% coupon bonds at 99.90 (not usually referred to a discount at issuance and they try as hard as possible to issue at par).

"As bond prices rise, the number of discount points the borrower must pay decrease. When the media speaks to a rally in bonds, they are indicating that bond prices have risen which pushes interest rates lower."

Are you saying that the homeowner must pay discount points if rates rise or are you generalizing what happens when institutions issue debt to homeowners?

Institutional borrowers do not think in terms of points of discount off a bond. They are trying to raise a specific amount of money at the lowest rate possible and would not pay points upfront to lower the interest rate.

"As bond prices rise, the number of discount points the borrower must pay decrease."

Why must a homeowner pay points if they do not want to? Is it to get an equivalent or specific rate? For example, they want a $1000 mortgage payment, but rates went up and now they have to pay points to get it back down to $1000?