Here’s a peculiar thing that one of my clients is facing.
He bought a second and third floor condo in a two-family house. The condo downstairs is rented to a stable, pleasant couple. He met with the other owner before buying and was comfortable with the situation. The owner downstairs said that she would be selling down the road. Down the road happened; she approached him about selling the downstairs.
Then a problem cropped up: Fannie Mae (FNMA) does not approve loans for a buyer who wants to own both condos in a two-family house. Fannie Mae would be perfectly happy approving a loan on this exact property, were it a two-family house. My client would qualify to buy it as a two-family, but not as two condos. Since he does not want to re-do the legal work to change the building back to a legal two-family, he is going to get his loan from a non-FNMA lender.
My client is daunted. It is a two-family house, physically, but he cannot purchase it with a Fannie Mae loan because it is now legally two condos. He would own the same exact house on the same exact piece of land.
My client wrote:
[The portfolio lender] can work with me, but it would be in the bank's portfolio, not a Fannie Mae approved deal.FULL ENTRY
The interesting thing I learned is that Fannie Mae does not sponsor mortgages where owner of one unit in a 2-family then buys other unit of 2-family. I asked [The portfolio lender] how this was different than one person buying a 2-family. [The portfolio lender] agreed it was a mystery with no reasonable answer --- but it seemed like she hadn't really considered it until I pressed her… But I am also curious if you understand Fannie Mae's position on my buying a 2-family (OK) vs. buying both units of a 2-family (not OK)
CNN Money reports that the cost of mortgage closing costs has fallen by 7 percent. They attribute this to disclosures that have been in place for the past couple of years.
CNN Money reports:
The decline can be attributed to new regulations that require lenders to be more accurate when estimating closing costs for borrowers, said Greg McBride, Bankrate's senior financial analyst.
The regulation, which was put in place two years ago as part of the Real Estate Settlement Practices Act requires lenders to provide a "good faith estimate" of third-party fees that is within 10% of the actual amount the buyer will pay.
About a month ago I wrote an entry outlining the disclosures they are crediting with the lowering of fees.
Do you think that these disclosures are what caused the change? Is the GFE what is helping a borrower compare costs and making lenders be competitive about their fees? What’s your experience?FULL ENTRY
It's actually a pretty crucial question given the current state of the housing market.
Buyers jumped off the fence this spring big time, but they too often wound up frustrated by the lack of choices out there.
Even as the market has improved, the number of homes on the market in Greater Boston has plunged, falling more than 19 percent since July 2011.
So what's behind this dearth of decent homes on the market?
Andrea’s question from last week was about her out-of-pocket attorney’s fees. The discussion went quickly to Title Insurance, so I would like to restate the question:
Have you had the experience of an attorney padding the buyer’s side of the attorney bill, or padding the fee to the buyer that appears on the HUD-1? (When you answer, please note if you bought before or after the GFE changes in 2010.)
When I spoke to lenders that I work with, they tell me that they require that the closing attorney accept the stated fees on the GFE for the closing attorney line item. Period. So, there should be no change there from what a buyer expects. So, how does an attorney charge more, out of the buyer’s pocket?FULL ENTRY
Today, to Andrea’s question:
Hi Rona, When it comes to hiring an attorney for the buyer, how are buyers protecting themselves from sticker shock at closing? It seems the most expensive items on the closing settlement sheet are usually title and title insurance services, and closing -- which are provided by an attorney. If that attorney is selected from the bank's list of service providers, then the buyer is protected by the estimates on the GFE. However, if I've understood correctly, these estimates do not apply if the buyer chooses to use her own attorney for the title work and the closing. Many buyers are advised to use their own attorneys for the closing because "it saves them money" (i.e., by way of a discount on the P & S work). Has this really been the case in practice? Do buyers-choice attorneys typically stay within the GFE numbers quoted by the bank, which I understand to be over-disclosed anyway? Or do they get a discount on P & S only to see higher rates for the other work? What can a buyer do to avoid/minimize sticker shock at closing?
What are those “required services that you may shop for?”
There aren’t any in Massachusetts. In other states there are title companies and other entities that we don’t have here in Massachusetts.
How can a consumer shop for title services and title insurance?
Some attorneys will discount their fee for the Purchase and Sales Agreement in order to capture the closing business for the loan. Andrea is suspicious that the “discount” will inflate the closing attorney fee.
Actually, that fee is already a good deal for the attorney; there is no need to further pad the bill. So, it is worth it to many attorneys to give the buyer a break on the Purchase and Sales Agreement services in order to get the closing business. If the GFE rate for the closing attorney is set at some fee -- say $400 or $500 or $600 -- the closing attorney is bound to that fee if he or she agrees to close the loan. There is no negotiation about this with the lenders I spoke to.
Sometimes the buyer’s attorney’s fee for the Purchase and Sales Agreement or condo document review is put on the HUD-1 Settlement Statement and sometimes it is not. If Andrea’s bill for the non-closing work doesn’t go up from what she negotiated with the attorney, then she is not paying more than she bargained for. However, seeing the Purchase and Sale preparation bill on the HUD can be confusing.
Rates for title insurance, across companies, is pretty even. Many lenders in Massachusetts use First American.
Here is a calculator.
An example: I chose “title rates” at the top, my location and “sale with mortgage” from the drop-down menu. I put in for a $500,000 purchase with $400,000 mortgage. The results were $1075 for the lender (mandatory) policy and $1100 for the optional owner’s policy.FULL ENTRY
A reader I’ll call “Andrea” send me an email with a question that belongs in my new series, “what else can go wrong.” Today, I review the nuts and bolts of the Good Faith Estimate before I answer the details of her questions. I would like to thank Loren Shapiro of Asset Mortgage Group for fact checking this for me.
When you apply for a mortgage, you have a right to get a completed GFE. Attorney Vetstein covered this, in detail when the change occurred.
These are the fees that can legally change between the time Good Faith Estimate is prepared and closing day.
1. Fees with a ten percent leeway, if the lender chooses the vendor:
Title services and lender’s title insurance. This is the review of the title at the registry and certification that the title is marketable. That title is insured. The lender requires insurance for the part of the title that the lender owns.
Owner’s title insurance. A buyer can buy title insurance for the buyer’s equity in the property. The good news is that the owner’s policy is bought once, and will remain in force if you refinance or pay off your mortgage.
Government recording charges. These charges change, but not all that often.
Required services that you can shop for. This is a trash-basket.
Required services that we select. (“We” meaning the lender.) This is another trash-basket.
The other category contains fees that can change randomly. I divide these into two sections, the ones not in the lender’s control and the ones that can be in the lender’s control.FULL ENTRY
Today, Sam discusses the issues involved when lenders disregard buyer’s contract dates for mortgage commitments:
When a buyer applies for a mortgage, the lender is given the commitment date that the buyer and seller have agreed to in their offer and/or the Purchase and Sale agreement. At that time, the loan officer should be able to tell the buyer if it is realistic for the lender to deliver the commitment on time. This is important because if the lender cannot deliver a well underwritten commitment letter by the commitment date, the buyer must go back to the seller and ask for an extension. If the seller says no, the transaction is either terminated and the buyer gets the deposit money back but has no home to buy or the buyer can stay in the transaction and risk losing deposit money if the commitment does not come through.
Most lenders try to deliver commitments on time, however, some are notorious among active real estate agents for not be able to deliver on time and/or close on time. As a result, sellers are often advised by their listing agents not to accept offers with pre-approval letters from such lenders.FULL ENTRY
In the current marketplace, a seller has to sell a property three times: to the buyer, to the appraiser, and to the lender. That's because appraisers are more conservative today than at any other time in my 18-year career, and appraisals are gone over with a fine-tooth comb by lenders. That has led us to where we are today, where buyers, sellers, agents, and even appraisers can be anxious about appraisals.FULL ENTRY
Here's what I now do to prepare myself and my sellers' properties for the appraisal:
I always tell my sellers to prepare the property for the appraisal appointment just as they would for a prospective buyer. This includes:
a) Having the place in showroom condition and hotel-clean. Appraisers are mostly concerned with numbers and condition, but they're human, too. A property which gleams make a good impression on everyone.
b) Leave all the lights on so rooms are bright when they walk in. Again, this makes a much better impression than a dark and gloomy room.
More important than these emotional appeals, I provide the appraiser with reasonable comparable sales (comps) from the past six months which reflect well on the purchase price for the listing. The appraiser isn’t obligated to consider them, but the best way to make sure they won’t look at the comps you’re looking at is to keep them a secret.
I’m starting a series called “what can go wrong.” Today I discuss applying for your mortgage.
At one time buyers were able to get a fully underwritten pre-approval from a lender before beginning to house hunt. That meant that the lender’s underwriter -- that’s the person who accepts or denies the mortgage application -- checked all the borrower’s paperwork before issuing a pre-approval letter. As underwriters got busier, this service disappeared.
Without this service, borrowers were not compelled to dig up all their paperwork well in advance of finding a house. Human nature being what it is, that means that borrowers don’t dig up their paperwork until the last minute. This is a bad idea for a number of reasons.
There is added stress once you have a house to lose and a deadline to meet. Most people do not have as good a filing system as they think they have. So, most people have several frantic moments. It increased the stress of finding all the items they need for their mortgage application’s supporting documentation. Doing the paperwork search well in advance helps things go easier for you.
There are usually only a couple of days after the home inspection (which is a high-decision time) and the time of loan application. It is less stressful to make your mortgage decision well ahead of time. If you want to rate-shop, choose two or more lenders and have their paperwork ready to go. Then, you can compare rates and fees, apply, and hand over the paperwork they need.FULL ENTRY
Last time, I shared a typical timeline for the various steps involved with buying a home in the Greater Boston area. This week, I want to talk about locking in your mortgage rate, and how the closing date can affect the “rate lock.” (When you tell the loan officer with whom you’re working to lock in the current rate available, that’s called the rate lock.)FULL ENTRY
There’s a cliché in real estate that says, “Everything is negotiable.” That’s pretty much true; a buyer and a seller can work out just about any agreement, as long as the terms are within the law. So, while most transactions close between six and eight weeks from the date of the offer, buyers and sellers can agree to close sooner or much later.
One factor to keep in mind if you do propose to close well into the future is how your financing could be affected. When you lock in your mortgage rate, most lenders will guarantee that rate for 45 or 60 days at no additional charge. As long as you close within the term of the rate lock, you’re guaranteed to receive that rate.
If you want to extend the lock beyond 60 days, it will probably cost you money; as a general rule, the further out into the future you close, the more it will cost you to extend. It could conceivably cost you many thousands of dollars for a lender to guarantee the rate you locked in for 90 days or longer.
Lenders given 30 days for short sale decisions Well, someone in government has been listening to the chorus of complaints about lenders taking too long to make short sale decisions. In a *rare* move of federal government housing competence, the Federal Housing Finance Agency has instructed Fannie Mae and Freddie Mac to impose new guidelines which should accelerate short sale decisions. The new rules require that short sale lenders make a decision on a short sale within 30 days of a complete application, and if more time is needed, they must give weekly status updates. This will make short sale agents, sellers and buyers much happier. The new requirements go into effect June 15.FULL ENTRY
However, how much of an impact this will have on national short sales remains to be seen. Freddie Mac has jurisdiction over a small percentage of short sales, mostly HAFA short sales as well as a limited number of traditional short sales, totaling about 45,000 last year. (Bank of America did over 150,000 short sales last year, by comparison). This is certainly a step in the right direction, and hopefully will lead to more regulatory pressure on the big banks to speed up short sales.
I asked short sale negotiator Andrew Coppo of Greater Boston Short Sales, for some commentary on this news, and he has a more tempered reaction:
Attorney Richard D. Vetstein on the topic of lending:
When I was a kid, my dad would often answer my questions with “because I said so,” and it would drive me crazy! Now it’s prudent advice to borrowers in a great piece by Mark Greene at Forbes.com, called The Perfect Loan File (click for link ). It’s a must read for consumers and real estate professionals alike. I’ve sent this article to all of my mortgage bankers and they, in turn, are sending it to all their clients.FULL ENTRY
The point Mr. Greene makes so well is that lenders are going absolutely nutty over borrower financial documentation to create a “put-back” immune loan file. (A put-back is when Fannie Mae or Freddie Mac make lenders buy back bad loans). Mr. Greene tells borrowers to give their lender everything they ask for even if they want to stick needles in their eyeballs, and don’t talk back. I will just highlight some gems from the article:
When I was a kid, my father occasionally issued directives that I naturally thought were superfluous, and when asked why I needed to do whatever it was he wanted me to do, his answer was often: “Because I said so.” This never seemed to address my query but always left me without a retort, and I would usually comply. This is exactly what consumers should do during the mortgage approval process. When your lender requests what seems to be over-documentation and you wonder why you need it, accept the simple edict – “because I said so.” You will find the mortgage approval process much less frustrating.
Every nook and cranny of your financial life has to be corroborated, double- and triple-checked, and reviewed again before closing. This way, if the originating lender has created a loan file that is exactly consistent with published underwriting guidelines and has documented while adhering to those guidelines, the chances are that your loan will not be subject to repurchase.
Some people seem to have never heard of the mortgage meltdown of 2007. They show up in my practice (usually on the phone) upset and unhappy because they can’t borrow as much money as they thought they could, and the &^%*# lender wants so much documentation. They ask whether I have a reasonable lender for them to talk to.
So, this is for people who just walked into the world of real estate and are wondering why lending is the way it is:
In the book, The Big Short, Michael Lewis explains the details of the conversion of mortgage notes into a bond commodity. At some point in the Bubble years, the way that the bonds were rated became strongly weighted on the credit score of the borrower and less weighted on the borrower’s income and ability to repay. This created a market for mortgages with borrowers who had high credit scores. Their ability to repay the mortgage didn’t much matter. When everything collapsed around this questionable valuation of notes, the banking industry tightened their standards. Some think they went overboard.
Have they gone overboard, or are they simply protecting their investor’s assets?
The truth about lending lives somewhere in between the free-for-all of the mid 00s and the tightening that started in 2007. Yes, today there are mortgage programs for people with less than 20 percent down. There are programs with as little at 3 percent down. There are several programs available. Two examples are FHA and Mass Housing. The requirements for each of these low down payment loans vary. For example: Mass Housing has income restrictions. All of these programs have credit score requirements as well as some other underwriting requirements. Check with your lender for details. Mass housing has just introduced a 3 percent down payment loan program with no MI (mortgage insurance). Rates on all these programs are the same as the rest of the market Rate.FULL ENTRY
… I found something out over Easter regarding moving from a two family to a single family that I had never heard about before.
If I own a 2 family home that I plan on keeping and I am qualifying for a mortgage on a new single family home. I can only use income from one of the units unless I have 30% equity in the MFH. It’s to prevent homeowners from buying a single family home and then letting the MFH go into foreclosure? I assumed that if you rented both units, the lender would consider both rents towards your new mortgage qualification.
My quick answer was:
It is an interesting question. However, I don’t think the qualification rules are as foreclosure-related as you think they are. It could be pure income guideline at work. FNMA counts part of rental income – not all of it – toward qualifying for another mortgage. FNMA may not be willing to count the second rental income unless the owner has a lease in hand from a verified (real) renter who will be moving in at a certain date. Since it is hard to pin a renter down months ahead of time, it may be near impossible to prove one has a renter.FULL ENTRY
It is a similar problem that a SF house owner has when that owner is moving up or downsizing. Frequently, the owner cannot own both properties simultaneously because his/her income cannot carry that level of debt. Those owners need to sell their current house first, then buy the trade-up or trade-down property.
I keep a list of reliable lenders for my clients’ use. There are lots and lots of good loan originators out there. I know twice as many as I have on my list.
These are the things I expect from my lender-contacts:
1. No over-promising. If you can’t get a conventional loan for these buyers, don’t say you can.
2. Be available. Answer questions.
3. Provide a pre-approval letter that does not disclose more personal information than is necessary.
4. Get the loan commitment in on time. (The loan commitment is the promise that your file is 100 percent approved and the funds are allocated for your mortgage.)
5. Offer a range of loan options, with full explanations.
6. The “Good Faith Estimate” and the actual closing costs should be about the same.
OK, that is pretty ridiculous, but I thought I'd throw it out there to get things moving.
Mortgage rates may very well have hit bottom, as this Globe piece suggests.
Yet even if that's the case - and rates promptly sunk back below 4 percent at the end of last week - it is likely to be a long climb back up to relatively higher rates.
Freddie Mac's forecast, according to the article, sees rates hitting 5 percent, not this summer or fall, but by late 2013!
In August 2007, the subprime melt-down was a big topic. Now that the lending industry has tightened up again, I hear potential borrowers being confused about both extremes of borrowing. Some think no one can get a loan with less than 20 percent down. Some think that anything goes, if you know the right lender. Here'ss where we stand in 2012:
Prime Lending Rate is set nationally. It is the base rate of all loans. Residential mortgages rates are higher than that prime lending rate. The subprime residential mortgage rate will be even higher than conforming residential mortgage rate. This is reasonable, because non-conforming lenders are taking more risk.
The opposite of "subprime mortgage" is not "prime mortgage"; it's a "conforming" mortgage. To get a conforming (or conventional) loan, borrowers must conform to rigid standards developed by mortgage underwriters at FNMA or FDMC, the two big national mortgage companies. Non-conforming loans do not conform to those standards. There are local banks and credit unions that hold their loans. They are non-conforming, but usually called "portfolio lenders."FULL ENTRY
Attorney Richard D. Vetstein reviews the next set of changes to real estate closing paperwork.
Final product will be a combination of both the final Truth in Lending (TIL) form and the HUD-1 Settlement Statement — a dramatic change from the existing forms.
For the second time in as many years, the federal government is substantially overhauling two of the most important disclosures given to mortgage borrowers, the Truth in Lending Disclosure and the HUD-1 Settlement Statement. The revisions are mandated by the Dodd-Frank Act. The new Consumer Financial Protection Bureau is in charge of re-designing and testing the new forms.
Most real estate industry professionals are unaware that these new changes are on the horizon. The new forms are expected to be implemented in 2013 after rule-making and industry comments are completed.
Here is the new prototype combined HUD-1 Settlement Statement: 20120220 Cfpb Basswood Settlement Disclosure
What do you think of the new form? Helpful? Deficient in any way?
To kick off a series for spring house hunters on mortgages, a historical perspective is in order. The current changes in the mortgage industry were a result of the mortgage meltdown in 2007. To understand that economic event, I recommend you take the time to read The Big Short.
Today, I rerun an entry from January, 2011.
I won’t try to summarize Michael Lewis’s 264-page book, The Big Short . He tells the story of the collapse, including character portraits of some of the players, in a rather short book. I hope many of you will read it.
Today, I write about how the concept of a mortgage changed in the past 50 years. (A reader pointed out in 2011 that home mortgages were short term at an earlier time in American history.)
Before I was born, my father bought his one and only house. Thanks to the GI Bill, he had a very low rate. But, even if he had a typical rate, the concept of refinancing would not have crossed his mind. He didn’t get bombarded by mail or TV ads encouraging him to refinance. The advertising he got was by mail, and occasional. It intensified as time went on. My father didn’t bite. My father’s mortgage was paid off in 1986, not a second earlier. In this way, my father was pretty typical of his “greatest generation” status.
Then things changed. Businesses that sold early payment and refinancing changed Wall Street behavior, over time.
Michael Lewis explains:
“The big fear of the 1980s [mortgage]bond investor was that they would be repaid too quickly, not that he would fail to be repaid at all. The pool of loans underlying the mortgage bond conformed to the standards, in their size and the credit quality of the borrowers, set by one of the several government agencies: Freddie Mac, Fannie Mae, and Ginnie Mae. The loans carried, in effect, government guarantees…”
In my adult lifetime, everything changed. Mortgages stopped being long-term loans used to purchase housing. People with mortgages stopped holding them for 30 years. As inflation hit the housing market in the 80s and 90s and 00s, the “flipping” mentality emerged along with Americans borrowing against their bubble-created equity. In the mortgage bond market, this is what was happening:
Today, the Center for Housing Policy published Housing Landscape 2012. Here are the highlights, or should I say low-lights:
Nationally, nearly one in four working households spends more than half its income on housing costs.
Despite falling house values, housing affordability worsened between 2008-2010 because incomes declined over this period. (Housing cost increased for renters, but decreased for owners over this period.)
Massachusetts falls right on the average, with 22-24 percent of working households with severe housing cost burden. This figure is basically stable over the past three years.
Do you hear what this is saying?
One out of four working households spends more than half its income on housing costs.
Let’s look at this with numbers attached to it.
A person working full time at minimum wage ($8) earns roughly $16,000 a year. ($8 X 40 hours X 50 weeks)
Spending one-third of one’s income is generally considered a bearable housing burden. One third of that $16,000 a year is roughly $440 a month. For $440 a month, it’s hard to rent a room anywhere in the Boston area. Half of that income is $667 a month. You can rent a room in a multi-bedroom apartment for that half of the income… maybe.
A couple, both working for minimum wage can spend $880 at the one-third level, but you can see why they are likely to stretch to spend $1333 to have a place to live without other roommates.FULL ENTRY
Yesterday, things changed for home owners who lost or are losing their properties to foreclosure. Massachusetts Attorney General’s office was part of a national settlement with Ally Financial, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. (This agreement includes 49 states -- including all six New England states.)
Here are the main points:
It’s a big settlement. $25 billion.
It affects borrowers who were foreclosed on from 2008 – 2011.
It has provisions for financial relief in the form of reductions in loan principal, a lower interest rate, or cash payments. The rules about how these benefits will be distributed will vary from lender to lender. The lenders have three years to complete the settlement terms. They need a month or two to get their systems in place. (So, if you are involved, expect to not know how it will affect you for a while.)
Who qualifies, generally?
Loan modification will apply to borrowers who are behind in their payments and at risk for foreclosure.
A cash payment of an estimated $1500-$2000 will be given to owners who were foreclosed on between 2008-2011. (The amount will depend on how many people file claims.)
Those who are in the process of modification cannot be foreclosed on mid-stream.
Foreclosed homeowners have not waived their right to sue lenders on their own.
There they go again, those Massachusetts liberals, now pushing for "principal forgiveness" for deadbeat homeowners.
That's been the theme on the comment board of this blog since Massachusetts Attorney General Martha Coakley the other day publicly urged federal mortgage giants Fannie Mae and Freddie Mac to start writing down the principal on mortgages held by struggling homeowners.
But I find it somewhat ironic that many of the folks who are steamed about Coakley's comments - and the fact that the state's congressional delegation is predictably jumping on the bandwagon - are often the first to blast off about Greater Boston's ridiculous home prices.
Here is a sampling Coakley's fairly modest proposal has generated.
This afternoon we learn that the Congressmen Capuano (of Somerville!) teamed with "Bailout Barney" to pen a letter to the FHFA endorsing Coakley's request of principal forgiveness for Massachusetts homeowners.
This comes at a time when "the national debt is equal to $48,700 for every American or $128,300 for every U.S. household. It is now equivalent to the size of our entire economy."
Attorney Richard D. Vetstein writes today about a case regarding mortgage commitment and getting your deposits back. Here is a case where the buyer could not get a loan, but also did not get all deposits returned.
I recently came across a very interesting case from the Appeals Court, Survillo v. McDonough No. 11–P–290. Dec. 2, 2011. The case underscores how carefully attorneys must craft the mortgage contingency to protect the buyer’s deposit in case financing is approved with unexpected conditions.
The buyers submitted the standard Offer To Purchase provided it was “Not subject to the Sale of any other home.” The sellers accepted the offer. The buyers received a conditional pre-approval from a local bank for a first mortgage in the amount of $492,000. The pre-approval also stated that anticipated loan was “[n]ot based on sale of any residence.”
The parties then entered into the standard form purchase and sale agreement (P & S), with the typical mortgage contingency provision for a $429,000 mortgage loan. Due to the buyers’ debt to income ratios, the lender changed the loan into a “piggyback” and with the condition that the buyers list their primary residence for sale prior to the loan closing. The buyers absolutely did not want to list and sell their residence, so they wanted out of the deal.
On the last day of the extended financing deadline, the buyers timely notified the sellers that they had “not received a loan commitment with acceptable conditions,” and attempted to back out of the agreement under the mortgage contingency provision. Ultimately, with the buyers refusing to sell their home, the bank denied the buyer’s the mortgage application based on the fact that the “borrower would be carrying three mortgage payments and the debt to income is too high.”
I recently ran numbers (using MLS) to determine the impact of short sales on the Greater Boston market in 2011. They appear to impact just over 5 percent of the market, depending upon the neighborhood or municipality. It appears that the more affluent the community, the lower the percentage of short sales. In some neighborhoods that I spot-checked up to 13 percent of sales were short sales. The numbers are consistent with 2010.
I was also looking for a statistic that would tell what percentage of short sale listings actually closed. Depending upon the community, I found that 30 to 50 percent of short sale listings did not close. (I didn’t extract the number of repeat listings because that required examining each listing manually. Therefore, my numbers are off somewhat because some short sales are listed more than once to allow enough time to go through the process or get the asking price to where buyers will make offers on them.)
For those that need a review, a “short sale” is the sale of a property by a seller that can’t sell the property for enough money to pay off all of the mortgage balance(s) on the property in full. Sometimes the seller can’t afford to make payments any longer. Sometimes the seller needs to move and can’t afford to pay the lender(s) the difference between the sale price and the mortgage balance(s).
If you are not sure about the details of a short sale, see my October 2009 post:FULL ENTRY
OK, silly me. I had no idea know the federal government's latest undertaking involves a tipster hotline to ferret out complaints about bad appraisals.
It was apparently one of ten million sundry items apparently packed into the sprawling Dodd-Frank overhaul of our nation's financial system.
But, in true Washington fashion, the obscure Appraisal Subcommittee was given the mandate to set up a national complaint line, without enough money to do it.
It turns out that this ten person agency with a budget of $2.8 million has been given the job of overseeing the enforcement of tough new appraisal standards in states across the country.
That includes running the tipster line - my wording on this - which appears right now headed nowhere fast.
Like a lot of government news this winter, changes made to help the economy are not actual changes. They are, instead, extensions of changes already made that were set to expire. One of those was an extension of the waiver on anti-flipping regulations. (found in right-hand column)
Before the waiver, buyers were unable to get FHA-insured funding to buy houses that they intended to sell within 90 days. The prohibition was designed to stop speculators during the ya-ya years, when house prices were rising in the bubble. It’s been extended a couple of times now.
The idea out of Washington is that it should be easy to buy a distressed property, improve it, and flip it. The hope is that this will help communities with large areas of distressed houses.
FHA research finds that in today’s market, acquiring, rehabilitating and reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.
This year, I worked with distressed properties that closed in less than 90 days. From what I read from agents across the country, it does not seem like the norm. Distressed house sales still seem pretty slow, according to agent reports. Is your experience more in line with FHA’s research?FULL ENTRY
Who is at fault, legally, if a loan goes into default because of delays in loan modification paperwork? Attorney Richard D. Vetstein reports on a recent court case.
The fallout from the sub-prime and mortgage crisis continues in Massachusetts courts, and some judges are reacting in favor of sympathetic borrowers. In Parker v. Bank of America, Massachusetts Superior Court (Dec. 15, 2011), Judge Thomas Billings considered what is unfortunately now a very common fact pattern in borrowers’ quest to have their lenders approve loan modifications, or loan mods.FULL ENTRY
A common story of lost paperwork and ineptitude
In 2007, Valerie Parker granted first and second mortgages on her home in Lowell to Bank of America. She paid the loans on time for the first 24 months. As the economy worsened, however, she anticipated difficulty in making payments, and so she called BofA for advice. The bank told her that because the loan was not in default they could not help her, and that she would have to cease payments if she wanted their assistance. (Is this not one of the most ridiculous, yet common, responses lenders give to troubled borrowers?)
After a lengthy period of lost and repeatedly re-submitted paperwork, BofA informed Parker she qualified for HAMP (Home Affordable Modification Program) relief, underwent a lengthy financial audit over the telephone, and was promised follow-up documentation and a halt to further collection and foreclosure efforts. BofA repeatedly lost her paperwork; she had to submit and re-submit documents; and she spent hours at a time on hold, waiting to speak with a human being. She did, however, receive the bank’s verbal assurance that she was “pre-qualified” for the HAMP program and that confirmatory paperwork would be forthcoming. BofA never sent the promised documentation, however, and refused to approve a loan modification. Lengthy and repeated telephone calls produced no documents, no approval, and no progress.
A legal look at why condos are harder to finance by Richard D. Vetstein.
Since the condominium market meltdown, both Fannie Mae and FHA have passed increasingly stricter and tighter lending guidelines on condominium financing. Of particular concern to the agencies and potential buyers is the capital reserve account. For those who don’t know, a condominium capital reserve account is an emergency fund set aside for major capital common area repairs and expenses, such as a leaky roof, a new boiler system, or other major structural issues. In a new condominium, the developer will establish a capital reserve account through mandatory contributions by new buyers, then a certain percentage will be allocated towards that capital reserve account every month through condo fees. In established condominiums, some have already set up a healthy capital reserve fund, while others have little, if any, money set aside. That’s where the problem starts as far as Fannie Mae and FHA are concerned. 10 percent of operating budget now the goal.FULL ENTRY
FHA is now the strictest lending program for condominiums. Ironically, FHA is typically the loan of choice for first time condo buyers. FHA rules now require that condominiums set aside at least 10 percent of their operating income towards their capital reserve accounts. So if the annual budget is for $200,000, then $20,000 must be set aside in the capital reserve fund.
The lender may also require a review of the annual budget, and where the budget is inadequate, require a capital reserve study.
With regard to Fannie Mae, the 10 percent rule is often required by lenders although it’s not technically part of the Fannie Mae condominium guidelines. However, arguing with Fannie Mae and lenders about this issue is tough because a healthy capital reserve account is critical for the financial stability of any condominium project, and hence, vital to the underwriting of the condo mortgage loan.
Accordingly, for all FHA and some FNMA loans (the vast majority of conventional loans), the 10 percent capital reserve account rule will come into play.
The Capra Christmas classic, It’s a Wonderful Life is a movie about banking. It was about a Savings and Loan in trouble during the Great Depression.
Fast forward to 2011. The FDIC (Federal Deposit Insurance Corporation) http://www.fdic.gov/about/mission/ was established by Congress after the Depression to prevent a “run on the bank” by insuring deposits (among other things.) Then the so-called “Savings and Loan” crisis of the late 1980s when 747 banks failed in the US. (Some of you won’t remember that, so look it up.) Now, in the wake of the Financial Crisis of 2007 http://timeline.stlouisfed.org/index.cfm?p=timeline, big lenders are under the gun of our Attorney General.
Small banks that are still in business are doing work that would make Jimmy Stewart proud.
In my personal history, the relationship with a local bank made all the difference for my family. My father worked a union job for almost all his adult life. When I was in elementary school, his union went on strike for almost four months. I remembered the feeling of worry in the house, but I did not understand what was going on beyond that my father was home and he wasn’t (happily) on vacation.
Sometime after college, I talked to my father about that period of his life. There were bills created during the strike that took him years to repay. But, he was never at risk of losing the house. Why? One month into the strike he had a meeting with someone at the bank and created a plan to freeze the mortgage payments for the duration.
Try that now… fat chance, right?
Dynamite, in the hands of a terrorist, can kill innocent people. Dynamite, in the hands of a demolition engineer, can make way for new construction. It is not the dynamite that is destructive; it is how it is used.
The same can be said for non-conforming mortgage loans.
I saw a bridge recently. I haven’t seen one in years and years. Two of my agents had never seen one. It wasn’t a bridge that spans a river or highway. It was a bridge loan that spans the purchase of one house before the sale of another.
Bridge loans went out of fashion during the recent real estate bubble. Equity was high, selling was easy, and lending rules were loose. Trade-up was done by borrowing against the starter house with a HELOC (home equity lines of credit) to augment the down payment on the trade-up house. Then, the starter was sold easily. The HELOC was closed when the starter house was closed. Until the bubble burst, it worked.
When the bubble burst, and the ya-ya years of lending went with it. Anyone who had applied for a mortgage during the ya-ya years knows that the application process did not ask for anywhere near the information you need to provide today. When income-debt ratios came back into line with affordability, few borrowers could qualify for bridge loans. In addition, selling wasn’t so easy anymore.
This December, I saw that bridge. Small banks, such as Wakefield Cooperative Bank, offer bridge loans. So, who should use a bridge loan?FULL ENTRY
Today, our Monday guy, Sam Schneiderman, Broker-owner of Greater Boston Home Team, wraps up his two part series on getting a mortgage in 2011.
Last week, I began the first part of this series about mortgage financing in 2011. Today, I wrap up with the top 5 myths about mortgage financing in the current mortgage environment.
Mortgage money is hard to find because lenders would prefer not to give mortgages right now.
There is plenty of mortgage money available at just about every lender.
While mortgage money is plentiful, credit is considered to be “tight” right now because lenders require more verifications than during the boom years. Qualified borrowers that state their situation truthfully have nothing to fear and should be able to get a mortgage.
The average person can't qualify to get a mortgage right now due to the “tight” credit market.
While there is still high unemployment and the economy is still challenged, not everyone has been affected. The average person with a steady job, good credit and enough cash available for a down payment and closing costs can still get a mortgage at competitive rates. Down payment money can also be partially borrowed and/or taken from a retirement account, if desired.
Some fear that demanding 20 percent down would be a major shock to a housing market still struggling to get up off its knees.
It is certainly the big question amid a raging debate in Washington on whether to return to the 20 percent down rule, the long-time gold standard in real estate that was thrown to the winds during the bubble years.
Yet a new survey of what home buyers are putting down reveals we are already more than halfway there.
Amid the now years-long housing downturn, the down payment has morphed from a small or token entry feet to a substantial, upfront payment.
Nationally, banks and other lenders across the country are now asking for, on average, 12.29 percent down, according to a new report out by LendingTree.com.
Here in Massachusetts, the average is a shade below 13 percent, making us No. 10 in the country for states with the highest down payments.
Today, our Monday guy, Sam Schneiderman, Broker-owner of Greater Boston Home Team, begins a series on getting a mortgage in 2011.
I recently read about a recent survey that asked potential home buyers why they were not buying in the current market. (Sorry, can’t remember where.) The survey found that about 70 percent of those surveyed were under the impression that getting mortgage financing was out of their reach, so they didn’t try. The survey also noted that only about 20 percent of all recent mortgages applied for were denied, although the reasons for those denials weren’t available.
The reality is that mortgages with down-payments as low as 3 1/2 percent are still available and veterans can still buy with no down-payment, but lenders have tightened up the mortgage process to eliminate the loose standards that they used during the boom years.
Getting a mortgage today isn’t much more difficult than it was when I bought my first property 30 years ago. There’s plenty of mortgage money around and lenders are happy to lend to qualified buyers. Buyers and the property that they plan to buy will be scrutinized by lenders and still need to meet most of the same criteria to get a mortgage:
- Buyers need reliable, steady employment or income stream and prove it to the lender’s satisfaction.
- Buyers must show that they are credit worthy with a credit report showing no recent late payments or “charge-offs” (i.e. creditors that have not been paid according to the terms of their financing agreements, unpaid charge cards that creditors wrote off, late student loans, car repossessions, unpaid judgments, etc.)FULL ENTRY
One description of “a loser” is someone who is out of college and sleeping in his/her parents’ basement. I am not sure when it started, but early comments on this blog included insults of that nature. The idea that parental generosity allowed for a room in the basement did not especially strike me as real. Are you living in your parent’s house? Do you have a room nicer than the old playroom near the boiler? I would think you could at least get the room with the Good Charlotte posters back.
During family time at Thanksgiving, my nephew Nate brought up that there is “huge” numbers of college graduates living with their parents and still unemployed. When I got back to work, I headed back to my computer to take a look on line.
I did some quick research. I found the figure of 85 percent of graduates from the class of 2011 planned to move back home.
I kept looking.FULL ENTRY
Do you know what a private way is? (Yeah, It’s the opposite of a public way.) A public way is land owned by the municipality that the public uses for a thoroughfare; in short, a road. A private way is also a road. But, the owner of the house owns half (or sometimes all) of the road in front. Towns will plow private ways so police and fire can get through. In towns that have garbage and recycling pick-up, the pick-up includes private ways.
The difference is twofold:
1. If a house is on a private way, the lot line of the property is in the road. So the lot includes the square footage under the road. Therefore a 6000 SF lot on a private road is smaller than a 6000 SF lot on a public road. (It is one of the things I check when I do a CMA) I see this in Arlington in a number of neighborhoods.They're in some in other towns, too. Seen 'em in Newton, Lexington, Somerville... There are developments with all private ways where the owners collectively need to plow and pave; I don't see those in the towns around Boston where I work.
2. Around Boston, where I work, private roads are plowed by the town, but in most cases they get paved or repaved by the private owners… or not. Have you driven on a really beaten-up road and wondered why the town was neglecting it? It might have been a private road. Private roads are maintained by mutual agreement. So, if the neighbors don’t get along well enough to chip in for road care, the road gets more and more rutted. I have run into owners who love their rutted private way; it keeps people off their street!FULL ENTRY
Usually, once someone moves into their house, the pain of bad service fades. Not in this case. My client still detests her loan officer. On closing day this client was baffled by the chirpy email she got from her lender saying
“it was a pleasure to be of service.”
My client couldn’t get over it. “What service?” she kept saying. She got to the closing table, but she got there late and will far too much stress. (A note to Lance: the lender was one of the big banks, not a mortgage broker or small bank or credit union.) What happened to her can be avoided by checking on both service and rates before you choose your loan officer.
Here's what happened:The sellers were pleasant and responsible. The buyer had a lot on her plate. The lender was the root of almost all the stress in this transaction. This was a complicated loan, in that there was a second mortgage. But, the buyer/borrower was over-qualified, fully employed (no self-employment to document) and the house appraised for value without a hitch.
What was so bad about this loan officer?
1. She did not provide a list of documents needed for the loan. She called several times to say, "I guess you need this form too."
2. The loan commitment was late. When we got a 48-hour extension, she yelled at the buyer that “most attorneys give us a week.” It was completed 9 days late, causing the buyer to close late and rent an additional month.
3. There needed to be a second appraiser visit because a repair was done by the seller. The reappraisal request went in five business days after it was requested.
4. The Good Faith Estimate was significantly lower than the final settlement charges.
5. She never made a promise that she kept. She missed deadlines and then wouldn’t commit to future deadlines. She left the office on the day of a deadline and passed the buyer to a processor (who was rude.)
I've been on a kick about banks lately. Below are the basics about what happens when you approach a bank or other lender for a loan.
What’s a mortgage broker and how is that job different from a loan officer?
A mortgage broker represents many different lenders (banks, mortgage companies, private investors) similar to the way an independent property casualty insurance agent has the ability to price car or home insurance with different insurers. A mortgage broker arranges loan with mortgage lenders. Lenders provide the actual funds. A loan officer or loan originator is just a title for someone who works for a mortgage broker or a lender/bank.
How does a loan officer get paid?
He/she is a commission-based sales person. There is a commission built into your loan, which your loan officer gets at closing.
What is his/her job?
He/she is paid to find qualified borrowers and to prepare documentation to show that the lender is taking an acceptable risk.
I keep a list of reliable lenders for my clients’ use. There are lots and lots of good loan originators out there. I know twice as many as I have on my list.
Rui Domingos from CPCU describes the standards that his credit union uses in place of the one-size-fits-all FNMA rules. Non-conforming loans are generally equated with subprime and overly-risky practices. But, at a credit union, that does not seem to be the case.
What is an example of a loan good for a first time buyer?
A good loan for a first time buyer (FTB) is a loan that was developed with the FTB best interest in mind. A loan that was designed to take into consideration the borrower’s true ability to afford their first home. Most FTB need guidance with the process of getting their first mortgage. However, a good lender will also take the time to help FTB realize the true cost of homeownership. Most FTB do not have a good understanding on the difference of owning a home versus renting. Therefore, they make the mistake of simply comparing the cost of rent versus a mortgage payment.
First time buyers don’t know what to expect regarding water bills, utilities in a larger space, repair and maintenance. We look at all the expenses of home ownership. We also look at the total expenses that are not housing, like childcare, tuition and other regular bills. At the credit union, we look at these things.
What is an example of a loan good for people who want to buy two or three family homes?
Two and three family homes are great homes for both investors and anyone who is looking for an owner occupied property that generates income to assist with the mortgage payment. However, these properties do come with the added responsibility of managing tenants and the additional expenses associated with a multifamily homes. A traditional owner occupied 30 year loan is suitable for an owner occupied multifamily home for as long as borrowers requires a 10-20% down payment and enough reserves to cover situations when an apartment is vacant or a tenant defaults.
Who can borrow from CPCU? Isn’t it Cambridge Portuguese Credit Union?
You don’t have to be Portuguese or Brazilian (or learn Portuguese real quick with Pimsleur language program) to join CPCU. CPCU membership is open to anyone who lives, works worships or goes to school in the Middlesex, Suffolk and the Essex counties. Therefore, membership is open to our surrounding communities regardless of ethnicity. Our history and commitment to immigrants has the advantage of getting good information into the hands of would-be borrowers who speak and read Portuguese and other languages. CPCU staff speaks multiple languages, such as English, Portuguese, Spanish, Creole, which is a reflection of the communities that we serve.
The Feds have launched a massive review of homeowners who lost everything in foreclosures that may have been seriously flawed.
Banks last week began sending out an estimated 4.5 million letters to homeowners who were in some stage of the foreclosure process in 2009 and 2010, informing them they may be eligible to have their files reviewed.
These include victims of robo-signing, in which banks churned out foreclosure documents in assembly-line fashion without checking the accuracy.FULL ENTRY
Larry bought and renovated an old Victorian in a town north of Boston.
Now, just as he was about to close on a new mortgage that would cover what he paid originally and the couple hundred thousand he just put in, a big problem has popped up.
Suddenly unhappy with the first appraisal, Larry's bank brought in another appraiser to review the first valuation. Basically, she looked at the comps again and decided Larry's practically new, rebuilt Victorian has been overvalued.
The result is the bank is reducing the amount it will lend from over $500,000 all the way down into the $400,000s, a cut of nearly $100,000.FULL ENTRY
When I with Rui Domingos from CPCU to get up to speed on credit unions, I had a personal agenda, too. I have not had access to the credit unions that my clients used. Some were from their work, and some from their college. So, when I met with Rui, I was curious how extensive the use of credit unions was. It seemed like a tiny part of American banking from where I sat.
Boy, was I wrong! There are about 300 million people in the United States. 96 million of them belong to credit unions.
My banking history is not so unusual. I got my first ATM card in 1983. It was a wonder to behold. I had an account in New York that I could access from graduate school in Maryland.
When I graduated, I move to the Boston area. I set up an account at the BayBank in 1984. I stayed at that branch from 1984 to 2004. In that time BayBank merged with Bank of Boston in 1996 and became BankBoston. BankBoston became FleetBoston in 1999. In 2004, FleetBoston morphed into Bank of America. I left the bank and moved around the corner to Wainwright. This year, Wainwright became Eastern. Sound familiar?FULL ENTRY
Credit unions are beholden to their members to run a solvent and productive institution. They are not profit-driven like a commercial bank. So when a borrower comes to a credit union to get a loan, the loan officer takes a closer look at each borrower. It is not a simple matter of plugging in figures for income and debt into a FNMA underwriting software and writing a pre-approval. They truly try to mitigate the risk of extending credit by looking at all factors including the borrower’s history with the credit union. For example, I asked Mr. Domingos whether a borrower is counseled about all their monthly expenses, like childcare costs and church tithing payments. He said, “Yes.” In some cases he also looks at utility costs and other payments that are part of the ongoing economic picture.
A portfolio lender has the ability to assist borrowers who do not quite fit the secondary market requirements. There are many great borrowers that are credit worthy, but for some reason, do not qualify for a FNMA mortgage. Portfolio lenders are lenders that are willing to hold the mortgage that sometimes do not meet the secondary market requirements. In CPCU’s case, they do both portfolio loans and sell to the secondary market (loan servicing is retained by the credit union, so the borrower will always deal with the credit union during the life of the loan).
This is the consistent way that credit unions operate. The volunteer Board of Directors is beholden to the members to keep the institution solvent. So, when loan requirements got loosened in the ya-ya years, Mr. Domingos, as CEO, made some members mad by denying them a loan or qualifying them for much less. However, the credit union was doing this in the member’s best interest so that they would not purchase a home that they could not afford.FULL ENTRY
Underwater homeowners would get a lifeline of sorts under the Obama Administration's latest housing market rescue plan.
While interest rates have fallen to unbelievable lows, many homeowners can't refinance. After years of falling prices, they simply owe more on their mortgages than their homes are worth.
But underwater homeowners, as long as they have made all their mortgage payments on time in the past six months and meet a few other basic criteria, such as being gainfully employed, would be eligible for a new refinance product just rolled out by the Obama Administration.
The savings could prove substantial, with $3,000 in savings each year on a $200,000 mortgage that is refinanced from 6 percent down to 4.5 percent, according to this explanatory piece put out by the Associated Press.
Given higher home prices here in Greater Boston, that could amount to $6,000 in savings a year for a homeowner with a $400,000 mortgage.
An estimated 230,000 homeowners across Massachusetts are underwater on their mortgages, owing an average of $120,000 more than what their properties are actually worth now, CoreLogic reports. That's more than 15 percent of everyone who owns a home in the state.
It's a breathtaking gap, created in part by our crazy home prices. Nationally, underwater borrowers owe on average $65,000 more on their homes than they are currently worth.
All that said, there are a couple of red flags here.FULL ENTRY
For my readers who care about environmental issues: remember that next Friday, October 28 is Walk/Ride Friday, brought to you by Green Streets.
On a national level, there is a change being proposed for real estate mortgage underwriting that would make energy costs part of the value calculation. Energy costs would be added to the cost of home ownership for qualifying borrowers for a mortgage and would also be considered part of the appraisal calculations.
From the Institute for Market Transformation:
The SAVE (Sensible Accounting to Value Energy), championed by Senator Michael Bennet (D-Colorado) and Senator Johnny Isakson,(R-Georgia), require federal loan agencies to assess the expected energy costs for mortgage loan applicants. This can be accomplished through modest adjustments to underwriting guidelines and appraisal practices and could be implemented over a manageable period without disruption.FULL ENTRY
I met with Rui Domingos from CPCU to get up to speed on credit unions. I have occasionally had a client get their mortgage from a credit union, but I did not pursue a relationship with the loan officer there because I thought credit unions were exclusive organizations. Apparently, some are and some are not. CPCU is open to everyone. I had a Bildungsloch (a hole in my education) when it comes to credit unions.
Credit unions came into being when a group of people needed banking services that were not being offered by traditional banks. When some members of a community had savings and others need to borrow money, a credit union was a way to get money flowing within a community in a safe a professional manner. In the bad old days, traditional banks discriminated wildly. Not only were minorities and women unable to get loans, some banks would not allow “certain people” to open accounts for savings. Bad days indeed. Credit unions offered access to loans before the days of FNMA and FDMC.
In the case of CPCU, it was started by Portuguese immigrants. They were hard-working people who could not get a bank loan. In response, successful local Portuguese professionals and business owners collected their funds and began lending it to members of their community. Those with savings received interest on the loans and those in need of loans to start businesses and buy houses had a source for a loan. It was a win-win.
A wave of new rental towers is coming your way.
Thousands of new apartments are either under construction or about to start across Boston and in the suburbs as well.
This surge in building activity comes with apartment rents soaring amid rising demand as home and condo sales sputter.
After decades of little new rental construction, it is a welcome sight.
End of story? Well hardly, for there are some real things to be concerned about here as well.
After all, will this improve life for the majority of Boston area renters out there, instead of simply providing more choices for upwardly mobile young professionals?
I wouldn't bet the house on it.
Yes, there certainly seem to be many more cash buyers out there than before. The Globe and WBUR both recently did pieces on this - more than a third of all home and condo sales across the state so far this year have been cash deals.
Yet with home sales across the state having fallen to anemic levels and banks skittish, it may also be the case that cash buyers are among the last guys standing here. (Thanks to Markus for this common sense observation.)
Yes, the cash buyer may be king now, but the realm is shrinking fast.
Here's a revealing stat. In 2004, as the housing bubble was reaching its peak, there were 50,561 homes sold across Massachusetts. But by 2010, that number had plunged by more than 25 percent, to 37,326, according to the Massachusetts Association of Realtors.
My hunch is that more than just our incredibly shrinking real estate market is at work here - there is also a surge in speculative buying of the kind that always takes place in the wake of a market crash, whether on Wall Street or Main Street.
Generally, about ten percent of real estate transactions are paid with cash. This year, the average in Massachusetts for the first three quarters is forty percent. It is this change that piqued the interest of both the Boston Globe and WBUR.
Jenifer McKim at the Boston Globe mentions some overlapping categories of cash buyers:
Very rich cash buyers purchasing deeply discounted high end condos.
Speculators buying distressed properties at deep discounts to flip or rent.
Investors buying rental property near colleges.
Over at WBUR, Curt Nickisch was working on a similar story this week. He also added this statistic to the mix:
In some Massachusetts communities, more than half of home sales this year are have been paid with cold hard cash. Those communities include Provincetown, New Bedford and Cambridge.
I am not sure how to categorize these cash buyers. Some are downsizers buying retirement properties, some are investors, and some are purchasing “kiddie condos.” (Parents buying condos for their student-children. This is a hybrid between investing and buying a second family home.)
Are you laying you cash down for real estate this year?FULL ENTRY
The most common reason that sellers are underwater now is not because of their initial mortgage. It is because they kept borrowing against the bubble-level equity of their house. Some did it to improve the house with a new kitchen, put on an addition, upgrade some of the systems, or just for good-quality maintenance. Others floated their vacations, cars or paid college bills. Some hedged their periods of unemployment or underemployment with their home equity loans.
When the bubble began to deflate, they found themselves stuck in their homes and in their mortgages. If they are lucky, they still have the income to pay the mortgage and keep the house. What they don’t have is the cash to leave the house.
Here’s a rough case in point to show how owners can be underwater without being slammed by large-scale depreciation. I chose a middle-class example, because the example of people who bought with no money down at tippy-top peak is just too obvious. Those buyers had not equity to begin with.
Instead, I also used a town where the deflation has been relatively small, compared to most of Massachusetts and tiny compared to the rest of the country. I used a steady 5 percent loan rate, even though these owners would have started higher and refinanced down through the time period I am describing:
J and J bought a smallish house is Lexington in 1996 for $250,000. They added an addition in 2000 for $100,000. Today, they are still sitting pretty. They can still sell that house for $600,000 or more and walk away with a profit.
Here's how the the water rose:FULL ENTRY
Sam Schneiderman, Broker-owner of Greater Boston Home Team explains how all credit reports are not created equal.
I spoke with Connor (a lender) and he recalled his conversation with Sid.
Connor recalls that Sid was not ready for Connor to run a credit report, but Sid gave him a verbal credit score and they discussed Sid's financial and employment situation. Sid also mentioned that he was about 6 months away from buying. Based on what Sid provided to him verbally, Connor did not foresee any issues with financing.
Now that Connor is getting more serious about his condo search, it is prudent for Connor to run his credit report and get a formal pre-approval for the following reasons:FULL ENTRY
What should have been a noble effort to help out jobless homeowners has turned into yet another shameful government fiasco.
Check out this story by Jenifer McKim on the much-touted $2 billion proposal, championed by Barney Frank, to extend up to $50,000 in no interest loans in a bid to help homeowners who have lost their jobs.
The feds have been unable to dole out even half the $61 million targeted for Massachusetts homeowners, with stories piling up of deserving applicants being turned down for a range of nonsensical reasons.
Some have been rejected because their income hadn't technically fallen far enough. And, as I've noted previously, you also don't qualify if you managed to pull down more than $110,000 before you got the ax, a healthy income but hardly enough to put you in the economic elite here in Greater Boston.
But the most galling requirement of all is that you must stop paying your mortgage in order to make yourself eligible for a helping hand from Uncle Sam.
The FNMA/FHA limit in the still-expensive parts of Massachusetts just changed from $523,750 to $465,000. Sort of. In usual government fashion, there is still some arguing going on about it. The limits were raised a while back, then the raise was extended. What they are fighting about is whether to extend the extension of the increase. Get it? No extension equals decrease in the conforming loan limits. It is looking like the extension is dead.
The $465,000 limit (and $417,000 away from the high-priced zones) will be the new, lower limit, unless the extension gets pushed back to life.
Quick definition: Conforming loans are the normal ones that can be sold to secondary market. The theory here is sound: it is a good idea to have standards when selling loan products. The limit to a conforming loan is about to be lowered to $465,000 or $417,000, depending on where you live in Massachusetts.
This does not mean that no one can borrow more than $465,000. There are still Jumbo loan products. Jumbo mortgages require larger down payments (20 percent) and higher credit scores. The interest rates will be higher for larger loan amounts. The theory here is sound: it is a good idea to have borrower standards when lending larger sums of money.FULL ENTRY
House owners may find themselves stuck at a higher interest rate. The reason: in order to refinance, they will have to buy PMI (mortgage insurance to cover loan), if they no longer have 20 percent equity. Owners who bought near peak or borrowed against equity along the road, may have dropped below that 20 percent mark.
(Those who bought with less than 20 percent equity are not affected by this, since they have been paying PMI anyway.)
Because of 80 percent loan limits to avoid PMI, a refinanced loan could cost more on a monthly basis. Owners don’t have to be under water to be too undercapitalized to refinance. They need to have a 20 percent equity share in the house to avoid PMI cost.
Many people are in this no-longer-have-20-percent-equity boat. Those who bought at peak may have lost enough equity to fall below the 20 percent level. On average, equity loss statewide in Massachusetts is about 15 percent in the current decline. Averages don’t tell the whole story; to refinance at 20 percent equity, the appraisal is the make-or-break.FULL ENTRY
With interest rates dropping to around four percent, I am getting a flurry of questions about refinancing. Interest rates are expected to stay low for more than a year. So, my general advice is to look before you leap.
Refinancing is not as good a deal as you may think. In January, 2009, I outlined how refinancing can set back your long-term financial goals. If you refinance, but do not shorten your loan term (go from a 30-year to a 30-year), you are adding more payments to the end of your loan.
You borrowed $300,000 at five percent two years ago. Your monthly principal and interest is $1610 a month. You have paid $38,640 toward principal and interest over the past two years and $14,388 went toward principal, the other $24,252 went to interest.
The $285,612 you now owe would cost you $1533 a month without any change to your interest rate. You have added 24 more payments to the end of the loan. That’s $36,792 to save $77 a month. ($77 times 360 payments is $27,720.) That is obviously not worth it. You also have to add in closing costs, which can be thousands of dollars.
If you can get your rate down to four percent, the monthly payment goes down to $1364. You reduce your payments by $246 a month, and add $32,736 to your thirty-year payments. ($246 times 360 is $88,560.) That’s worth it.
There are more good reasons to refinance, even if you can’t afford to go to a shorter loan:
OK, wrath may be a strong word given the weakened version of Irene that finally lumbered into Massachusetts yesterday morning.
Still, the storm did do damage, from downed power lines to flooded basements.
My Natick fixer-upper escaped without any major injury - I had to turn on the sump pump in the basement, but that was about it. Luckily, we had some older, dying trees near our house taken out over the past two years.
It looks like there's hope after all for that 70-year-old Florida woman who found herself facing foreclosure after paying her mortgage early.
To recap, Florida retiree Sharon Bullington won a mortgage modification from Bank of America after getting slammed with medical expenses.
But problems started after she made her first payment early - Dec. 23rd instead of January. She put a wrong routing number on the second payment, and, suddenly, she was faced with foreclosure, the St. Petersburg Times has reported.
The initial response from BofA was hardly inspiring - as I noted in my recent post.
Apparently, though, the saga is not over.
Can the nation's big banks get any more incompetent in how they handle individual foreclosures?
A popular mistake seems to be foreclosing on the wrong home and then only offering a grudging apology later - of course not until after having thrown some innocent homeowner's possessions onto the sidewalk and locking everything up tighter than Fort Knox.
It's a hard act to top, but Bank of America appears to have succeeded in the case of a 70-year-old woman in Florida.
Underwater on her $133,000 New Port Richey home and nursing a bedridden husband, Sharon Bullington found herself in a financial jam as medical bills began to pile up.
But she thought she had staved off foreclosure after working out a loan modification deal with BofA, the St. Petersburg Times reports.
That was until she paid her mortgage a week early. That's right, Mrs. Bullington made her January payment on Dec. 23, the Times reports.
And that turns out to have been a big mistake.FULL ENTRY
Desperate times, desperate measures. Proposal to guarantee rock bottom mortgage rates for all takes flight
Life, liberty, and a guaranteed, rock bottom mortgage rate?
A proposal for a great, big national mortgage refi party may turn out to be more than talk radio/blog fodder after all.
The Obama Administration is studying plans that would guarantee a 4 percent interest rate for tens of millions of homeowners with federally backed mortgages, The New York Times reports.
There are appealing aspects to the plan - bondholders, not taxpayers, would take the hit. Better yet, it would act as a giant stimulus plan for the economy, freeing up as much as $85 billion in potential consumer spending that is now being sucked into mortgage payments.
Moreover, it may not need Congressional approval, the Times notes. That would let the Obama folks sidestep all the Tea Party rock heads.
After you close, your closing “goes to record.” This is the process of getting your mortgage, deed, and other paperwork into the system. Someone paid by the closing attorney will go to the registry to get the paperwork filed into a registry of deeds database. (It can be done by a non-lawyer. There are errand services to do this for attorney’s offices.) Within a couple of hours of most closings, a new owner can see his/her deed on line at the local registry. The original paper deed will show up, by mail, months later. You can file it, but you don’t need to take extra-good care of it. To sell, you do not need an original deed; it is not like the title you have for your car. The important thing is that your deed is recorded at your local registry of deeds.
A registry is an old-fashioned system. The filing is done by Book and Page. This corresponds to big books with big pages. On-line searching can be done by document (Book and Page number or type of document), name (of buyer or seller) or address.
My buyers check to see that their purchase has gone to record. The ones that haven’t been patrolling the databases for months find this really neat. They also realize anyone can see it. They wonder about their privacy. What is not on record is your interest rate, what you paid along the way, or your social security number.
Getting the purchase to record is the easy part, and it goes well almost all the time. The problems develop later. Buyers rarely check later to see that the discharges (which take a while to process through the lenders) get to record.FULL ENTRY
If so, you are not alone.
Just over half of all agents surveyed by the Massachusetts Association of Realtors said sales in their offices have taken a hit as a result of appraisals that came in under listing prices.
A significant number of those who answered yes had seen as many as three to four sales hit by low appraisals, which, if they don't kill a sale, can lead to some frantic last minute restructuring.
In fact, the Bay State numbers are significantly worse than the national numbers, which have been rising as well. The National Association of Realtors reported that 16 percent of all sales fell through in June, up from 9 percent in June of 2010. Low-ball appraisals were the main culprit, the trade group contends.
For a growing number of would-be home sellers and buyers, the numbers appraisers are throwing out are increasingly disconnected with reality.
OK, the idea is completely loopy, but you know what they say about California being a trend setter.
So it will be interesting to see whether a proposal out in the Golden State to ban all foreclosures - and force banks to refinance homes at lower rates - makes it onto the ballot.
Sacramento resident David Benson is on a mission to gather more than 800,000 signatures to put a question on the state ballot that would radically amend the California constitution.
Benson's proposal would make homeownership a "fundamental right." And it would not only bar banks from foreclosing on homeowners who fall behind on their mortgages, but it would also require lenders to refinance a mortgage at a lower rate - and a minimum cost - within 45 days!
Wow, now how's that for service? That's not all, with banks also required to knock down the principal on underwater homes as well.
Of course, this looks more like a way of sticking it to the banks - a protest vote - than a serious proposal.
Still, I wouldn't underestimate the level of anger out there toward the banking /lending industry that proposals like this one illuminate.
Today, our Monday guy Sam Schneiderman, broker owner of Greater Boston Home Team discusses what every borrower should know about how lenders verify income these days
Not long ago, a signed copy of a borrower’s tax return, copies of W-2 forms, 1099 forms and maybe a letter from the borrower’s CPA would have been sufficient to prove income for most loans.
In today’s lending environment, lenders are more prudent. They are required by Fannie Mae to verify that the information on the tax returns submitted to the lender matches the information on file with the IRS. The lender does that by submitting form 4506t to the IRS to obtain a transcript of the tax returns on file with the IRS. That transcript is not a copy of the tax return; it consists of a line by line printout of the income and deductions from the tax returns filed with the IRS for the particular years in question.
For those who are current with their tax returns, that should not pose a problem.FULL ENTRY
We count on Richard D. Vetsteinto keep us up-to-date on the issues about legal procedures and the foreclosure mess.
Ironically on the same day Bank of American was about to sign a historic $8.5 Billion settlement agreement over bad mortgages, somebody finally went through a registry of deeds to look at the effect of the U.S. Bank v. Ibanez decision and the validity of mortgage assignments in Massachusetts.FULL ENTRY
According to an audit performed by McDonnell Property Analytics, in the Salem, Mass. Registry of Deeds, 75 percent of mortgage assignments are “invalid.” About 27 percent of invalid assignments are fraudulent, McDonnell said, while 35 percent are robo-signed and 10 percent violate the Massachusetts Mortgage Fraud Statute.
McDonnell said it could only determine the financial institution that owned the mortgage in 60 percent of the cases reviewed. There are 683 missing assignments for the 287 traced mortgages, representing about $180,000 in lost recording fees.
“What this means is that the degradation in standards of commerce by which the banks originated, sold and securitized these mortgages are so fatally flawed that the institutions, including many pension funds, that purchased these mortgages don’t actually own them,” according to analysts at McDonnell. “The assignments of mortgage were never prepared, executed and delivered to them in the normal course of business at the time of the transaction.”
“My registry is a crime scene as evidenced by this forensic examination,” said O’Brien. “This evidence has made it clear to me that the only way we can ever determine the total economic loss and the amount damage done to the taxpayers is by conducting a full forensic audit of all registry of deeds in Massachusetts.”
If so, I want to hear from you.
The nation's ten largest banks nixed nearly 27 percent of all mortgage applications last year, The Wall Street Journal recently reported.
That's actually up from the recession year of 2009, when the big banks turned down 23.5 percent of all mortgage applications.
In Vermont, Mississippi and Texas, the banks rejected 40 percent of all mortgage applications. Apparently Massachusetts and Minnesota were on the lower end, in terms of rejections, though I couldn't find the exact rates.FULL ENTRY
At the Fourth of July party, my family was abuzz with the New York Times article about big lenders modifying loans for borrowers who didn’t ask for help.
Banks are proactively overhauling loans for borrowers… who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.
We are never going to solve the question about fairness. I’d rather not try.
Let’s talk about whether this is good business on their part. Is it just good business to get some of the underwater borrowers out of option adjustable rate mortgages and into conventional loans? Doesn’t it make sense to do this for borrowers who are paying on time? Those borrowers are more likely to keep paying on time, since their payments are being held steady. The modification gives them a chance to start paying down principal. Or should modifications only go to those that are headed for foreclosure? Is it better business to stop defaults by giving a leg up to the most vulnerable borrowers?
The two big lenders, Chase and BOA, are using different tactics to convert these toxic loans into something more stable. Chase, in the example in the story, reduced the principal by $150,000. The borrower had started with a large down payment, but her option ARM had swelled her debt to $300,000, well above the 2006 purchase price of
$259,000. $359,000 (corrected)
BOA, on the other hand, is modifying loans without reducing principal. They are waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.FULL ENTRY
Richard D. Vetsteingives us the bullet-points on the new FHA condo guidelines.
FHA loan programs offer low down payment mortgages which are often ideal for first time home buyers who lack cash for a 20 percent down payment but are otherwise strong borrowers. On June 30, 2011, FHA confirmed its commitment to financing condominiums with the issuance of revised lending guidelines (HUD Mortgagee Letter 11-22). The new FHA Condominium Project Approval and Processing Guide can be downloaded here.FULL ENTRY“Today, we institute revised guidelines that preserve FHA’s role in the condo marketplace during these difficult times while making certain we manage risk in a responsible way,” said FHA’s Acting Commissioner Robert Ryan. “This guidance formalizes and expands the policies we put in place in 2009 and lays the groundwork for a more formal rulemaking process going forward.”
Highlights of new guidelines
1. Reserve study requirements:
New guidelines require reserve studies on all conversion (i.e., new) developments. Reserve Studies are valid for a period of 2 years.
2. Reserve funding
In addition to a reserve study determination, a minimum of 10 percent of the operating budget must be set aside as a baseline in a reserve account. Funds to cover the total cost of any item in the Reserve Study or that will require replacement within 5 years must be deposited in HOA’s reserve account. The insurance deductible must also be included in the reserve fund.
3. Delinquent condo fees
On existing projects, the condominium cannot have more than a 15 percent delinquency rate on unpaid condo fees. This could be a problem for struggling condominiums. A waiver may be granted, however, with supporting documentation.
Richard D. Vetstein talks about how a title insurance case has made its way to the US Supreme Court.
In a case closely watched by the title insurance and real estate settlement services industry, the United States Supreme Court has agreed to hear a class action which will decide whether consumers can sue under the Real Estate Settlement Practices Act (RESPA) over a title insurance referral arrangement that allegedly violated RESPA’s anti-kickback provisions. The case’s outcome could shield title insurers, banks and other lenders from litigation under RESPA and a wide range of federal and state laws. If First American wins this case, we could see title insurance companies in Massachusetts taking a much more active role in the operations of their favorite and most profitable agents.FULL ENTRY
The case is Edwards v. First American Title Co. For more coverage of the case, read the SCOTUS Blog summary here.
No way, contends the Massachusetts Association of Realtors, which wades into the down payment debate this morning with a provocative press statement.
In its monthly report on housing sales, MAR takes aim at a move in Washington that would in effect require most homeowners to put 20 percent down when buying a home.
That would mean a down payment of roughly $60,000 on a $300,075 home - the median price for a house in Massachusetts in May, our local Realtor group notes.
Of course, that looks like a bargain compared to what would-be Boston area home buyers might have to shell out. Given the metro market's median sale price of $417,000, we are talking a cool $80,000.
All sounds so reasonable, does it not? Yet I have some big problems with this argument, which would snuff out a potentially helpful reform to our severely messed up housing market.
Bank of America foreclosed on someone who didn’t have a Bank of America mortgage. The owners say they had no mortgage at all. The judge charged the legal costs to Bank of America and the Bank commenced ignoring their debt. Whoever was in charge of paying this court bill did exactly what a lot of homeowners in trouble have been doing: He or she didn’t answer letters, didn’t answer phone calls, and generally ignored the problem. When a bill is delinquent, the last thing you should do is ignore the person you owe. Ignore it and it only gets worse. Doesn’t BOA know that after chasing delinquent homeowners for the past four years? Tee hee.
Foreclosure is no laughing matter for homeowners who can’t pay their mortgages. Help and advice are available. The worst thing you can do is to act like the person in charge of paying the court fees at Bank of America. Go to the next page for some serious information about foreclosure.FULL ENTRY
To clarify the discussion going on in response to your recent post, I took the following example:FULL ENTRY
A 30 year loan taken at 6.5 percent 5 years ago. In round numbers, it will have principal and interest (P&I) payments of $1,353, a remaining balance of about $200,000, and 300 payments left (25 years) for a total of $405,900. That’s $205,900 in interest on top of the $200,000 principal.
Some of my clients are interested in the savings as the reduction in monthly payment. In the above situation, someone refinancing the remaining $200,000 to a new 30 year loan at 5.25% will have 360 payments of $1,104, a total of $397,440.
$405,900 - $397,440 = $8460
While the monthly savings is almost $250, the total of the payments is only a few thousand different after resetting the schedule to 30 years. If the interest rate differential is any less or if you factor in closing fees, this loan may not provide any savings in the long term.
The question is: how do you define “savings” in a refinance situation?
Reduction of monthly payment:
In the above situation, someone refinancing the remaining $200,000 to a new 30 year loan at 5.25 percent will have 360 payments of $1,104, a total of $397,440. The monthly savings is almost $250. For homeowners with immediate monthly cash flow issues, this refinance could make sense. I am thinking of a two income family that becomes a one income family or someone who may be absorbing significant day care or school tuition costs. In that case, there is benefit to lowering the monthly expense.
That is the average length of time it takes for banks to seize your home if you live here in Massachusetts, according to RealtyTrac.
It's up significantly from 2007, when the foreclosure crisis kicked into high gear and the time between the initial filing by the bank and the auction was just under a year.
Now we are talking more than 15 months - a 25 percent increase.
Of course, back in more normal times, the bank would get wrest back the title to your home in a matter of six months or so if you fell behind on your payments.
That is still the case in many small states, but it is not so anymore in big government states like Massachusetts, New York and New Jersey, which have thrown up an array of regulations designed to slow the process down.
CatB may be wondering if she should wait for lower prices and risk being in a higher loan rate environment, What do you think?
There is a fallacy that “you can always lower your payments by refinancing.” First, you may not be able to refinance if your income or your equity is shaky. Second, the savings may not be real savings.
It’s a dirty little secret that most of the homeowners who are under water got there through refinancing, not by borrowing for their initial purchase. It was tempting to buy new kitchens, cars, vacations, college educations and just junk by using cash-out refinancing products. These products were given out like candy.
While housing prices were going up, the value in equity was burning a hole in a lot of people’s pockets. Homeowners felt rich. If you paid $250,000 for a house that’s worth $500,000 five years later, you are $250,000 ahead, right? Wrong. It seemed perfectly reasonable to borrow only $50,000 or $100,000 of the profits. Right? Even more wrong. Even though the house may be worth $425,000, in 2011, it was not a good idea to borrow against the equity.
Cost of the refinancing service: even if you get a “no points, not closing cost” loan, you are paying for it somehow. Sometimes the rate is higher than a mortgage with more fees. Sometimes the fees are added into your principal.FULL ENTRY
This entry comes to you in response to an email from CatB. Real estate questions are always welcome. Send to Rona Fischman.
Cat B asked:
I’d like to see a post about what it means to "have to buy now." What are the factors that (should) go into this calculation? Is there a better way people can find adequate rental housing that will alleviate the “need” to buy now?
I hear regularly from wanna-be homeowners that the only way to get decent housing for their family is to buy a house. They tell me that anyone trying to rent with children will face a wave of discrimination and rejection after rejection. They tell me that trying to find an apartment for one person that can be supported by one income, near the T, is like trying to win the lottery. They tell me that they are sick of living like students.
The other thing I hear is that friends and family are telling you that any renting is second-rate when you are happy renting? Tell us! Has your Aunt Margaret said something ignorant like, “Well, darling, you graduated from BU five years ago, we expected you’d buy a house by now. When are you going to grow up?”
Renters, how hard is it? Really? Tell your story. Is it true that all rental property for families and singles is either second-rate or costs an arm and a leg? What does it really cost to live in a nice place? Renters, what are you paying? Tell us how many bedrooms, house or apartment, what town, what shape.
So, do you need to buy? Is it because rental housing is the pits? Or is there more to it?
If there is news about Ibanezrelated court cases, Attorney Richard D. Vetstein is on it...Here's what happened this week at the SJC:
The SJC heard arguments on Monday in the case of Bevilacqua v. Rodriguez on whether a home buyer can rightfully own a property if the bank that sold it to him didn’t have the right to foreclose on the original owner, after the U.S. Bank v. Ibanez landmark ruling in January. This case, which national legal experts are watching closely, may determine the rights of potentially thousands of innocent purchasers who bought property at foreclosure sales that have been rendered invalid after the Ibanez ruling.FULL ENTRY
Land court ruling
The case started in the Land Court where Judge Keith Long (ironically the same judge who originally decided the Ibanez case) ruled that the buyer of property out of an invalid foreclosure has no right to bring a “try title” action to establish his ownership rights because he never had good title in the first place. Judge Long’s ruling can be read here.
Who’s side are they on anyways?
Given the importance of the case, the SJC accepted it on direct appellate review. The oral arguments can be viewed here.
The positions taken by the case participants were curious to say the least. While the mortgage lobby argued in favor of the homeowner’s right to clear his title, the state Attorney General’s office argued against enabling home buyers to clear their title. It would seem to me that the Commonwealth has a vested interest in assisting the thousands of innocent home buyers clear their titles. Maybe Attorney General Coakley didn’t want to give the impression that she was favoring the mortgage industry? But she’s short-sighted if she doesn’t realize that Ibanez title problems have hurt a lot of innocent folks.
How can this be? Years after the subprime mortgage meltdown almost derailed the world economy, many Americans appear to be as clueless now about mortgages as they were in the bubble years.
Back then, untold hundreds of thousands fell victim to all sorts of lending scams. And when it comes to woeful ignorance about basic mortgage facts, little appears to have changed, a new Zillow.com survey shows.
Some lowlights include:
Homeowners who walk away tend to have good credit. And they are pretty savvy with their personal finances as well, FICO reports in a study that profiled strategic defaulters.
"As a group, strategic defaulters tend to be more savvy managers of their credit than the general population, with higher FICO® Scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This indicates that strategic defaulters display a different type of credit behavior than distressed consumers who miss payments," FICO states.
Before they make the big jump, strategic defaulters tend to open new credit accounts, according to the study, and, needless to say, tap them for cash before their credit lines are cut.
Basically, strategic defaulters, as a group, have seen substantial declines in the value of their homes and have concluded it no longer makes sense to keep paying, FICO finds.
Richard D. Vetstein discusses the long awaited ruling from the Massachusetts Supreme Judicial Court in case of Real Estate Bar Association (REBA) v. National Estate Information Services (NREIS) that came down yesterday.
The net effect of the Court’s ruling is to reaffirm Massachusetts attorneys’ long-standing involvement with all residential real estate transactions. The ruling can be read here.FULL ENTRY
This case pits Massachusetts real estate closing attorneys vs. out of state non-attorney settlement service providers which are attempting to perform “witness or notary” closings here in Massachusetts. At stake is the billion dollar Massachusetts real estate closing industry.
Quick analysis of ruling:
• Massachusetts attorneys must be present for closings and take active role in transaction both before and after the closing. The substantive ruling from the court was a huge victory for Massachusetts real estate closing attorneys. The court requires “not only the presence but the substantive participation of an attorney on behalf of the mortgage lender.” This is what Massachusetts real estate attorneys have been fighting about for consumers in the face of out of state settlement companies who have tried to conduct notary or witness only closings.
• No “robo-attorneys” allowed. The court went one step further here by ruling that not only are notaries banned from conducting closings, but the closing lawyer cannot be what I like to call a “robo-attorney.” A lot of these out of state settlement companies hire unemployed newly minted attorneys right out of law school who get a call to preside over a closing they know nothing about for $100 or less. The court commented that “if the attorney’s only function is to be present at the closing, to hand legal documents that the attorney may never have seen before to the parties for signature, and to witness the signatures, there would be little need for the attorney to be at the closing at all. We do not consider this to be an appropriate course to follow.”
Richard D. Vetstein describes the changes to the lender compensation. Will this create more fairness and transparency? What's this going to cost the consumer?
Late week, after an initial win by the mortgage industry, a federal appeals court cleared the way for the immediate implementation of controversial new Federal Reserve loan officer compensation rules. In summary, loan officers must be compensated based on the loan amount, not on other factors of the loan. The new rules were also intended to prevent the practice of “steering” where a loan officer improperly steered the consumer into higher interest rate loans which provided more commissions.FULL ENTRY
For example, a loan officer can't earn a higher commission for selling a mortgage with a 5.5 percent rate versus a 5.25 percent rate. Another element effectively creates a rule on who pays a mortgage broker: Either the lender pays the broker directly or the consumer does -- but both can't pay for the services.
The return of the 20 percent down payment was the first shoe to drop amid the mortgage market overhaul taking place in Washington.
But the real game changer for Greater Boston, with its perpetually inflated home prices, can be found in some of the less examined pieces of this monster federal proposal.
Some of the new rules, notes Kenneth Harney, would bar home buyers from tapping the best mortgage rates if they exceed strict debt-to-income ratios.
Basically,no more than 28 percent of your monthly, pre-tax earnings can go towards housing, while total housing debt can't be more than 36 percent of what you make, he notes.
Darn, I guess that means no more million-dollar fixer-uppers.
My wife and I spent months tire kicking and going to open houses before we got pre-approved for a mortgage.
It was valuable time, certainly - we came to a rough agreement on what we wanted and what we didn't want.
But we really didn't have a clue what we could afford - that came later when we got pre-approved for a mortgage.
According to David Crowley, a downtown Boston broker who I chat with from time to time, home buyers who look before getting pre-approved are putting the cart before the horse.
In fact, if you don't have your pre-approval in hand, David won't be driving out to that open house with you.
No pre-approval, no housing hunting with David.
Today, Sam Schneiderman, broker owner of Great Boston Home Team discusses mortgage basics for prospective buyers evaluating lenders in today’s lending environment.
Here’s what prospective buyers need to know before choosing a lender:
Most lenders have close to the same costs and therefore, any deal that looks significantly below the average rates for that day needs to scrutinized carefully.
There are lots of mortgage programs out there, but different mortgage programs require different combinations of credit worthiness, down payment and property criteria.
Advertised rates almost always require a top tier credit score. The lower your credit score, the more it will cost in up front "points" or a higher rate to get the promised rate, if it's available to you at all. (To understand points, see my post from July 12, 2010.)
The advertised rate may require a certain percentage of the purchase price as a down payment. If your down payment is lower, the loan may cost more or may require that you pay for Private Mortgage Insurance.
The advertised rate may be based on a short term “rate lock”. You might need a longer rate lock if you are not going to close quickly, therefore, your rate might be higher. Some lenders are known for quoting short-term rate locks, but can’t process their loans within that time frame.
Not all properties qualify for all mortgages. The lender's requirements and interest rate are likely to be different depending upon the type of property that you buy and the condition of the property. Most important, all of the above assumes that you have a regular income sufficient to make the payments on the loan.FULL ENTRY
Today, Sam Schneiderman, broker owner of Great Boston Home Team discusses what happens when a real estate deal goes bad. This is his 100th entry here at BREN!
The buyer, who we will call Jane, has been a licensed Massachusetts agent for about two and a half years. She had less than six closings. Her agent license allows her to work for a broker who is responsible for overseeing her transactions.
Jane decided to buy herself one of my listings. She acted as her own buyer's agent so that she could collect a commission on her purchase.
Jane made her offer, negotiated a purchase price that worked for her, did her inspections and finally signed the purchase and sale agreement after the deadline to sign had passed. Her attorney obtained extensions to protect her right to the return of the deposit that she made with her offer.
When she signed the P & S agreement, I suggested that it would be wise to speak with a lender other than the one that pre-approved her because she might get a better rate and service. She didn't take my advice. I warned the sellers that we could be in for a bumpy ride.
Jane had a month to get her mortgage. After ten days, no lender’s appraiser. After more reminders, the appraiser arrived three days before her commitment date. Her mortgage broker needed to send her mortgage out to an investor for final review. It was obvious to me, but not Jane, that the commitment was going to be late. Her lender gave notice and her attorney requested an extension of the commitment date at the last minute. The sellers had a new home under agreement, so reluctantly agreed to extend.
The lender ran the final credit check before issuing the commitment. Jane's credit score recently dropped 20 points because she forgot to make a ten dollar credit card payment. She no longer qualified for her original loan. The lender said he had another investor that could close in about two to three weeks.
The sellers reluctantly agreed to extend the commitment date for two weeks. They closed on their new home.
It's a timely warning from a rather interesting source, to say the least.
Lewis Ranieri, the pioneer or godfather, if you like, of the private mortgage-backed securities market, contends the already record number of foreclosures could double if housing credit gets tighter than it already is. (He's credited with helping invent mortgage backed securities back in the 70s while working for Salomon Brothers.)
Ranieri's comments were directed at the Obama Administration's recently unveiled proposal to start raising fees charged by federal mortgage giants Fannie Mae and Freddie Mac. Since the global financial crisis in the fall of 2008, the twin behemoths have controlled the vast majority of the secondary market after an exodus by private investors.
While the administration hopes to ease the government out of the secondary mortgage market and bring in private capital, the tightening up of credit by the feds during the transition could tear the already troubled housing market "apart at the seams," Ranieri warns.
It is part of a larger, mortgage market overhaul that could see 20 percent down payments become the norm again as well.
I'm all for scaling back the mortgage interest deduction. But please, don't touch middle-income homeowners like me.
OK, that sounds decadently selfish. Let's balance the budget, just let me keep on deducting the interest on my Natick fixer-upper's $412,000 mortgage.
But let's cut the ideology here and instead look at this with that scarce commodity these days, common sense.
A close look at the interest rate deduction reveals much of its benefits go to homeowners with mortgages far larger than most in the middle of the housing pack. Check out this Forbes piece, which nicely lays out the argument for taking away this perk from the homeowners with outsized mortgages - incredibly the limit is currently $1 million.
And you can even use it for vacation homes.
Today, I am pleased to share a man bites dog story sent to me by my very favorite weird-news forwarder, Kathy in Philadelphia.
Kathy sent me this, from Boing Boing:
Patrick Rodgers, an independent music promoter in Philadelphia, has won a judgment against his mortgage lender, Wells Fargo, which Wells hasn't paid, and so he's foreclosed on them and arranged for a sheriff's sale of the contents of Wells Fargo Home Mortgage, 1341 N. Delaware Ave to pay the legal bill. Rodgers made all his mortgage payments on time, but Wells decided out of the blue that he had to carry insurance for the full replacement value of his home -- $1 million -- and started to charge him an extra $500 a month in premiums. When Rodgers sent a formal letter to the lender questioning this, they did not answer in good time, so a court awarded him $1,000 in damages, which Wells wouldn't pay. So the court is allowing him to sell the contents of the lender's office to make good on the bill.
I trust Kathy. I’ve known her to be reliable since I met her in college. But, this story was a little too good to be true. First I checked Snopes; it has no information one way or the other. Google sent me to the Philly.com , the on-line Philadelphia Inquirer.For those of you who never lived in Philly, the Inquirer is a real daily paper, not a local branch of the National Inquirer.
I looked a little further… I found it on Fox, too. (tee hee) That means it must be true.
Let’s assume it is real… what about it?FULL ENTRY
How quickly we forget.
A growing number of homeowners are gambling again on adjustable rate mortgages.
And gambling is the key word here, as it always is with ARMs, which start off with artificially low rates and then reset after a few years.
Not long ago, ARM had become a toxic term, with adjustable rate mortgages having been blamed for helping fuel the foreclosure epidemic.
But now, with rates on 30-year mortgages edging up again, more homeowners are taking a chance again on ARMs, lured by teaser rates that are falling as the costs of traditional mortgages rise.
After rising to 40 percent of the market, ARMs fell to just 3 percent in 2009. Now adjustable rate mortgages are back to 7 percent of the market and headed for the 9 percent mark, according to Freddie Mac.
Memories are short, so here's a refresher.
Here's Attorney Richard D. Vetstein with the next court case about mortgages.
First the robo-signing controversy. Then the U.S. Bank v. Ibanez ruling. Now the next bombshell ruling in the foreclosure mess has just come down from a New York federal bankruptcy judge.FULL ENTRY
The case is In Re Agard (click here to download),
and it essentially throws a huge monkey wrench into a hugely important cog of the entire U.S. mortgage market, the Mortgage Electronic Registration System, Inc. known as MERS.
What is MERS?
MERS, even for many seasoned real estate professionals, is the most important entity you’ve never heard of. In the mid-1990s, mortgage bankers created MERS to facilitate the complex mortgage securitization system where hundreds of thousands of mortgage loans were (and still are) packaged and bundled as securities for sale on Wall Street. Each mortgage entered into the MERS system has a unique 18 digit Mortgage Identification Number (MIN) used to track a mortgage loan throughout its life, from origination to securitization to pay-off or foreclosure. The MERS system was vital to the proliferation of the $10 trillion U.S. residential securitization mortgage market.
Critics say that the decision to create MERS was driven, in large part, to avoid paying recording fees charged by county registry of deeds which required that all mortgage transfers and assignments be properly recorded and indexed in publicly available registries of deeds. Thus, MERS was designed essentially as a privately run, national registry of deeds under which MERS would act as the record “owner” and depository of all mortgages participating in the system, while the mortgage notes and loans themselves were freely bought and sold on the secondary market. About 50 percent of all U.S. mortgages participate in the MERS system.
OK, so the Obama Administration's blueprint for overhauling the mortgage industry is finally out.
Actually, it's not just one blueprint but three - kind of a pick-a-plan approach.
All three would eventually give the boot to troubled government-controlled lenders Fannie Mae and Freddie Mac, but how they get there is a different matter.
One proposal calls for a new government agency that would ensure a smaller part of the market - not hard to do given the feds have their fingerprints on 90 percent of housing finance as it stands now.
The other two proposals - like I said it's the pick-a-plan approach - either call for a new agency that would only step in during times of crisis or simply wind down Fannie and Freddie and leave just the Federal Housing Administration to guard the shop.
Of course, it will all take years to work out, we are told. And oh, by the way, it's up to Congress to pick the plan and give its blessing, according to Tim Geithner and gang.
Call me cynical, but a lot of options and a lot of years sounds like a great big nothing to me as far as anything getting done.
While we are likely stuck with Fannie and Freddie for years to come, bigger changes may be coming a lot faster for home buyers.
Well count me as highly skeptical.
The Obama Administration is set to unveil today its long-awaited proposal to revamp our nation's messed up mortgage market.
Yes, today is the day where we will learn how the feds plan to unwind an untenable system in which Uncle Sam has become pretty much the only buyer of residential mortgages. As it stands now, lenders across the country write mortgages and then ship them off Fannie Mae and Freddie Mac, leaving taxpayers as the ultimate backstop for the entire residential mortage market.
Of course, the other big shoe to drop is a proposal to revamp the standard mortgage.
While some have pushed for 30 percent down, the recommendation is likely to be 20 percent.
I'll put up another post when more details come out.
Check out this story by the Globe's Jenifer McKim - it has some astounding stats on the number of homeowners who've stopped paying their mortgages.
It's currently up to 36,000 here in the Bay State, with some having gone for years without a payment. (The 36,000 are all behind at least three months on their payments, with a third behind a year or more.)
I hardly envy anyone in that position. And I challenge anyone who casually throws around the term "deadbeat" to really think again.
Attorney Richard D. Vetstein recently came across a very provocative and interesting idea to address the foreclosure and bankruptcy crisis.
It's Chapter M bankruptcy, as described on FireDogLake:FULL ENTRY“Prof. Adam Levitin has proposed this with his Chapter M for Mortgage bankruptcy. It would remove foreclosure actions from state court to federal bankruptcy court. Successful petitions can be offered a standardized pre-packaged bankruptcy plan. The plan would be based on HAMP modification guidelines (interest rate reduction to achieve 31% DTI goal, but without federal funding) plus cramdown to address negative equity. We can make this fair on the backend. If the homeowner redefaults we can speed up the foreclosure process. It wouldn’t affect non-mortgage lenders. It is fast-tracked relative to traditional Chapter 13. It can have clawback mechanisms to address potential future appreciation.
And going through the process can give the lender clean title. Because there’s this whole issue of who owns what in the securitization chain which is a few court cases away from putting our financial system over a cliff. And the best feature is that it has no cost to the federal government. Like other smart policy, it builds off already existing infrastructure, so it can be started immediately using existing courts and Chapter 7 panel trustees for sales.”
Be forewarned, this is not another pretend debate over the future of the housing market.
As I type away, federal regulators and lobbyists for banks and mortgage companies are hashing out what the conventional mortgage will look like in the years ahead.
The handy acronym is QRM, for Qualified Residential Mortgage.
And the proposals so far are heavily weighted towards 20 percent down, with banking giant Wells Fargo pushing for an even higher hurdle of 30 percent.
Under the proposed rules, banks that cut mortgages that don't include these hefty down payments will retain some of the risk on their books when they go to sell these loans on the secondary market - that is if they still can find buyers.
Two agencies, the Federal Housing Finance Agency and the Department of Housing and Urban Affairs, have until the end of April to roll out the new mortgage rules, mandated under last year's Dodd-Frank financial reform bill.
Depending on what the big boy and girls down in Washington come up with, we could be looking at the biggest game changer in the real estate since the subprime mortgage meltdown.
Neil Barofsky is on the warpath again. This time he's taking on the Home Affordable Mortgage Program, better known as HAMP.
That's the Obama Administration's bid to stem the flood of foreclosures by enticing lenders and mortgage servicers to modify loans.
Well it has been a big flop, Barofsky, the blunt spoken special inspector general appointed to ride herd over the government's $341 billion bank bailout program, told Congress Wednesday. After two years, only a fraction of the millions of homeowners facing foreclosure stand a chance of receiving any help under HAMP.
But as interesting as Barofsky's icy blast was the response of a trio of House Republicans, who immediately filed a bill to scrap the program and save the last $30 billion in bailout money.
Here in still very blue state Massachusetts, the group, led Rep. Jim Jordan, R-Ohio, will surely be dismissed as a bunch of red state rock heads.
But it seems to me offering up false hope to desperate homeowners is far worse.
I won’t try to summarize Michael Lewis’s 264-page book, The Big Short . He tells the story of the collapse, including character portraits of some of the players, in a rather short book. I hope many of you have taken up the suggestion to read it.
Today, I write about how the concept of a mortgage changed in the past 50 years.
Before I was born, my father bought his one and only house. Thanks to the GI Bill, he had a very low rate. But, even if he had a typical rate, the concept of refinancing would not have crossed his mind. He didn’t get bombarded by mail or TV ads encouraging him to refinance. The advertising he got way by mail, and occasional. It intensified as time went on. My father didn’t bite. My father’s mortgage was paid off in 1986, not a second earlier. In this way, my father was pretty typical of his “greatest generation” status.
Then things changed. Businesses that sold early payment and refinancing changed Wall Street behavior, over time.
Michael Lewis explains:
“The big fear of the 1980s [mortgage]bond investor was that they would be repaid too quickly, not that he would fail to be repaid at all. The pool of loans underlying the mortgage bond conformed to the standards, in their size and the credit quality of the borrowers, set by one of the several government agencies: Freddie Mac, Fannie Mae, and Ginnie Mae. The loans carried, in effect, government guarantees…”
In my adult lifetime, everything changed. Mortgages stopped being long-term loans used to purchase housing. People with mortgages stopped holding them for 30 years. As inflation hit the housing market in the 80s and 90s and 00s, the “flipping” mentality emerged along with Americans borrowing against their bubble-created equity. In the mortgage bond market, this is what was happening:
Michael Lewis continues:
… the mortgage bound was about to be put to a new use: making loans that did not qualify for government guarantees. The purpose was to extend credit to less and less creditworthy homeowners, not so that they might buy a house but so they could cash out whatever equity they had in the house they already owned.FULL ENTRY
The mortgage bonds created from subprime home loans extended the logic invented to address the problem of early repayment to come with the problem of no repayment at all.
The last time we caught up with "Frank" last spring, our tech guy was renting a condo with his wife and scouting Stoneham and other suburbs for a good deal on a home.
Then disaster struck. Frank, like millions of others over the past two years, was handed a pink slip and suddenly found himself thrust into the world of the jobless.
A regular contributor to the comments section on this blog, Frank suddenly dropped from view.
Well I am happy to report that I caught up with Frank and he's back - having landed another IT job last fall.
But he's wondering, given his recent layoff, how long he will have to wait before a bank might consider him for a mortgage.
"I am wondering what a new position will do to our house hunt, when applying for loans etc." Frank writes.FULL ENTRY
Wow, now here's a contrast.
Banks are halting foreclosures around the country, with a record, 14 percent year-over-year drop in November, RealtyTrac reports today.
And it all stems from the fallout from the robo-signing scandal, which first came to light thanks to Thomas Cox, a retired lawyer in Maine doing pro bono work for a nonprofit.
Meanwhile, the Massachusetts Supreme Judicial Court is poised to rule on the landmark Ibanez case, which could have sweeping national implications, with the potential to all but permanently derail millions of foreclosures.
That case, involving a pair of local homeowners, was argued before the SJC by a lawyer from Fall River.
And what do we have from the Obama Administration, which has spent two years talking about saving struggling homeowners even as foreclosures have skyrocketed?FULL ENTRY
Last January, I predicted; “Lenders and buyers would continue the return to conservative fundamentals. Some sellers will get in sync with the market, sell and move on while others will continue to test the waters with high prices and/or poorly presented property. Many will continue to sit on the sidelines hoping to regain some equity before moving on. Everybody will be waiting to see what happens with interest rates, foreclosures, government programs and the economy.”
In fact, we saw interest rates move up toward year-end. Foreclosures started, stalled and continued, government programs targeted at real estate fizzled, and the economy bumped and ground its way toward a recovery that didn’t mature.
Here are my predictions for 2011:
Uncertainty will continue as politicians distort any progress made by opposing parties and the media continues pitching fear-based predictions as news. The general public will continue to buy into national trends instead of learning about local trends. Therefore, we will have a year of confusion ahead.
I also think that 2011 will also be a year of reconciliation.
I believe that instead of continuing to wait for an economic and real estate recovery, many Americans that have been hanging on will give up waiting and reconcile their own situations. Lots of people that had high expectations will “get real” in 2011. Some will finally sell their homes for less than expected, give them back to the banks or declare bankruptcy. Therefore, I will call 2011 “the year of confusion and reconciliation”.FULL ENTRY
Last week, Lance called me on publishing the current mortgage qualification limits because those limits are still excessive. He mentioned a nifty website that is much more budget-oriented qualifier. Point taken. (the link is not playing nice with he blog software. Here is the direct link: http://dinkytown.com/java/MortgageQualifier.html)
I look back at this blog and see that my advice puts me in alliance with Lance. In September, 2008, I wrote this.
Now, it is even more relevant, as the effects of the recession linger on. Single income households have cut back, some to bare bones. For buyers who bought based on a single income -- but have another income in their household – there is room for saving and a cushion against unemployment. But, how low can family income go, here in Massachusetts, and still have basic needs met? I respect Lance’s calculator and offer another one, which is also budget-oriented, but at a poorer level.
I take you back in time to September, 2008. I wrote:
From my email last week:
At 10:35 AM 9/25/2008, you wrote:
.... My wife and two daughters and I are anxious to buy a home in ________ we love it: its close to work (I’m in _____[the next town]), good schools, and the community is terrific.
The problem is that we feel like there is basically nothing in ________ for us. We do have $150K to put down on a house, but with only my salary to work from ($60K/year) we just cant handle a big mortgage payment. ....
Are we being unrealistic in thinking that the market in ________ will ever come down to our level?
I told this reader to keep renting.
He's not Scrooge, he's Attorney Richard D. Vetstein. Today, he has a timely reminder for buyers who are in the middle of their mortgage process!
I’m never one to rain on a good shopping day parade, but this year’s Black Friday and “Cyber Monday” shopping binges and the entire holiday shopping season could cause some problems for home buyers who make big purchases, but haven’t closed yet on their real estate transaction.FULL ENTRY
The reason is Fannie Mae’s Loan Quality Initiative (LQI) rules which have resulted in lenders pulling last minute credit reports and additional verifications of borrower information. If you have racked up a big credit card bill before your closing, these last minute credit checks could result in a closing delay, pricing adjustment, or, worst, loan approval cancellation.
Uncle Sam sure has a lot of explaining to do.
He's spent years pumping untold billions into the housing market, only to see home prices and sales sink again.
Now he's getting hit by critics on the right and now the left, who contend our wayward uncle, in his desperation to keep the real estate market from collapsing completely, has made the ultimate down market move.
He's gone subprime, according to a growing number of critics on both sides of the political spectrum, replacing the high-cost mortgage dealers of old on the neighborhood stoop.
My guess is that readers of this blog are more familiar with the right's critique of the federal government's takeover of the mortgage market. In order to keep the mortgage market alive, Fannie Mae, Freddie Mac and the FHA let through a lot of questionable borrowers over the past two years, only to reap a whirlwind of bad loans.
While default rates of Fannie Mae and Freddie Mac owned loans have declined somewhat over the past few months, they are still up over 2009.
Now here comes the left, with charges that the minority and lower income borrowers are winding up disproportionately stuck in higher cost FHA loans.
Attorney Richard D. Vetstein. writes today about the nuts and bolts of closing on a refinance.
With interest rates at all time lows, we’ve been doing a ton of refinance closings. Here are some questions which often come up.FULL ENTRY
1. Why does the payoff of my existing mortgage seem higher than I thought?
In many cases, borrowers will focus only on the “principal balance” figure in their mortgage statement. However, this figure does not provide the complete figure necessary to pay off the loan. You must also pay any unpaid interest calculated up to the time that the lender actually receives the payoff check which will be several days after your closing. Mortgage interest is not like traditional rent in which the monthly payment is for the upcoming month. Mortgage interest is paid in arrears, or backwards. Thus, your monthly mortgage payment is allocated partially to principal, but also pays the daily interest accumulated during the last month.
Therefore, if your refinance loan is funding on August 15, we must pay off your existing principal balance plus the interest that accumulated from August 1 to August 15 (plus additional days necessary to get the payoff check to the bank). That unpaid daily interest makes your payoff higher than just the principal balance. Frequently included in your payoff is also a $75.00 registry discharge recording fee and a fee to issue a payoff statement (usually between $10.00 to $60.00).
Sam Schneiderman, broker owner of Great Boston Home Team (our Monday guy) writes today about resale problem for owners of small condo associations.
Condo associations that do not have their financial act together can cause problems for resales of individual condominiums in their building.
For those who don’t understand how condominiums deal with their financial responsibilities, here is some background:
Owning a condominium unit involves sharing responsibility with other owners for the parts of the condo property that are not individually owned by the unit owners. Usually, that shared responsibility involves providing for the upkeep and maintenance of a roof, building exterior, hallways, grounds and often, shared plumbing, electrical or heating system components.
Most condo owners pay a monthly fee into their condominium association bank account to cover those expenses, based on the projected annual budget of expenses for the building.FULL ENTRY
Attorney Richard D. Vetstein. writes today about the court case that looks into whether we need an attorney to do a closing.
Today, the Massachusetts Supreme Judicial Court heard arguments in the closely watched case of The Real Estate Bar Association of Massachusetts, Inc. (REBA) v. National Real Estate Information Services, Inc. (NREIS). This case pits Massachusetts real estate closing attorneys versus out of state non-attorney settlement service providers which are attempting to perform “witness or notary” closings here in Massachusetts. At stake is the billion dollar Massachusetts real estate closing industry.FULL ENTRY
Unauthorized practice of law?
I wrote previously about the case in this post. Massachusetts’ long standing practice is for licensed attorneys to oversee and conduct the residential real estate closing process. NREIS’s business model is to outsource the vast majority of those functions to back office workers who aren’t trained attorneys. REBA argues that this practice violates Massachusetts common law and consumer protection statutes requiring that attorneys perform the most vital functions of a real estate closing transaction, such as certifying and analyzing title, preparing the deed, handling the transfer of good funds, where necessary, and conducting the closing.
The case was originally brought in federal court, where NREIS won and obtained a $1Million attorney fee award. But the federal appeals court overturned that ruling, and asked the Massachusetts Supreme Judicial Court to answer the question of whether and to what extent a residential real estate transaction and closing is the “practice of law” required to be performed only by a licensed attorney.
In the fallout over the robo-signing scandal, the stakes are suddenly getting bigger for financial institutions across the country.
Banks who lose foreclosure cases will now have to fork over legal fees to homeowners in the Empire State.
Nor are New York state lawmakers alone in taking aim at the banks, with similar proposals having passed or pending in state legislatures across the country.
In fact, as New York goes, Massachusetts can't be far behind.
"It's sweeping the country," Edward Mermelstein, a top Big Apple real estate lawyer, told me when I reached him the other day.
Still, it is also reasonable to be skeptical about just who these new laws really benefit.
Accidental landlords are owners of a “departure residence.” That’s the house or condo that was left behind when the owner bought and moved into another house or condo.
Today, I describe the qualifying rules in regard to what rental income counts and under what conditions it counts. There are equity requirements before the rent counts at all. And… reserve requirements.
If a borrower does not have enough income to qualify for mortgages on both properties, he/she will need to prove that there will be rental income to help cover the cost of the new property’s mortgage. A borrower cannot count rental income based on a rental appraisal. Those days were gone by 2008. In 2008, the rules changed to require proof that there is a real renter with real money. That proof was a one-year, or longer, lease and proof of paid first month’s rent or security deposit. Then 75 percent of the rent will be counted, in most places. (There are some exceptions because of expected vacancy rates.)
In 2008, the borrower also had to have 25 percent equity in the soon-to-be rental. Now, it is up to 30 percent equity.
A borrower has to show that he/she has two months reserve on the PITI of both the departure residence and the new property.FULL ENTRY
Lawyer and jobless Maine homeowner at center of robo-signing scandal given heroic treatment by media, but is it deserved?
I guess whether you consider Nicolle Bradbury and her pro-bono lawyer heroes for successfully sticking it to one of the nation's largest mortgage lenders depends these days on where you fall on the ideological spectrum.
Check out this New York Times piece, which claims that this out-of-work Maine woman and Tom Cox, a retired lawyer volunteering for a nonprofit, triggered the national furor over robo-signing.
On the verge of losing her tiny, weather-beaten $75,000 home after having stopped paying her GMAC mortgage two years ago, Bradbury, an one-time employment counselor in Denmark, Maine, turned to help to Pine Tree Legal Assistance.
From there, she lucked out. Cox, the retired lawyer who took her case, had just happened to handle foreclosures for a local bank back during his working days.
Pouring over her paperwork, Cox's suspicions were triggered by the phrase "limited signing officer." He started digging, won permission from the state court hearing the foreclosure case to depose the GMAC executive, and the rest is history.
I am rooting for a happy ending here. But the hassles Josh (not his real name) have encountered trying to close a pretty straightforward mortgage to buy a new home in Sudbury have already left a bad taste.
First, Josh is to be congratulated for pulling off a difficult feat in this crazy market: He found a way to sell his Waltham house and is with a few signatures of moving into a larger home in Sudbury priced somewhat under $800,000.
A corporate finance guy, Josh and his wife bought a fixer-upper in another western suburb seven years ago. Three kids later, it was time to move to a bigger home.
In a down market, Josh should be a prize catch for mortgage lenders desperate for new business - he's a guy with a high-paying job and a great credit score who is ready to put down 20 percent.
"We feel pretty fortunate to be able to make a move to a new house at this point," he writes.
Attorney Richard D. Vetstein. answers the questions that many, many would-be refinancing borrowers need to know.
With interest rates at historical lows, we’ve been doing a ton of refinance closings. Here are a few questions which almost always come up.FULL ENTRY
1. Why does the payoff of my existing mortgage seem higher than I thought?
Borrowers often focus only on the “principal balance” figure in their mortgage statement. However, this figure does not provide the complete figure necessary to pay off the loan. You must also pay any unpaid interest calculated up to the time that the lender actually receives the payoff check. Mortgage interest is not like traditional rent in which the monthly payment is for the upcoming month. Mortgage interest is paid in arrears, or backwards. Thus, your monthly mortgage payment is allocated partially to principal, but also pays the daily interest accumulated during the last month.
Therefore, if your refinance loan is funding on October 15, you must pay off your existing principal balance plus the interest that accumulated from October 1 to October 15 (plus additional days necessary to get the payoff check to the bank). That unpaid daily interest makes your payoff is higher than just the principal balance. Frequently included in your payoff is also a $75.00 registry discharge recording fee and a fee to issue a payoff statement (usually between $10.00 to $60.00).
2. What is an escrow account and why is my lender collecting so much money for it?
An escrow account is established with a lender to pay for recurring expenses related to your property, such as real estate taxes and homeowner’s insurance. It helps you to anticipate and manage payment of these expenses by including these expenses as a portion of your monthly mortgage payment. Sometimes, your lender will allow you to waive the escrow account; sometimes it’s mandatory. At closing, the lender will collect sufficient funds to start your escrow account, typically 2-3 months worth of real estate taxes and up to a 12 months of homeowner’s insurance.
OK, maybe a bit pungent, but there is no sense in sugar coating this one.
As I blogged earlier this week, there is a catch to the Obama Administration's supposed $1 billion lifeline for jobless homeowners.
If you and your spouse pulled down than $110,150 before a layoff or a big hit in income, you won't get a dime from the newly launched Emergency Homeowner Loan Program.
That excludes a lot of people - from a school teacher married to a cop who pulled in a little overtime to a sales guy who made $120,000 a year before he lost half his commissions.
Hardly extravagant incomes in Greater Boston, where the middle of the housing market ranges from $267,184 to $404,029, according to Case Shiller.
That's bound to leave a lot of solidly middle class homeowners in need of a break on the outside looking in.
Just take isitfriday, who was the first to weigh in when I first blogged on this a couple days ago.
The federal government's new loan program for unemployed homeowners is definitely not for everyone.
Especially if you are one of the many mini robber barons out there who, in the estimation of top Dems like Barney Frank, ruined our economy.
Of course I am talking about all those greedy rich folks who made more than $110,000 - or God forbid even $130,000 or $140,000 - in some evil sales job and walled themselves off in gated compounds in such exclusive enclaves like Franklin or Medford.
OK, just being a little sarcastic here, but I couldn't help myself after reading the fine print of federal government's much touted bailout of jobless homeowners.
And I guess as is to be expected, it is a program designed to cater to traditional Democratic constituencies while carefully cutting out everyone else.FULL ENTRY
Here's a story this blog and its readers were once again ahead of the curve on.
MassHousing, our state housing authority, started offering zero-down mortgages under the Affordable Advantage banner back in July. It was part of a broader initiative bankrolled by Fannie Mae here and in three other states as well.
Now it looks like the feds are poised to pull the plug on the program next spring, Jenifer McKim reports in today's Globe. In fact, even Barney Frank, in the middle of a reelection fight with a feisty conservative opponent, appears to have soured on the zero-down concept.
We'll see what happens - if the Republicans seize control of the House in November it surely will be a goner long before next spring.
But as I mentioned, the controversy is no surprise to regulars on this blog, who have been weighing in on it for the past two months.
The launch had received zero attention in the local mainstream press when I first blogged about it on Aug. 10.
My husband and I…are thinking of buying next summer…and are seriously thinking of the owner-occupied 2 or 3 family approach, as Ehwhy suggests…
Can you comment on the financing picture for owner-occupied dwellings like this? Will 25 percent down still be required, or somewhat less (do I remember 10 percent from your post a few days back)?
Also, we still have our rental property back in our old home state. It's on an aggressive repayment schedule (7 years left on a 15 year loan) and is essentially breaking even. Can you speak to how this might affect our financing requirements? A while back folks were talking about needing 6 months PITI in reserve for both the old investment property *and* the new property as well--are those guidelines still in place?
About down payment:
Fannie Mae or Freddie Mac guidelines are looking for 20 percent down for 2- or 3-family home loans. The vast majority of lenders will want that, so they can resell on the secondary market.
A portfolio lender can offer more options for someone like Angie. Smaller lenders have the option of holding their loans, instead of selling them to investors on the secondary market. This makes them able to lend with as little as 5 percent down.
FHA will finance with as little as 3.5 percent, but be aware that the mortgage insurance with FHA just increased.
For a 3-family house, FHA requires 3 months of PITI in reserve. Most conforming lenders will want to see 6 months' rent loss insurance on the other property as well, but that shouldn’t be very expensive at all. Portfolio lenders, like Middlesex Savings Bank, require as little as 2-3 months reserves.
OK, that's not my observation, but rather the finding of a recent nationwide poll.
Now of course we have to consider the source here, Fannie Mae, the bloated government-owned mortgage giant. As I wrote a couple days ago, Fannie is so desperate to unload its stockpile of foreclosed properties it is showering brokers and buyers with thousands in incentives.
Still, the poll, conducted for Fannie by market research and consulting firm Penn Schoen Berland, finds that 78 percent of Americans believe either home prices have stabilized or are even poised to go up over the next year.
Here's Attorney Richard D. Vetstein. Today, he writes about a refinancing solution that could prevent foreclosure.
The recent historic drop of mortgage rates has created a refinancing boom for qualified homeowners. Unfortunately, the refinancing wave washing over the country has paradoxically left dry homeowners who would most benefit: those who are “underwater.” Underwater mortgages, or “negative equity” (i.e., they owe more on the mortgage than the property is worth) cause foreclosures and serves to bottle up the housing market. Thus, assisting homeowners who are underwater on their mortgage is good public policy.FULL ENTRY
According to a CoreLogic study, there are currently 11 million mortgages underwater and another 2 million nearly at negative equity in the US housing market – a figure that comprises 28 percent of all residential properties with a mortgage. In Massachusetts, there are 225,000 properties with negative equity and another 52,000 with near negative equity.
Another stab at loan mods:
The government has made attempts to address this crisis. Last year the Obama Administration created a loan modification program, the Home Affordable Refinance Program, to help refinance borrowers whose loans were worth up to 125 percent of their homes value. The program did not take hold, and only a relatively minor number of modifications/refinances occurred.
Attorney General Martha Coakley may become the latest to jump into the burgeoning controversy over allegations of assembly-line style foreclosures at major mortgage industry loan servicers.
These are firms that are servicing mortgages originated by other lenders, including pushing forward with foreclosures when homeowners fall behind on their payments.
At issue are revelations that a GMAC Mortgage employee signed off on thousands of foreclosure documents without checking their accuracy. The GMAC middle manager has owned up to signing 10,000 foreclosures a month. That's 500 a day, or one per minute. How reassuring is that?
A spokeswoman for Coakley's office told me yesterday our AG is exploring the issue, but as a practice does not comment on whether a formal investigation has been launched.
I think we can read between the lines here, with attorney's general in Iowa, Illinois and Texas having launched formal investigations.
In fact as I write this, Connecticut Attorney General Richard Blumenthal has become the latest to take on GMAC, intervening on behalf of 2,400 homeowners across that state poised to lose their homes to foreclosure.
OK, if the bank is not breathing down your door, why care? Very simply, with the home buyer tax credit gone, the painful process of letting sales and prices fall until they hit their natural level has begun.FULL ENTRY
Last week, I asked how we might be able to create a better way to finance homes. The premise was that using 30-year mortgages to finance homes that are often sold much sooner didn’t make sense, especially when combined with low down payments.
Many readers felt that the best way to do that was to require a twenty percent down payment from all borrowers. I initially agreed. Then I though about it and wondered how the foreclosure rate on VA loans compared to conventional loans because VA loans require no money down (for those that qualify). On Realtor.com I learned that
“The foreclosure rate in VA loans is a strikingly low 2.46 percent compared to subprime 15.5 percent and even prime loans that are a full ¾ of a percent higher than VA foreclosure loan rate.”
Next, I wondered about FHA loans, which are significant because an estimated 50% of loans are FHA loans in the current environment. On rkaelaw.com I learned that
“The foreclosure rate on FHA loans is one (1%) percent, as opposed to five (5%) percent for non-FHA loans. Among the reasons for this disparity is because the FHA requires the owner to occupy the property and provide full income documentation in order to qualify.”Elsewhere, I saw older statistics that showed a higher FHA foreclosure rate that was still lower than the conventional mortgage foreclosure rate.
Based on VA and FHA loan experience, it looks like tougher lending guidelines are more important than the amount of the down payment.FULL ENTRY
Well it was nice while it lasted.
Fannie Mae and Freddie Mac for the past two years have been authorized by Congress to back jumbo loans up to $729,750.
The move came in the aftermath of the global financial crisis, a time when banks all but pulled out of doing jumbos.
In high cost markets like Greater Boston, jumbos are a big deal. The Boston area jumbo limits were raised to $523,750 last year through the end of 2010, but it's not clear what happens now after Jan. 1.
Traditionally, anything above $417,000 has been considered a jumbo loan, meaning you get stuck with a higher rate and fewer options in terms of banks willing to play.
Despite the downturn, it’s not hard to go past that limit if you are trying to buy a home inside Rt. 128.
The best way to reduce the risk of foreclosures and mortgage related bankruptcies is to reduce the mortgage debt on a home so that there is an “equity safety net” in case values decline, or borrowers need to sell or refinance unexpectedly.
Despite recent problems, lenders and politicians haven’t improved financing to allow borrowers to build equity in their homes as quickly as possible. There has to be a better way. Let’s review the issues and see if we can do better.
The issue of staying in a home long enough to build equity is not just a concern for today’s first-time home buyers. Baby Boomers, retirees, and seniors that sell their homes and move to condos aren’t likely to remain in their new homes long enough to build significant equity either.
Thirty year mortgages don’t build much equity until after about the seventh year. While that worked in a less mobile society, today’s buyers are unlikely to remain in their homes long enough to build much equity by paying down their mortgages.
In 2007, I sang the praises of two-family home ownership and lamented the dwindling supply and escalated prices of properties of that type. By the late 1990s, the window of opportunity for two-family ownership had pretty much closed. This was mostly due to condo conversion of this type of property.
In 2007, owning a two-family home for rental investment just didn’t add up in my area.* Sale prices were too high compared to the rental potential:
Sale price $625,000. Two-family house with 5 rooms, 2 bedrooms downstairs and 6 rooms, 3 bedrooms upstairs. Downstairs rent about $1300. Upstairs rent about $2000.
Down payment: 25 percent (that’s what’s needed now) = $157,500
Principal and interest = $2962 at 6.5 percent interest
PITI about $3640
Gross income about $3300
Return on the $157,500 investment is approximately -$340 per month.
(At 20 percent down, your return would be -$540 per month. If you put 10 percent down, your return would be -$930 per month. I used the 25 percent figure so we could compare apples and apples… To finance a two-family house as an investor, you need that 25 percent equity in 2010.)FULL ENTRY
Ready or not, here come those zero down loans again.
I blogged here a few weeks ago about a new mortgage program MassHousing rolled out over the summer, with the backing of Fannie Mae, under which borrowers don't have to fork over a down payment.
I noted the initiative comes with the federally-controlled housing finance behemoth already in hot water amid a sharp spike in defaults.
Upon some further reporting on my part, it turns out these new, no-money-down mortgages are taking off fast here in the Bay State. (As far as cash up front, the only requirement is ponying up $1,000 in advance toward closing costs.)
MassHousing, as of a couple weeks ago, was on track to ink 400 of these Affordable Advantage mortgages in the program's first year. That would amount to 18 percent of the mortgages MassHousing expects to write, though the number will likely settle out closer to 7 percent, officials contend.
Thomas Gleason, the long-time affordable housing advocate who heads MassHousing, has come forward with a spirited defense of the initiative.
I laid out the details in my weekly Banker & Tradesman column on Aug. 30th. Here's a Sept. 4th piece by The New York Times that takes a national look at the effort - Massachusetts and a couple other states are doing this.FULL ENTRY
It's Wednesday, so here's Attorney Richard D. Vetstein. A few well-placed words can protect your deposits and your rate lock while you are getting your purchase mortgage commitment. Attorney Vetstein tells you how and why:
Today’s strict lending and underwriting environment has resulted in quite a few delays and even losses of buyers’ financing for home purchases. Loan commitment deadlines are being pushed back due to underwriting delays, regulatory compliance and appraisal issues, among other delays. The worst case scenario for any borrower is the wholesale rejection of financing in the middle of a transaction.FULL ENTRY
What is the typical mortgage contingency clause?
The Massachusetts “standard” form purchase and sale agreement contains a mortgage contingency clause which protects the buyer (and his deposit) for the period of time until he can obtain a firm loan commitment. The date is negotiated by the buyer and seller, and is usually around 30 days from the execution of the purchase and sale agreement, depending on the closing date. If the buyer cannot get a firm loan commitment by the deadline, he can opt out of agreement with a full refund of his deposit.
What if there are delays in obtaining my loan commitment?
The buyer really has only two choices if the lender cannot deliver a firm loan commitment by the mortgage contingency deadline: (1) ask the seller for an extension of the loan commitment deadline, or (b) terminate the transaction. There is, however, a smart way to handle this situation.
I always couple a request for a loan commitment extension with notice that if the seller does not agree, then the buyer will exercise his right to terminate the agreement. That way, the seller has to make a tough choice: grant an extension or lose the deal. If the seller does not want to grant an extension, the buyer really has no other choice but to move on to the next home for sale.
While the refi side is booming, banks are writing fewer mortgages on home sales.
Some of this may simply be a reflection of the dramatic fall off in sales since the home buyer tax credit expired this spring. Of course, it's also hard to say how much of the drop in sales is also related to skittish banks leery of writing mortgages to anyone without a pristine credit record and a big downpayment saved up.
But for those lucky enough to get a mortgage these days, the cost of closing the loan seems to be going through the roof. Or is it?FULL ENTRY
When I refinanced 6 years ago, I thought that was the refi to end all refis. We were in a fixed 20-year product at a hair over 5 percent. I had seen rates below 5 percent going by, but was dubious that I could get far enough ahead to make it worth the closing costs and time.
Monday: The loan officer who did my last refi also works with my clients. While having a conversation with her about a client’s loan application, I asked, “Is it time to refi yet?”
The numbers looked good. My husband and I are committed to keeping the length of our loan the same (now 14 years.) We were able to buy a 15-year loan. We will shorten it to a 14-year loan by paying more than is due every month. That payment is still $56 less than our current one. That’s not much, per month; $56 a month times 14 years is a lot of money.
Thursday: We agreed to the loan and paid for the appraisal.
Friday: I got a call from the closing attorney looking for the insurance and the current loan information.
Sunday: I sat down with the loan packet and made copies of the materials the lender needed: Tax forms, IDs, bank statements, W-2s.
First snag! I saw the Good Faith Estimate (GFE) and flipped out. My loan officer said that the settlement charges were around $3000, but the GFE said $6000+. (After taking a breath, I realized that the GFE included my tax escrows.) Amateur mistake. I know better.
It's Wednesday, so here's Attorney Richard D. Vetstein. Today he looks at the mortgage part of the Wall Street Reform laws passed this summer.
Buried in the fine print of the much publicized Dodd-Frank Wall Street Reform and Consumer Protection Act is the new Mortgage Reform and Anti-Predatory Lending Act, which contains strict new rules aimed at preventing another sub-prime mortgage collapse.FULL ENTRY
What Is The Impact To Mortgage Lenders and Originators?
The Mortgage Reform and Anti-Predatory Lending Act certainly changes the regulatory landscape for mortgage originators who focused on high-risk, sub-prime lending, setting tougher new standards and creating new federal remedies for consumers victimized by deceptive and predatory lending. Stripped down, the Act puts the onus on mortgage lenders and originators to ensure, based on verified and documentation information, that borrowers can afford to repay the loans for which they have applied. Pretty novel idea, huh?
Here are the words of Attorney Richard D. Vetstein. Today a look at the law regarding appraisal.
Several weeks ago Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is one of the most radical overhauls and reforms to the banking industry since the days of the Great Depression. The bill will “sunset,” or put an end to, the Home Valuation Code of Conduct, what many appraisers thought was an ill-advised attempt to revamp the residential real estate appraisal system back on May 1, 2009. The HVCC impacted all Freddie Mac and Fannie Mae loans and has stirred up quite a bit of controversy within the real estate industry.FULL ENTRY
The HVCC: A Failed Experiment?
The HVCC essentially re-wrote how lenders order appraisals. The HVCC’s goal was to remove incentives for mortgage lenders to apply pressure on appraisers to inflate values, understanding that lenders and mortgage brokers normally only get paid if a loan closes. No longer could lenders choose from their own roster of local appraisers who knew the local real estate market. Instead, the HVCC prohibited mortgage brokers from even communicating directly with appraisers, and required that appraisals be ordered through an independent Appraisal Management Company, or AMCs.
Now that's the way to shake things up.
With a big assist from controversial bond guru Bill Gross, today's summit on housing finance down in Washington is off with a bang.
Gross, who runs the largest bond fund in the world, touted his controversial proposal for a massive, federally-backed plan to refinance millions of homeowners paying more than 5 percent to today's lower rates. The rate on a 30-year mortgage is now hovering at a record low of 4.44 percent.
Gross, who runs Pacific Investment Management Co.'s $239 billion Total Return Fund, talked up his proposal at a panel discussion chaired by U.S. Treasury Secretary Timothy Geithner.
The proposal would be targeted at homeowners with federally-backed mortgages stuck paying interest rates of 5.5 percent or higher. That's more than 18 million homeowners.
Gross' pitch is simple - refinancing millions of mortgages at today's rates would save homeowners more than $46 billion. In turn, this would spur $50 billion to $60 billion in new consumer spending and push up home prices by 5 to 10 percent.
OK, the Republicans are right about one thing.
Despite a lot of hype from the Obama Administration, don't expect any bold action from the president at this Tuesday's summit on housing fianance reform.
However, at least in the case of one key facet of the American housing market and middle class life - the mortgage tax credit - that is not such a bad thing.
The housing meltdown is prompting calls for a sweeping evaluation of the federal government's relationship to the housing market. Check out this pretty extensive piece from USA Today - not bad for a paper designed to look like a TV set.
Anyway, given the mess we are in, that's only natural.
But to the chagrin of would-be housing market revolutionaries, the Obama Administration is also making clear that any reforms must include the continuation of the mortgage tax credit.
And I say bravo to that. After all, for cash and tax strapped middle class homeowners, this is one of the few perks doled out by the federal government.
Is a little common sense too much to ask from the do-gooder set?
With foreclosure rates spiraling out of control, it would seem an odd time for the federal government and various state housing authorities to be promoting zero-down mortgages.
But that's apparently what state officials in Massachusetts, Wisconsin and Idaho are doing right now as they team up with troubled federal mortgage giant Fannie Mae to offer so-called "Affordable Advantage" mortgages.
The new initiative lets qualified, lower-income buyers with good credit get a mortgage without even having to meet the already low, 3.5 percent down required on most federally-backed mortgage loans.
Instead, these lucky few are eligible for 100-percent loan to value mortgages. In some cases a token downpayment, such as $1,000, is required.
Defenders of this seemingly hairbrained mortgage initiative - now being offered locally by MassHousing - point to the high credit scores of the borrowers. In Wisconsin, the minimum credit score of 680 is required.FULL ENTRY
Sam Schneiderman, broker owner of Great Boston Home Team (our Monday guy) was an appraiser for nine years. Today, he posts the rules for choosing a comparable property.
Last week, I wrote about why more properties won't appraise at sale price due to recent appraisal guideline changes. Readers’ comments made it clear that there is confusion over what makes a good comparable sale.
Most residential values are determined by comparing properties to each other. Comparable sales (and now listings and pending sales) are known as “comps”. Although many web sites offering online value estimates use sales in the area as “comps”, not all sales are “comps”, especially for appraisal purposes.
Because I no longer do mortgage appraisals, I checked with Mike Williams of Atlantic Appraisal Associates, an appraiser whose work I respect, to get recent secondary market guidelines for comparable sales. (Fannie Mae and Freddie Mac purchase loans from most lenders and are known as “the secondary mortgage market”.) Mike said:
“Comps (for federally related mortgage transactions) are the most similar and proximate sales to the subject property that fall within secondary market guidelines.
- Comps should be within 1 mile and 6 months, however, most lenders and AMCs (Appraisal Management Companies) require 2 comparables within 90 days plus a pending sale or listing adjusted for anticipated price negotiation, typically 2-5% of the last asking price.FULL ENTRY
What does it mean when a property “does not appraise”? The simple definition is that the appraisal does not come in within $1000 or so of the sale price. But, there is more to it. If the lender does not think the property is sufficient collateral for the loan, then the loan will fail. If there are not enough comparable properties to accurately assess the value of the property for collateral, the loan might fail.
Borrowers with a large down payment -- 20 percent or more -- can get their loan approved even if the property doesn’t appraise for the sale price. In some cases, they must increase the down payment so that it is 20 percent of the appraised value; sometimes they have to acknowledge in writing that they are aware that the lender’s appraiser calculated a lower value.
When the property is an “odd duck,” the appraisers must look longer ago and farther away to find similar sold properties. Being able to use UAG properties would help in cases like that.FULL ENTRY
Regardless of what a buyer or seller thinks about a property’s value, in the end, the only opinion that probably matters is the appraiser’s.
When mortgage financing is involved, the lender sends an appraiser to the property to make sure that it is habitable, marketable, and worth at least what the buyer intends to pay for it. The appraiser's job is to do a brief walk-through of the property (not a home inspection) and develop his or her opinion of value based on an analysis of recent sales and current market activity. There's a saying amongst appraisers that they are the eyes and ears of the lenders.
Until fairly recently, appraisers developed their opinion of value by comparing the subject property to at least three of the nearest, most recent, and most similar sales available. Now appraisers are also asked to include pending sales and/or currently listed properties in their reports. By including currently listed properties or pending sales, the lender is able to better see whether or not current market values are trending up, down or remaining stable.FULL ENTRY
This may or may not be a good time to buy, depending on your stomach for risk and what looks to be another bout of falling home prices.
But it does look like a good time to refinance.
The average 30-year mortgage has fallen to 4.59 percent, with an even lower rate of 4.05 percent for 15-year loans, the Mortgage Bankers Association reports.FULL ENTRY
Andrew asked me:
Hi Rona,I am writing with a request that you write a blog post on the potential for having a mortgage loan denied because one is on maternity leave- the NY Times ran an article on this yesterday and I am wondering if you could comment on what the situation is here in Massachusetts.
My wife and I are currently pregnant with our second and hoping to move before he/she is born but realize that this may not happen exactly according to our preferred schedule. We both work and are now wondering if our ability to get a mortgage depends on doing so before the baby comes. The article mentions that at least some of the restrictions are related to Fannie/Freddie guidelines for purchasing mortgages. They don't mention jumbo mortgages, leaving me to wonder if lenders apply similar restrictions to those loans as well…
I asked Brian Cav of www.smartborrowing.com to give me an update on the current Fannie/Freddie rules. He says:
Lenders will ask for "over the top" documentation from a Borrower or Co-Borrower going on maternity leave. They will require written and signed explanation from the Borrower or Co-Borrower stating she fully intends to return to their previous job, with same salary, etc. after the leave. The lender will also ask for a letter from her employer stating that the job will still be available when she returns with same salary, and number of hours, etc. This must be signed by an Human Resources representative on company letterhead. If you can prove that she will have the same job at the same pay after the maternity leave, the lender cannot deny mortgage financing on a purchase or refinance application.
Today, a follow-up on the story of a young family that I worked with this year. They are selling their too-small starter home and buying a bigger long-term family home.
They cleared out their house for showing. It looked good, but was far less functional. The printer was stowed away, because the desk went into storage. Their three-year old asked, when she couldn’t find something, “Mommy, is it in the Pod [temporary storage module]?”
Things went well. They had a buyer for the small house and chose a bigger one. Both loan commitments were committed: the buyer’s for their little house and theirs for their big house.
Two weeks before closing, they had their temporary housing lined up and were in the middle of lining up the contractors for the before-we-move repairs.
Their worries are over, right? Well, not 100 percent!FULL ENTRY
Well the Massachusetts Association of Realtors, which just released a survey on the issue, contends they are.
Roughly 60 percent of local real estate agents and brokers polled by MAR report that it has become either “somewhat’’ or “significantly’’ more difficult for clients to obtain a mortgage.
By contrast, just 11 percent reported that financing was “somewhat’’ easier to obtain, with no one even trying to claim that financing is “significantly’’ easier to get now. That category is a big fat zero.
Certainly the credit crunch has faded somewhat from the news – but it still casting a dark shadow over the real estate market.
Everybody loves a special deal. That's why there are special loan programs for teachers, doctors, unions and employees of certain companies.
Most of the so-called “special mortgage programs” that I've explored over the years really don't offer anything special at all. In fact, they often cost more than mortgage programs elsewhere. That is why I always have clients that are offered a special deal shop it against another lender’s rates and costs to see if it really is a deal.
Recently, I learned of a special deal. The rate was 5 percent and the lender would wave payment of the lender's legal fees (worth $750). The buyer still had to pay other closing costs. I suggested that the buyer check the “deal” with a lender that I referred her to. She was able to get the same rate with a closing cost credit of almost $1500 and lower legal fees.FULL ENTRY
Among the confusing things about getting a loan is deciding about your rate lock. First, what is a rate lock? It is a promise from the lender to loan you the money at a specific rate for a specific time. The lender is betting that the rate will be the same or lower at the end of the lock period; you are hedging your bet against it going up.
How long does your rate lock need to be? Your rate lock should be long enough to get you to closing. If possible a few days beyond closing, so that if there’s a delay, you are still locked. As I mentioned, a time-honored bait and switch tactic is the quote a rate with a 15-day lock. Why? Because if your rate lock expires before you are ready to close, your rate goes to either the rate you were locked at or the current rate -- whichever is higher. If you want the lower of the two, you can get a “float down option” for a fee. You can also get an extended rate lock, for a fee.FULL ENTRY
After a home inspection, it’s not unusual for a buyer to ask a seller to correct some “deferred maintenance” or other defect in the home that was not obvious when the buyer and seller agreed on the price.
Sellers are usually reluctant to do much work on their property because there is always the possibility that the buyer might not get a mortgage or might not like the way the work was done. Sellers are also busy preparing for their own move. Instead of doing the work, many sellers will offer to give a buyer cash at the closing, but Fannie Mae and FreddieMac lending guidelines don’t allow a buyer to receive cash from a seller. Instead, a buyer can receive a credit from the seller at closing or a reduction in the purchase price.FULL ENTRY
A reader, K, wrote this note to me on Wednesday about her friend’s failed appraisal.
Hi Rona,FULL ENTRY
I just heard a tale of woe from a friend trying to buy a house in Boston and I wanted to pass it on to you in case you can use it. My friend and her husband had a signed P&S to buy a 2-family house. The appraisal came in $50,000 below the agreed upon sale price, thereby jeopardizing the mortgage financing. The sellers refused to renegotiate the price, insisting instead that the buyers get a second appraisal. The second appraisal came in even lower! The sellers still refused to lower the price and the buyers walked.
I wonder if this is happening more often. And I can't understand what this seller is thinking. Do they think they're going to find a cash buyer? Do they think the appraised value will go up? Are they nuts?
The silver lining of this was that I was able to tell my friend, who is unfamiliar with the neighborhood, that I thought she was lucky to be out of the deal. I know that the house is in a pretty rough area and she would've (in my opinion) paid too much if the deal had held up.
Attorney Richard D. Vetstein. writes today about new loan procedures that will begin June 1st. It has never been a good idea to go buy furniture on credit a week before closing. Now, more than ever, borrowing mistakes like that can cost you your home loan.
Fannie Mae’s new Loan Quality Initiative (LQI) mandates become effective on June 1, 2010, and this will definitely curtail borrowers’ spending before their home closings. The June 1 changes are part of a new effort by mortgage giant Fannie Mae to cut down on slipshod underwriting by lenders and frauds by borrowers. Fannie's so-called "loan quality initiative" will require lenders not only to pull two credit reports for each mortgage transaction but to perform additional verifications of borrower occupancy plans for the property, Social Security numbers and Individual Taxpayer Identification Numbers, among other changes. These last minute credit checks could result in a closing delay, pricing adjustment, or, worst, loan approval cancellation.
The last-minute credit report will be designed to find out whether a borrower has obtained — or even shopped for — new debt between the date of the loan application and the closing. If borrowers have made applications for credit of any type — for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card — the closing could be put on hold pending additional research by the lender.
If you've taken out new loans that are sizable enough to affect the debt-to-income ratio calculations used in your original mortgage approval, the deal could fall through. The added debt load could render you ineligible for the mortgage because you suddenly appear unable to handle the payments without a strain on your household budget.FULL ENTRY
When my client called me to say that his lender would charge him $1200 extra for an extended rate lock (for 45 days,) I smelled a rat. Why the smell? The rate this lender initially quoted my buyer was artificially lower because it was based on an unreliable 30-day deadline. Lenders that I think are good are using 45-day rate locks as a standard so that delays at their end do not cost the borrower more money (for an “extended” 45-day lock.)
Changes in lending make loan application later and slow the appraisal process. Since Good Faith Estimates (now) need to be 100% accurate, lenders require the final purchase information to prepare one. Some refuse to take an application without a signed Purchase and Sales Agreement.
Appraisals require a completed Purchase and Sales Agreement. There also is a three-business-day delay between the day you apply for your mortgage and when the lender can order an appraisal. (This can be sped up slightly by applying by email or in person.) Then the appraisal company assigns an appraiser -- another delay. Then the appraiser gets access to the property and goes about doing the job and writing the report. It takes about a week longer to get a loan commitment because of all this.FULL ENTRY
Today, Sam Schneiderman, Broker-owner of Greater Boston Home Team writes about what lenders want to see in a borrower's profile. Last week, he wrote about common financing misunderstandings among borrowers.
Reader’s commented that common sense doesn’t appear to be part of the mortgage approval process. Most lenders have it with creditworthiness decisions based primarily on automated credit scores to avoid the perception of bias based on discrimination.
In the eyes of most mortgage lenders, particularly those that write loans to Fannie Mae and Freddie Mac (a/k/a the “secondary market”) standards, here is what the borrowers must have in order to get a mortgage:
Good Fico Credit Scores
This is the first test a borrower must pass. FICO (Fair Isaacs Corporation) credit scores are the standard of the industry. A good FICO credit score will entitle the borrower to the best rates. A so-so credit score will entitle the borrower to average rates and a poor score will disqualify the borrower from getting a mortgage.
Down payment must be the borrower’s own money, not a loan from someone else.
Down payments can be as low as three percent or as high as the borrower wants to put down. Generally, the higher the down payment, the lower the interest rate.
Attorney Richard D. Vetstein. writes today about why people with good incomes and good credit can see their mortgage loans go bad.
The mortgage lending underwriting environment has changed dramatically in the last several years. At the peak of the bubble, mortgage professionals joked that you needed only to be able to fog a mirror to get a loan. These days, even borrowers with good incomes and good credit scores can get turned down.
Much of the change is driven by the stricter underwriting standards imposed by Fannie Mae, Freddie Mac and FHA. There are two major issues which come up repeatedly in transactions today which can derail a borrower’s loan: (1) repairs, and (2) the appraisal.
1. The house requires substantial repairs.
A lot of properties on the market these days are foreclosures owned by banks, short sales, or otherwise aren't in great repair. Further, in a buyer’s market, sellers will not hesitate to agree to a list of repairs.
Broken windows, defective appliances, roof leaks, unfinished renovations, and serious water damage can all cause problems with obtaining final lender approval of the loan. At worst, the a substantial amount of required repairs could cause a lender to bail out. At best, the lender will require a pre-closing inspection and make the loan commitment subject to the satisfactory completion of all work.
Talk to your lender before the purchase and sale agreement is signed to figure out the extent to which substantial repairs will affect the underwriting process.
The real estate market is pretty quickly returning to reality with the expiration of the home buyer tax credit on April 30th.
Recently released mortgage stats and building numbers offer additional signs that buyer demand is already starting to come back down from its artificially high, government subsidized peak in April.
Building permits, just released by the federal government this morning, point to a big drop in housing construction in the coming months.
When I was a new agent, over 25 years ago, and buyers told me that financing their home purchase wouldn’t be a problem, I assumed that they were either paying cash, had a huge down payment, or had financing already lined up. Those were the days of true relationship banking, when local banks had relationships with customers that bankers often knew by name. Bankers usually had a good sense of who they could trust because they knew their customer’s parents, families and financial histories either from first hand information or by making inquiries through their network. Unfortunately, there isn’t much relationship banking available to consumers any more.
After spending countless hours working to find the right home for buyers that I assumed were financially savvy or connected, I learned that some buyer’s dreams remained beyond their reach because most of them didn’t understand the nuances of home financing. Those were the days before pre-approvals were expected from any qualified buyer.FULL ENTRY
Attorney Richard D. Vetstein. writes today about the FNMA changes:
For the first time this year, Fannie Mae announced significant updates to its mortgage underwriting guidelines. The changes include strict new ARM qualification standards, the elimination of a once-popular 7-year balloon loan product, and tighter rules for interest only mortgages.
Fannie Mae made its official announcement on April 30, 2010. The changes will roll out over the next 12 weeks.
These changes are intended to ensure that shaky borrowers can afford an adjustable rate mortgage not only during the first fixed term, but once the rate adjusts even higher.
Borrowers Need More Affordability Muscle For Their ARMs
The first guideline change is tied to ARMs of 5 years or less. This is a huge change which will really impact the ARM market. Mortgage applicants must now qualify based on a mortgage rate 2% higher than their note rate. For example, if your mortgage rate is 5%, for qualification purposes, you must be able to afford a 7% interest rate. The elevated qualification payment will disqualify borrowers whose debt-to-income levels are borderline.
Most Massachusetts real estate transactions include between one and three attorneys. Here are the various players along with an overview of their roles.
The lender's closing attorney:
Since we use attorneys instead of escrow companies in Massachusetts, if financing is involved, lenders require that the buyer pay for an attorney to look out for the lender’s interest in the transaction and conduct the closing. The lender’s closing attorney’s responsibilities include, but are not limited to;
- conducting a title search or arranging for a title search by a title examiner (see April 12th blog)
- assuring that all liens (including past mortgages) against the property have been paid off
- providing a certification of clean title to the buyer
- procuring title insurance for the lender (paid for by the buyer)
- procuring an owner’s title insurance for the buyer (if the buyer elects to purchase one)
- arranging and preparing the mortgage paperwork for closing
- obtaining a municipal lien certificate for the property
- obtaining mortgage payoff information and other lien payoff information
- ordering and reviewing a plot plan (for free standing property that is not a condo)
- preparation of the final settlement statement for the closing
- conducting the closing
- recording the appropriate documents at the registry of deeds
- paying off seller’s mortgages and other outstanding liens (i.e. water & sewer bills) from the purchase price
- disbursing the remaining proceeds from the sale to the seller, if any.
A closing is an event with the rare combination of being both boring and tense. Or is that tense and boring? At the closing, the buyers sign about 40 pieces of paper, many of which are redundant and confusing. They look at monetary figures the likes of which they never see, unless they run a business.
This week, I had an FHA closing. It was the first one in a long time, for me. Among the pages that said my clients know about the lead paint law – for the third time -- was a page explaining what bank fraud is. And, please don’t commit it.
Part of me sees this as a concise guide to what fraud is. Part of me sees it as a “how to.” Am I getting too cynical?
Don't Commit Loan Fraud It is important for you to understand that you are required to provide complete and accurate information when applying for a mortgage loan.FULL ENTRY
Do not falsify information about your income or assets.
Disclose all loans and debts (including money that may have been borrowed to make the downpayment).
Do not provide false letters-of-credit, cash-on-hand statements, gift letters or sweat equity letters.
Do not accept funds to be used for your downpayment from any other party (seller, real estate salesperson, builder, etc.).
Do not falsely certify that a property will be used for your primary residence when you are actually going to use it as a rental property.
Do not act as a “strawbuyer” (somebody who purchases a property for another person and then transfers title of the property to that person), nor should you give that person personal or credit information for them to use in any such scheme.
Do not apply for a loan by assuming the identity of another person.
Do not sign an incomplete or blank document; that is, one missing the name and address of the recipient and/or other important identifying information. [emphasis theirs]
Attorney Richard D. Vetstein. writes today about a case where a buyer was put out that a seller didn't accept a request to extend a deadline. In real estate law, a deadline is a deadline, according to the ruling on Coviello v. Richardson
I always check with lenders before putting a mortgage contingency date into an Offer to Purchase. Did your agent? When you bought or sold, did anyone miss a deadline and need an extension?
Last week, a very interesting decision involving the mortgage contingency provision of the standard form offer to purchase came down from the Massachusetts Appeals Court in Coviello v. Richardson. The case highlights the need for Realtors and real estate attorneys to be proactive with respect to mortgage contingencies and requests for extensions.FULL ENTRY
In the case, on February 12, 2008, the parties signed the standard form Offer to Purchase, which provided that a Purchase and Sale Agreement would be executed by 5:00 pm on February 26th. Under the mortgage contingency clause of the offer, which gave the buyer the right to cancel if she could not obtain financing, the buyer was required to secure a mortgage commitment by February 29th. The Realtor, who prepared the offer, made the first mistake here: asking the buyer to obtain a firm mortgage commitment not even 2 weeks after the offer is signed was completely unrealistic, especially in today’s tight underwriting environment.
Predictably, the buyer and her broker had immediate concerns that they would be unable to meet the mortgage commitment deadline. The broker asked the buyer’s attorney if he would ask the seller to agree to extend the commitment deadline for an additional week–a reasonable request.
The attorney, however, didn’t follow through on the request until 2 hours before the 5:00 pm deadline to sign the purchase and sale agreement. The seller, who was dealing with a high-risk pregnancy, didn’t want to extend the deadline. No agreement could be reached, and there was no tender or signing of the purchase and sale agreement.
Mortgage and finance expert Arthur Lindberg joins Boston.com Monday at 9 a.m. as part of the Globe's Spring House Hunt special section.
Lindberg, who has worked in the mortgage banking and financial services industry for more than 29 years, is regional vice president for Sidus Financial, a wholesale mortgage lender. He also sits on the board of directors for the Massachusetts Mortgage Bankers Association and Massachusetts Mortgage Association.
Come early morning, please ask away.
It's been a winter and now spring of sober reflection for the adults in our Natick fixer-upper.
While our six-year-old son builds lego rocket ships and his younger sisters fuss over their baby dolls, Karen and I have been reading the The Two-Income Trap and The Feminine Mistake, which lays out a compelling case for women to hang onto that second income.
Karen was laid off from her job as a financial planner late last year. And while she certainly has marketable skills, there are likely more challenging times ahead as we face the end of her severance.
I am just wrapping up Elizabeth Warren and Elizabeth Warren and Amelia Warren Tyagi's excellent take on the perils that now face two-income couples - and I've enjoyed Rona's observations on the book as well.
Right now the two of us need to move now from theory to the concrete, to do the "financial fire drill" that Warren and Tyagi recommend.
Still, having running the numbers in my head many times over late at night, I would have to say our financial outlook is a mixed bag. It's far from changing deck chairs on the Titanic, but it's going to require some tough financial decisions.
Home prices are the big elephant lumbering around the room amid the ongoing debate over how to fix our country's broken real estate sector.
It's hard to find anyone in Washington or on Beacon Hill who wants to deal with it honestly, yet the damage caused by the housing bubble is still with us and just can't be wished away.
It can be found in housing prices that in some key bubble prone markets, like Greater Boston, are still too high relative to the incomes of most buyers. And we are also still dealing with the wreckage wrought by the bubble years in the quarter or so of all homeowners across the country who are now "underwater" on their mortgages after buying homes at inflated prices.
So now the Obama Administration will finally start prodding banks - though ever so gently - to start writing down the principal on some troubled mortgages.
In addition, the federal government will now start doling out incentives to encourage mortgage companies to lower monthly payments of unemployed homeowners to about 30 percent of income. This involves a breather of three months, possibly more. It's all part of a sweeping, $50 billion attempt by the federal government to prop up the country's still shaky housing market.
Yet despite their differences, both proposals are yet another way to tinker around the edges instead of dealing directly with the painful issue of what to do with the still lingering problem of inflated home prices.FULL ENTRY
Ms Warren and Ms Warren Tyagi in The Two Income Trap wisely advise families to prepare for emergencies ahead of time. I am thinking of copying the chapter “The Financial Fire Drill” and giving it to my clients before they start house hunting. They pose three questions:
1. Can your family survive for six months without one of the incomes you rely on?
2. Can you downshift the fixed expenses?
3. What is your emergency back-up plan?
Rent or mortgage is usually the family’s biggest fixed cost. Since mortgage is almost invariably higher than rent here, would-be home buyers need to think about their fixed costs and how to prepare to pay them. Therefore holding the mortgage payment to something you can handle is key.
I would like to get specific about how to think about your mortgage payment.FULL ENTRY
What kind of housing recovery is this?
That's what I was left thinking after a jaw-dropping statement by David Stevens, head of the Federal Housing Administration, before a recent House hearing.
Amazingly, Stevens wasn't talking about demanding 20 percent down or even 10 percent down. Rather, he was arguing against raising the required down payment from 3.5 percent to 5 percent!
If that's true, the housing market, despite the claims of boosters, may be much closer to another big slide than many realize.
The foreclosure mess has hit another new low.
One of the nation's leading banks has recently faced at least four lawsuits in different cities across the country, having allegedly foreclosed on and seized the wrong homes.
And given the record volume of foreclosure activity out there, with a few million more homes expected to be padlocked this year alone, don't be surprised if more such cases crawl out of the woodwork.
RealtyTrac reports today that foreclosure activity across the country rose 6 percent in February over the same month in 2009.
Anyway, the most recent of these bizarre, mistaken-identity foreclosures comes out of Pittsburgh, The Wall Street Journal reports.
There 46-year-old diner owner Angela Iannelli returned home to find it padlocked.
Once she managed to get in, she found her furniture damaged, her belongings strewn about and her prized, 11-year-old parrot gone.
Iannelli, who had not missed any payments, then had to haggle with Bank of America employees to get her parrott back, she contends in a lawsuit.
She eventually had to drive 80 miles to retrieve Luke, her beloved parrot, the paper reports,
Nor is this just a Pennsylvania oddity, with a retired Massachusetts couple now battling the bank after a similar disaster. And they didn't even have a mortgage.
With rates dipping below 5 percent again, there are billions in potential savings for millions of homeowners out there.
How many? Roughly 37 percent of all homeowners with conforming, 30-year mortgages are now paying 6 percent or more on their loans, The Wall Street Journal reports.
Yet there is a huge swath of American homeowners who don't stand a chance of finding a lender that will do a refinance deal, or at least one that makes sense, according to the Journal.
The result has been low rates, but nothing close to the refinance boom seen back in 2003 when borrowing was this cheap, the paper finds.
The reasons are not hard to understand - years of falling prices and the toll taken by a savage economy.
Just call it the cruel tease of rock bottom rates.
Now this is a good story.
Mortgage bankers have not been terribly sympathetic these past few years to the plight of struggling homeowners.
Those who have tried to do the right thing, and sell their homes in short sales instead of simply walking away, have too often found themselves caught in a web of corporate red tape.
And for frustrated homeowners who opt to walk away, well let's just say there's been absolutely no mercy at all.
"What about the message they will send to their family and their kids and their friends?" John Courson, chief executive of the Mortgage Bankers Association, recently asked.
Well now we can ask the same question about the Mortgage Bankers Association's own, spectacularly foolish real estate activities.
After shelling out nearly $80 million for a downtown Washington office building in 2007, right around the peak of the commercial real estate price bubble, the Mortgage Bankers Association is bailing out big time, The Wall Street Journal reports.
That new study on how cash-strapped consumers are paying their credit cards before they make their mortgage payments sure was an eye-catcher.
Still, one has to be a little suspicious as to its source, a Chicago-based credit rating and research company that works quite closely with the industry.
TransUnion tracked the payment patterns of consumers with at least one credit card and one mortgage payment.
One particularly startling finding: Of consumers with the lowest credit scores, the percentage having fallen behind on their mortgages but are current on their credit cards has soared from 19 percent in 2007 to 29 percent in the third quarter of 2009.
The stats sound plausible given the corner many overleveraged and now unemployed homeowners find themselves in.
But it's also important to consider where the information is coming from and the self-serving message it appears to be backing.
Attorney Richard D. Vetstein. keeps his eye on what lenders are saying about the new GFE and why they are saying it. This form is going to change the way consumers shop for loans. But will it change it for the better?
Lenders have been using the new Good Faith Estimate for a little over one month now. From the vociferous reaction in the lender blogosphere, many lenders believe HUD really blew it with this new form. As my mortgage lender friends point out, the new GFE inexplicably fails to provide at least 5 critical pieces of information for home buyers:FULL ENTRY
• the total monthly mortgage payment (including escrows, taxes and insurance)
• total cash needed to close
• escrow amounts for real estate taxes, hazard insurance, and PMI
• seller paid closing costs
• Loan-to-value ratio/down payment
This why one mortgage lender called the new GFE
“the single worst government form dumped on the real estate industry.”
Div wrote in regard to FHA information posted this week:
…. I had a question about that in terms of the buying process. I bought a condo this summer for 220K as a FTHB. I put down 20%. In the process of buying, I had to write three checks. 1. An initial 1K after my offer was accepted. 2. A 10K deposit when we signed the final purchase and sale agreement. 3. The rest (33K + closing costs) at the closing.
It was in between steps 2 & 3 that I arranged for financing on my loan, which leads to my question. If I had an obtained an FHA loan, I’d have owed 7700 as a down payment (which I had exceeded already by step 2)? Do both parties have to agree to an FHA sized down payment at step 2 (even prior to FHA approval)? Or, does one need to be preapproved for an FHA loan prior to beginning the entire process and do the two agents adjust the down payment schedule accordingly? As a buyer’s agent, when do you assess what type of loan your client is going to be seeking? Are you allowed as an agent to discriminate between “Cash-on hand Carl” and “Subprime Stan?”
Or was I simply an agreeable (and perhaps naïve) buyer and that 10K at the time of purchase & sale is rare nowadays with lower down payment loans? Since I was always going to obtain a 30 year fixed loan w/ 20% down, it didn’t really matter to me how much was required at each step of the process.
For the past year or two, I have been bombarded with advice that I should be on Facebook and that I should have a business persona there. Before that, I joined Linked-In, where the grown-ups are, and left Facebook for the children.
My husband started looking into Facebook when he learned that it could benefit the non-profit he works for. That made sense to me. There are good arguments about using Facebook in the non-profit world. Yes, it has been good for his organization. It also helped him find old friends and acquaintances and find new ways to waste time in front of the computer.
But Facebook has a dark side.FULL ENTRY
Today, Attorney Richard D. Vetstein.goes over those new FHA requirements in detail:
As Scott wrote about this week, the Federal Housing Administration announced tightening of lending requirements to reduce risk and improve its weakening financial health. The changes include: • Borrowers must pay an increased upfront mortgage insurance premium (MIP) of 2.25 percent of the loan amount (increased by 50 basis points from 1.75 percent). FHA has also requested legislative authority to increase the maximum annual MIP so it can reduce upfront costs for prospective home buyers. • For borrowers with poor credit (credit score of below 580), they must make a minimum down payment of 10 percent (up from 3.5 percent). • Seller credits for closing costs are cut by 50 percent and cannot exceed 3 percent of the purchase price. • FHA will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability. With the current recessionary economic state, constricting mortgage availability, and general credit crunch, FHA loans have exploded, with projections of hitting $400 Billion in 2010. FHA loans, featuring low down payments, competitive interest rates, and more forgiving credit requirements, have proven the loan of choice for many first time home buyers and those with marginal credit scores.FULL ENTRY
Attorney Richard D. Vetstein.told you about RESPA changes for 2010. Today, he’ll tell you about lenders who have returned to giving rough estimates. Are they skirting the law, or are they giving consumers a rough estimate that they want and need?
Well, it didn’t take very long for lenders to work around the strict Good Faith Estimate required by HUD’s new closing cost rules which went into effect on January 1. HUD officials say they plan to conduct a review of the growing use of “worksheets” and “fee estimate” forms by mortgage lenders providing quotes to home buyers and refinancers.FULL ENTRY
The new closing cost rules under the Real Estate Settlement Practices Act (RESPA) significantly changed the manner in which lenders are required to estimate loan and closing costs. Many charges cannot deviate at all, or at most by a 10%, from the Good Faith Estimate to the closing. That's in stark contrast to earlier rules, which essentially allowed some lenders to quote low estimates of total costs, with no responsibility for the final dollar charges at closing.
Good, but what took so long?
That's my take on the Obama Administration's launch of a new Justice Department unit that will look at unfair lending practices that too often appear to have targeted minority communities.
Obviously, this isn't the kind of thing the Bush Administration was particularly interested in exploring.
But then again, why it took the new Obama Administration roughly a year to launch its new Fair Lending unit is another question altogether.
Guess it's better late than never.
There's clearly a lot of explore here. Minority homeowners in the Boston area and across the country were far more likely during the bubble years to end up with high-cost subprime loans than were their white counterparts.FULL ENTRY
I was raised by children of the Depression. So the idea of doing the numbers and opting to simply ditch your home still shocks me.
But you know the idea has begun to move from the fringes into the mainstream when an argument for "strategic default" appears in the New York Times Magazine. (Thanks to the regulars on this blog who tipped me off to this one.)
And under the headline "Walk Away From Your Mortgage!" no less.
Roger Lowenstein, an outside director of the Sequoia Fund and a contributing writer for the magazine, makes the case that what's good for Corporate America is good for debt-laden homeowners as well.
To be fair, despite the headline, he does not outright urge underwater homeowners - now a quarter of households - to pack their bags and move into that much cheaper rental down the street.
But he artfully argues that we shouldn't be so harsh on the growing number of homeowners who walk away. After all, why should they suffer shame for a tactic companies ruthlessly employ all the time?
Of course, when you are peering into the corporate swamp, there are all sorts of unrepentant bad behavior you can point to, as Lowenstein does. Morgan Stanley stopping payments on San Francisco office towers it overpaid for during the boom and commercial property mogul Sam Zell letting the Tribune Company file for bankruptcy while he sits on billions are two Lowenstein offers up.
Sorry, I'm not buying it.
FHA won’t finance properties that have been bought and resold within 90 days. The majority of higher volume lenders and wholesalers have also applied that rule to all of their loans. Some allow exceptions if they see satisfactory evidence that supports the increase in value from the original price. Many lenders also require similar evidence for properties being resold at a higher price within a year. Some PMI (Private Mortgage Insurance) companies are also on the bandwagon.FULL ENTRY
Let’s say that an investor/rehabber named Martha buys a property at foreclosure. She has her own workers and some outside contractors upgrade every interior surface of the house. They install new kitchen cabinets, bathroom tile, new fixtures and her own workers put a new layer of shingles on the roof.
Because Martha employs her own workers, who also work on Martha’s other projects, she’s able to get some work (like the roof) at wholesale so that she can add to her profit. (She also pays the employer’s share of taxes, workers comp, unemployment contributions and vacation/sick days.) Because she uses many of the same contractors about ten times a year, she gets a substantial discount from them. Because she accepted the risks of buying the home at a foreclosure auction with a 30 day closing and no home inspection, Martha had to go to a “hard money lender” that charges fifteen percent interest plus three to five points (percent of the loan amount) up front, so every day costs her big money.
Attorney Richard D. Vetstein.told you RESPA changes were coming. Well, here they are! Avoid reading the 51-page FAQ; Attorney Vetstein tells would-be borrowers how to handle the new forms.
If you are applying for a loan in 2010 you will likely receive the brand new Good Faith Estimate under new Real Estate Settlement Practices Act (RESPA) rules which became effective January 1. These rules, which I wrote about earlier, significantly change the way lenders must disclose and charge for loan and closing costs. Under the new rules, loan and closing costs are categorized into one of three of what I call “tolerance buckets”:
(1) those that cannot change from the Good Faith Estimate (GFE) disclosure to the closing – 0% tolerance;
(2) those subject to a 10% tolerance–that is, those which cannot increase by more than 10% from the GFE to the closing; or
(3) those that can vary by any amount – no tolerance.
Here is a snapshot of the new Good Faith Estimate with the three “buckets”:
This year, I am reviewing the year in terms of my immediate experience as an agent (today) and my experience as a blogger here with you on Thursday. Tomorrow, Attorney Vetstein will review the year, from a real estate lawyer's point of view.
Now, about my year: I went into the MLS to look at my closings in 2009. I worked with buyers in price ranges from $200,000 to $1,200,000. Some were empty-nesters, trading down. Some were growing families, trading up. Some young couples, some singles. So, basically, I worked with everyone!FULL ENTRY
A mortgage lender (a/k/a loan officer) arranges mortgage financing for borrowers that have or will have property to pledge as the collateral for a loan. Those that don’t pay cash for their home purchase will find themselves talking to a mortgage lender.
In my opinion, the best time for a prospective buyer to contact a loan originator is before deciding what homes to view. That way, the homes that are viewed will be homes that the buyer can actually afford. FULL ENTRY
Attorney Richard D. Vetstein.highlights the changes in RESPA that will greet us in 2010.
The New Year brings the long awaited Real Estate Settlement Practices Act (RESPA) reform to the residential real estate industry. Under the new rules, all lenders and closing attorneys must adhere to the new Good Faith Estimate (GFE) and HUD-1 Settlement Statement which is intended to simplify the disclosure of loan fees and closing costs and allow consumers to shop around for the best deal.
In anticipation of the new rules, HUD has released a very helpful guide: Shopping For Your Home Loan: HUD's Settlement Cost Booklet. Loan originators are required to provide consumers with the booklet within three days of a loan application. The booklet provides a basic overview of the home buying and mortgage lending process. It also explains in detail each part of the new Good Faith Estimate and the new HUD-1 Settlement Statement.
Want more proof of the housing market’s addiction/love affair with the tax credit?
Just check out what’s happened with mortgage applications.
Demand for new mortgages has gone on a roller coaster ride over the past few months.
The number of new mortgage applications fell steadily over the six weeks leading into November, hitting an historic low at mid-month.
But over the past few weeks, mortgage applications have exploded again, with a big jump last week.
Oddly, rates appear to playing at best a co-star role in this.
Despite some minor fluctuations, rates have stayed down and are now flirting once again with last spring’s historic low of 4.61 percent.
But if you match the rise and fall of mortgage demand with the debate in Congress over whether to extend the home buyer tax credit, then the yo-yo like fluctuations begin to make sense.
The good news – and there sure is not a lot of it right now with our jobless economy – is that mortgage rates continue to hover near rock bottom, historic lows.
The bad news is what anyone who has been even thinking about buying or refinancing knows – lending standards have gone from laughable to downright draconian.
These two trends work against each other. But you wouldn’t know it from reading the copious, and breathless coverage of how mortgage rates are back flirting again with some historic lows.
Yes rates are low, real low, with the current rate of just 4.71 for a 30-year mortgage just a shade above the record set back this spring.
But what’s often missing from the same rate articles is the fact that lending standards have dramatically – and probably all too often nonsensically – reduced the pool of eligible borrowers.FULL ENTRY
A while back, I wrote about clients who were approaching a property that was, in my opinion, way overpriced. They made an offer at what I thought was a fair asking price and got shot down. They made another one, a bit over fair market price. Shot down again. I was instructed to let the listing agent know that if they come back again, the next offer will be lower.
Well, this did not work out well.
A week later, another buyer came in and matched the counter-offer that I thought was about $30,000 more than the property was worth. My clients suffered major regret. They asked me to call the agent to inform him that they would re-offer if the current offer failed on appraisal.
Welcome back to Attorney Richard D. Vetstein. Here's Attorney Vetstein's take on the Home Affordable Foreclosure Alternatives Program.
The Obama administration on Monday set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed. The announcement can be found here.FULL ENTRY
Recent efforts to clean up the mortgage industry resulted in the Home Valuation Code of Conduct (HVCC) that I wrote about on April 27, 2009. The HVCC removed all contact between the loan originator and the appraiser. The purpose of the divide was to assure the public and those that provide the cash for mortgages (mortgage investors) that the appraiser’s estimate of value for the property used to secure their mortgage is truly an unbiased estimate of value. This removes the doubt that there was pressure from the hand that feeds them (the loan originators.)
To accomplish this divide, it was necessary to create a “wall” between the loan originators and the appraisers. The wall that is employed by most lenders is an outside contractor known as an “Appraisal Management Company” (AMC) that orders the lender’s appraisals from a list of appraisers or appraisal companies that receive appraisal assignments in rotation.
While employing AMCs may have created more unbiased appraisals, it has also resulted in less control over the quality of the appraiser used to complete the assignment.FULL ENTRY
The good news is the Obama Administration appears to be finally conceding that its efforts to staunch the foreclosure crisis are not working as planned.
It doesn’t take a rocket scientist – or a Nobel winner, for that matter - to figure that one out, with foreclosures set to rise right into 2010.
Despite tens of billions commited to stem foreclosures by an array of federal and state programs over the past few years, banks are seizing homes and condos at record rates.
An astounding 14 percent of homeowners across the country were either in foreclosure or behind on their payments at the end of September, the Mortgage Bankers Association reported last week.
So U.S. Treasury Department officials are rolling out today changes to a key, $75 billion that tired to head off foreclosures by paying mortgage companies to modify loans.
But bad news is that instead of the sweeping overhaul that’s needed, the Obama Administration appears instead to be focusing on what amounts to some minor modifications.FULL ENTRY
Due to HVCC and other changes in mortgage lending, the time it takes to get a loan commitment has increased by a week or two, sometimes three or four. That has caused a lot of stress in my business.
I cried because I had not shoes until I met a man with no feet.
The time between Thanksgiving and the end of the calendar year is prime time for charitable giving. Today, I share a story about someone who has been caught in the shifting maze of the mortgage crisis. Through no fault of her own, S.W. didn’t do as well as many do getting a modified loan with the help of CNAHS.FULL ENTRY
Looks like the foreclosure mess won’t be going away anytime soon.
Just as all the hoopla over the extension of the home buyer tax credit starts to fade, along comes the The Mortgage Bankers Association to bring the market back to reality.
One in seven loans is now in foreclosure, up from one in ten at the start of the year. It’s the highest on record since the MBA began track this stuff in 1972.
And forget about all those goofy subprime loans. The driver now is the ever rising jobless rate, which has topped 10 percent and may top 11 percent or higher before it settles out.
Foreclosures on prime mortgages accounted for 33 percent of all foreclosures last quarter, up from 21 percent at the start of the year, the group reports.
The mortgage bankers project rising foreclosures well into 2010, not leveling off unitl the jobless rate starts to moderate.FULL ENTRY
Today, Attorney Richard D. Vetstein. outlines the changes in lending that we both hope will lead to transparency and the final end to bait-and-switch lending.
New, sweeping changes regulating how lenders, closing attorneys and title companies disclose loan and closing costs are set to go into effect January 1, 2010. The new regulations are part of a long awaited reform to the 30 year old Real Estate Settlement Practices Act (RESPA) aimed at providing greater transparency and fostering better consumer choice in loan and closing costs. The changes are so significant that HUD recently took the unusual step of giving lenders a 120 day reprieve in enforcing the new regulations. The major components of the new RESPA reform are the new and substantially revised Good Faith Estimate (GFE), in which lenders disclose loan and closing costs to borrowers, and the HUD-1 Settlement Statement, which is a detailed financial breakdown of the entire real estate transaction signed at closing.FULL ENTRY
Sam Schneiderman, Broker-owner of Greater Boston Home Team teaches you how to commit bank fraud. Why would he do that? Because most buyers and sellers don’t understand how easy it is to get into trouble.
Many loan officers and agents don’t understand what the liability exposure is when they are involved in a fraudulent transaction.
Bank fraud is punishable by imprisonment for not more than 30 years, a fine of up to a million dollars or both. In addition, brokers, agents, loan originators and attorneys can lose their license(s) to practice. Obviously, the punishment depends on the severity of the crime. If the perpetrator is a mortgage loan originator (a/k/a “mortgage officer”), broker, agent or attorney that repeatedly helped buyers or sellers commit fraud, the punishment would probably be more severe than it would be for a borrower who lied on one mortgage application. A borrower that commits fraud risks having her loan denied or canceled if the lender discovers the fraudulent statement or omission.
If you doubt that people really get punished, I can tell you about a loan originator that was sent to jail for helping investors make loan applications that intentionally omitted facts. When the properties became vacant, the investors could not make payments and the lenders suffered losses. When the lenders investigated, it was easy to find that the common source was one loan originator that handled the loan applications in a way that hid the applicant’s true financial picture from the banks.FULL ENTRY
Welcome back to Attorney Richard D. Vetstein. The FHA guidelines for condos are changing again. Here's what Atty. Vetstein has to say about them:
With an eye on the volatility of the condominium market, the Federal Housing Administration (FHA) has backed off some of the stingy new rules for condominium lending set to be implemented Dec. 7. After a meeting with the Mortgage Bankers Association last week, the FHA made the following changes to its June 12 condominium guidelines:FULL ENTRY
• Spot loan approvals can continue until Feb. 1, 2010. Spot approvals are performed on non-FHA approved projects on a loan by loan basis, and are a way to make FHA loans available to home buyers in well run condominium projects even if they haven’t gone through the full approval process.
• The FHA will allow a 50 % concentration of FHA loans – up from 30 %-- in condominium buildings, and well-qualified buildings can have up to 100 %.
• The pre-sale requirement has been reduced to 30 % of new projects. So only 30% of a new project must be sold-out before being approved for FHA loans.
• The reserve study requirement has been eliminated. The new guidelines mandated that all existing and new condominiums undertake a study of its capital reserve account. The study can be expensive and onerous, especially for smaller associations. The guidelines instead require that all condominium budgets provide for funding the reserve account up to at least 10% of the operating budget. This is much more workable.
When I published comments from readers who thought their Offers were not being presented to lenders in short sales and foreclosure situations. I suggest that agents and consumers could do something about it. James wrote:
Where's the incentive for an honest agent in all of this? It seems like it's a lot of work for the agent, and he still won't get a commission. If the lender thinks the borrower is crooked, there will be a Fraud Alert flag on that file forever, making reasonable Offers nearly impossible to approve. Sure, it's the right thing to do, but it takes a lot of time, effort, and money (lawyers ain't cheap), and it doesn't get your client any closer to buying the house. Good community service (if you can get the bank to listen to you), but it won't pay the bills.
First a disclosure: on the bottom of the email address that I use with my clients is this statement:
Always do right. This will gratify some people and astonish the rest. --Mark Twain
So, I am someone who tilts at windmills; that’s who I aspire to be. Marcus thinks doing right to do right is a sign of hopeless naivety. But so be it. Attorney Michailidis thinks I owe someone an apology for saying there is something wrong with hand-picking low Offers to send to a lender in a short sale.
Back to James’ comment: why blow the whistle on sellers and their agents? James is right that the self-interest angle is weak, in the short run. The long-run upside is that action to stop those messing with the process will clear the path for buyers to buy properties; if the lenders are waiting forever to see market-rate Offers, would-be buyers are waiting along with them.
Like JGC, I wish regulators would look more closely at short sales. My suspicion is that not only are some brokers not submitting all offers, they are in collusion with the seller to sell the property to a relative or friend (a not "at arm's length" buyer). I have buyers putting in very good offers on short sales who are not getting the properties, and watching the properties sell for less than their bid. Where are the regulators?
There are a lot of accusations in what Mary wrote above. She’s not the only one. I also got this email from another commenter and blog-buddy of mine:
Rona, I’ve heard tales of people taking out cash loans on credit cards and cars in order to appear in dire straits and qualify for a short sale. If a savvy person knows the rules, I could see it working in this business/banking climate.
They'd be short selling it to someone they know as cheaply as possible, then renting it back. The idea is also to buy back after some time. Works well with tight knit ethnic groups. I think this is happening more where similar, although arms length, deals are common. Say, CA, FL, NV, AZ.
So, here’s the scam:
1. Get behind in your bills, so you can prove that you can’t keep the house that has depreciated below to loan amount.
2. Make a case for a short sale with your lender.
3. Go through the motions of selling on the open market with a crooked agent. Have the agent send only the low Offer of your confederate to the lender.
4. Once you sell to your not-arm’s-length partner, rent it back from him/her or buy it back at a later date.
(I have, in the past, run into agents who don’t present Offers. But, I can’t prove it is happening now, or for this reason, based on my experience in the marketplace. I am experiencing the inability to see properties, which may be a symptom of the same disease.)
Readers, I don’t recommend that you try this for a number of practical reasons that go beyond the obvious moral reason: it is stealing and bank fraud. You go to jail if you are caught; it’s a nice jail (Devons or Danbury), but it is still jail.
Welcome back to Attorney Richard D. Vetstein. Today, he looks at the wild world of short sales to tell buyers what they can expect...
A short sale is special type of real estate transaction between a homeowner, his mortgage holder, and a third party buyer. In a short sale, the homeowner’s mortgage company agrees to take less than what is owed on the outstanding mortgage, thereby being left “short.” In some but not all cases, the lender will agree to wipe out the entire debt. Many people believe that short sales offer bargain basement prices, but lenders will do their best to get as close to fair market value as possible so as to minimize their loss.
Short sales are a unique type of transaction and far different from the typical transaction between parties of equal bargaining power. Likewise, the legal aspects of a short sale are unique.
A “short sale” is typically the sale of a property by a seller that cannot continue to pay his monthly mortgage(s) and cannot sell the property for enough money to pay off his mortgage balance(s) in full. In a “short sale” the seller must ask his/her lender(s) to take a loss on the mortgage(s) in order to allow the seller to sell the house and move on. The seller’s lender(s) will accept a discounted mortgage payoff and usually forgive the seller’s debt. Buyers, sellers and their agents need to know that lenders have the last word in accepting an offer and final purchase price even after the seller “accepts” an offer.
Lenders might agree to short sales when it’s obvious that they will probably never be able to get paid the full amount of the mortgage balance and it is cheaper and faster to agree to a short sale. (Maybe the seller lost his job or had serious illness that prevents continuing mortgage payments. Maybe the value has declined substantially.) If the seller can’t pay off the mortgage from sale proceeds, the choices are: foreclosure or short sale of the property.
Most people think that short sales are automatically granted but that is not true. In order to grant short sale permission, lenders typically consider two things: the seller’s financial situation and the property’s market value.FULL ENTRY
When Jenifer McKim wrote about bidding wars ignited by the coming tax credit deadline, she quoted my friend and colleague Pat Magnell. Pat and I are both on the Board of Directors of the Massachusetts Association of Buyer’s Agents. Jenifer wrote that Pat said this:
Pat Magnell, a real estate agent with Buyer’s Choice Realty in North Andover, said she is surprised by the number of people who are only now deciding to look for a home because of the federal incentive. Although the credit is attractive, Magnell said, it should not drive such an important purchase.
Yet, it seems like the $8000 is burning a hole in too many pockets.
Buyers need to have their accepted Offer to Purchase and Purchase and Sales Agreements well in advance of the November 30th deadline. If you find a property too late, you will not be able to get your mortgage approved and cleared to close before the deadline. So how late is too late? I am beginning to hear rumors that so-and-sos competition will not promise to close by the deadline. But, to date, no lenders have told me that it is already too late.
Welcome back to Attorney Richard D. Vetstein. Today, he explains the new FHA regulations and how they will put more obstacles in the path of would-be condo buyers.
Under revised guidelines set to go into effect November 2, 2009, the Federal Housing Administration (FHA) is implementing a new stricter approval process for condominiums to be eligible for FHA financing. Similar in some respects to the new Fannie Mae regulations issued earlier in the year, the FHA guidelines will surely slow down condominium mortgage financing, and negatively impact first time home buyers for condominium units.
For those who don’t know, FHA is a government program designed to help more people buy homes, and more borrowers will qualify with FHA financing than with conventional financing. It is a low down payment (3.5% down) program and the credit standards are much looser. The mortgage rates are typically better, as well.FULL ENTRY
Sam Schneiderman, Broker-owner of Greater Boston Home Team continues his Monday series. Last week, we discussed the concept of an “exit strategy” when buying a home. That means that before you get into the house, you need a plan to get out of the house. Kind of like a pre-nuptial agreement for your home.
Part of that “exit strategy” should include planning for how much the mortgage balance will be when it’s time to sell. That means that the mortgage should be integrated into the exit strategy and home ownership plan. While it’s nice to have the lowest possible payment, it’s also nice to have the lowest possible mortgage balance left to pay off when it’s time to move on. If someone buys a home at age 40 and plans to retire at 65 and continue living in that home, it seems to me that a 25 year mortgage makes more sense than a 30 year mortgage.
For as long as I can remember, thirty years has been the “standard” length of most mortgages. Lenders advertise fifteen year mortgages, but most people are not aware that mortgages of any length are available. The shorter the loan term, the lower the rate and the faster the principal balance will decline. The longer the term, the higher the rate and the longer it takes to begin making a significant reduction in the principal balance, but the monthly payment is lower. When values were rising rapidly, there was discussion about whether 40 year mortgages made sense to keep payments more affordable.
Lately, I’ve been wondering if it’s time to retire the thirty year mortgage since most people don’t stay in their homes beyond 10 years. With the high cost of college, many middle-class families sell their homes (which they probably shouldn’t) in order to pay for college. At the most, those families probably only live in their homes 15-20 years. A shorter mortgage term would give them more equity when they sell.FULL ENTRY
Struggling homeowners seeking relief from banks and other lenders on their mortgages have too often been plunged into a bureaucratic nightmare.
Particularly mind boggling are mortgage servicers who plunge ahead with foreclosure filings, and then, when called on it my activist groups, say they have no power to stop the proceedings since they don’t own the real estate!
Now it appears the legal system may slam the brakes on this runaway corporate train wreck.FULL ENTRY
It’s been real quiet – too quiet in fact – on the shady real estate lending front.
The collapse of the subprime industry may explain some of it. Still, you have to wonder what happened to all those aggressive brokers made a killing signing home buyers onto high-interest rate mortgages they couldn’t afford.
After all, they didn’t go to jail. And the rare few who faced any sort of civil penalties likely brushed them off as a cost of doing business.
According to new report by the Boston-based National Consumer Law Foundation, questionable brokers and their sleazy subprime tactics have found a new home in the reverse mortgage business.
Brokers with “perverse’’ financial incentives are aggressively selling reverse mortgages to elderly home buyers, and possibly misleading seniors in the process, the report finds.
I welcome readers from the print edition of The Boston Globe. Some of you may be here for the first time.
My entry that was noted at the bottom of Jenifer McKim’s article today is this one.
(Boston.com online readers were sent right to it, but newspaper readers would need to scroll down a bit to find it.)
I have been writing about this $8000 credit since February, when I explained how to calculate adjusted gross income to be sure you qualify for it.
I explained how the credit works.
I posted another resource about how it works in April.
I got some great responses to my post about underwater homeowners who walk away.
Not long ago, they would have been called “deadbeats’’ by some. Now they have a much more respectable name, “strategic defaulters.’’
But let’s put the moral question aside for a moment.
The cheerleaders for walking away like to pitch the idea as a hard-headed business move.
In a world where major corporations gin up their stock prices with layoff announcements, homeowners who do the math and walk away are simply protecting their own interests with the same, steely resolve, or so the argument goes.
After all, your credit report turns over every seven years. So it’s just a simple matter of doing the math and figuring whether it makes more financial sense to stay or go, or so the pro-walkers contend.
There’s no real financial disincentive to walking and moral arguments against it are “naïve,’’ writes “Tim,’’ who I quote below.
Last Monday, we began a discussion about market forces to consider when buying.
I asked two questions:
1. Based on a good look at the indicators, do you think that timing the market is really possible?
2. Should buyers and sellers try to time the market or just move when they are ready?
Overall, those that answered the questions were balanced between those that thought the market could be timed and those that thought it could not. If our small survey is correct, then Lai was correct when she said:
“I find people who said the market will bottom in next 12 months and people who said the market will crash 20% in next 12 months equally overconfident about their opinion. We just don't have that crystal ball.”
There were also those that were buying or in the market because they were ready or needed to at this stage of their lives and they could get a mortgage they could afford. I agree with John, who said,
“There is really only one factor that drives home prices and that is the ability of a person or household to service the mortgage debt (and all other related household expenses). The ability to service the debt in turn, is tied to wages, interest rates and credit availability.”
What surprised me is that there was not much talk about prices vs. interest rates.FULL ENTRY
That’s a fancy sounding name for the latest trend in the nation’s troubled real estate market.
It refers to homeowners who choose to walk away after finding themselves underwater in the worst real estate downturn since the Great Depression.
Now a new study is shedding some additional light on this trend – and it sure isn’t pretty.
Let’s just say the folks who are doing this are from fitting the stereotype of the struggling homeowner battling just to make ends meet.FULL ENTRY
It looks like jumbo loans, if not back, are at least getting a little more palatable.
The Globe reports the gap between jumbos and conventional loans has fallen by half, down from two percentage points to one.
And that should be good news for the high end of the market, with any mortgage above $523,750 thrusting the buyer into jumbo territory.
The shift comes after a couple years in which both would-be buyers and lenders considering whether to issue a jumbo mortgages were increasingly wary of taking on such out-sized loans,
The mortgage industry helped plunge our country into the worst downturn since the Great Depression, writing millions of hideously bad loans.
As foreclosures have steadily mounted over the past few years, a host of state and federal initiatives have given the lending industry chance after chance to start repairing some of that damage.
The response has been corporate bureaucratic stonewalling that would put many a government hack to shame.
So I don’t have a problem with U.S. Rep. Barney Frank’s new, get-tough approach with the mortgage industry.
The chair of the powerhouse House Financial Services Committee has put the mortgage business on notice that there will be some consequences if it doesn’t start embracing loan modifications for struggling homeowners.
If the foot dragging continues, Frank has warned he will attach an amendment to financial overhaul legislation that would give bankruptcy judges power to do dreaded cramdowns.
Richard D. Vetstein, today, he explains a legal case regarding foreclosure:
In late March of this year in the case of U.S. Bank v. Ibanez, Massachusetts Land Court Judge Keith C. Long issued one of the most controversial rulings in recent years which has called into question hundreds if not thousands of foreclosure titles across Massachusetts.FULL ENTRY
In the Ibanez case, the Land Court invalidated two foreclosure sales because the foreclosing lenders failed to show proof they held ownership of the foreclosed mortgages through valid assignments. In modern securitized mortgage lending practices, the ownership of a mortgage loan may be divided and freely transferred numerous times on the lenders’ books. But the documentation (i.e., the assignments) actually on file at the Registry of Deeds often lags far behind. The Land Court ruled that foreclosures were invalid when the lender failed to bring the ownership documentation (the assignments) up-to-date until after the foreclosure sale had already taken place.
The Ibanez decision has called into serious question the validity of any pending or completed foreclosure where the lender did not physically hold the proper paperwork at the time it conducted its auction. The mortgage industry has criticized the decision as form over substance. The judge is presently reconsidering the ruling, but whatever the outcome, the case will likely end up before the Massachusetts Supreme Judicial Court given its far-ranging impact.
This entry is about the practical implications of mortgage appraisal. It is about why you need to care about “failed” or “bad” appraisals. I wrote about appraisal in June, but I am finding that the buying public still does not know that it costs them money to make an offer on a place that will not appraise for their asking price.
How it works:
After the buyer and seller agree to a price, the buyer needs to get a mortgage for the sale price minus their down payments. The lender must establish that the value of the property is sufficient to cover the debt. The appraiser works for the lender and the lender’s investors to set a value on the collateral house. The appraiser and the lender should not care a whit about the buyer, the seller, or the brokers.
In most cases, the appraisers can find recently sold properties that work well to establish the value. With good comparable properties, the appraiser stands on solid ground to state a value for the lender. When the comparable sales don’t exist, the appraiser has to look farther away and longer ago. The numbers get sketchy.
There’s a lot of confusion out there about the foreclosure crisis.
I remember editors at one paper I worked for seeking in vain a suburban counterpart of battered, boarded up and foreclosed Hendry Street in Dorchester.
Anyway, I am sure there was a lot of salivating over potential headlines, Wellesley’s Foreclosure Alley and things of that sort.
Of course, it turned out to be the El Dorado of foreclosure stories.
The fact is, you are not going to find a bunch of Hendry streets out in the suburbs, especially in towns like Wellesley and Weston, where foreclosures, while hardly unknown, are not a huge problem.
Anyway, I remember trying to explain in vain the idea, that, at least here in Massachusetts, the vast majority of foreclosures are taking place in low income areas that were flooded during the boom with crazy, high-risk subprime loans.
I might have better luck had I been able to roll out this nifty, new graphic just released by the Boston Fed detailing foreclosure trends in Massachusetts since 1990.
Financing is available to those that can satisfy a lender’s standards and answer all of the lender’s questions. Here’s a story seen on a couple of blogs to illustrate the point:
Supposedly, a Louisiana man hired a lawyer for help with an FHA loan. The client was informed that his loan would be granted if he could show clear title to the property.
The lawyer researched clear title dating back to 1803. He forwarded documentation to the FHA. They responded as follows:
“Upon review of your letter adjoining your client's loan application, we note that the request is supported by an Abstract of Title. We must point out that you have only cleared title to the proposed collateral back to 1803. Before final approval can be accorded, it will be necessary to clear the title back to its origin.”FULL ENTRY
H and L faced the prospect of selling their condo, but found another way. They are a lot like other young college educated adults. They are hard workers and good planners. They are 27 and 28 years old. They are willing to make compromises in order to not go backwards on their life plans.
L is still in graduate school. H is now out of full-time work and going back to school. Their combined student loans are $250 a month, so far. That is better than average. Finaid.org lists near $93,000 as average debt for H’s degree and $40,000 for the one the L is pursuing. One of the compromises that H made was to go to a less prestigious professional school. That is one of the bars to his ability to get another high-paying job now. Compromises have consequences.
OK…back to how they kept the wolves from the door of their condo:
They are renting it and moving to a cheaper place. Kudos to those who guessed right last week.
H and L nearly lost their condo this summer, when H lost his job.
They bought in the summer of 2008. They had just returned from living abroad and were living in a sublet. Not a living soul wanted to rent to a young family with a newborn and a pre-schooler. The place they sublet didn’t have a functioning toilet. Life was pretty tense…
They had saved a 20 percent down payment based on H’s professional job. They were able to spend far less than the 31 percent their lender would allow, so they would be able to continue saving while paying the mortgage. It seemed like the right time to get out of the rental market with their children.
Now it seems that another job like H just lost is not going to come around again in the current economy. He needs to get some more education so he could sell his skills in a lower-paid, but saner, part of his field. That will require a year or two of much lower-paid work while going back to school.
National Association of REALTORS® , NAR, surveys its membership pretty often. Frequently, the results seem predictable to me. (Like questions about how we think the market is doing.)
The results a recently of a recent NAR survey had some curious data. The survey was about changes due to the Home Valuation Code of Conduct (HVCC). I suspect that there is a bias here due to the voluntary nature of the survey. (My guess is that those who responded are those who are experiencing issues regarding these changes.)
For me, in my little Cambridge office, I have seen no change in appraisals. No increase in time, no increase in price. I answered the survey, and I find myself in the minority. NAR also has members who are appraisers. So, there are responses from agents as well as appraisers.
The respondents to the survey say that since May 1, 2009:FULL ENTRY
Ohio Attorney General, Richard Cordray, filed a joint lawsuit with the Ohio Department of Commerce against Carrington Mortgage Services, LLC. The lawsuit alleges that Carrington breached its agreement with the state to offer reasonable loan modifications to eligible borrowers. The lawsuit also alleges that Carrington violated Ohio's Consumer Sales Practices Act by providing incompetent, inadequate and inefficient customer service in connection with its servicing of Ohio mortgage loans.
"This lawsuit makes it clear that we have reached zero tolerance for this kind of behavior from loan servicers," said Cordray. "We've tried to work with them, but now we must take action. I am determined to see that mortgage servicers step up, take responsibility and start making it right with Ohioans. No more excuses."
Ohio is the first, filing on July 31st. It may not be the last. New York’s attorney general, Andrew Cuomo, published a report about bank exec bonuses. The New York Times covered the story of bank execs and their bonuses during the crisis.
“All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion.”Attorney General Cuomo said he was particularly galled because the bonuses were given out by banks who survived the crisis because of government funds. FULL ENTRY
I had a conversation with a listing agent whose seller is insisting on a price that has no basis in current comparable properties. Partly, it is an odd-duck kind of place. Partly it is over-improved (that means that it is too nice for the building and the neighborhood.) Partly, the sellers bought it at peak.
My buyers like this place. When I did my CMA, I could not justify the price. Not even close. I asked the listing agent what he was thinking. He gave me comparables in a totally different neighborhood (it would be like comparing Jamaica Plain to Back Bay.) When I said that the comparables don’t work based on location and an appraiser would know that, he reminded me that the appraiser may very well be clueless about this location issue.
He might be right about that.
Neil Barofsky is the Special Inspector General (SIG) for Troubled Asset Relief Program (TARP). He is also a former prosecutor. Being a lawyer and being a prosecutor makes him someone who is going to be suspicious until innocence is proven. That, IMHO, makes him a good man for this job.
So, what’s his job? To follow the money handed to the lending institutions for lending. He has to follow the money without looking at the books. His most recent report says that 80 percent of the lending institutions say they have use the funds to support lending. Of the 364 institutional lenders surveyed, more than 100 spent on residential mortgage loans. Sixty-one more claimed to support other forms of consumer lending.
The information is not verified by a look at the books (since Mr Barofsky, our SIG, doesn’t have the authority to do so.) Banks are required to give all lending data on a monthly basis. But that’s not enough to end the questions. Mr. Barofsky wants more transparency. “The program itself and American people’s view of the program suffers when there’s this sense that the money is going into a black hole.” That’s what Barofsky told NPR yesterday.FULL ENTRY
Really, what took these guys so long to start asking some pointed questions?
That’s my reaction to the news that some in Congress are starting to get ornery about the absurdly slow pace of the nation’s foreclosure rescue programs.
Members of the Senate Banking Committee took aim last week at the Obama Administration, angered over the painfully slow progress of the president’s much touted, $50 billion foreclosure prevention drive.
The money, as you may recall, goes to lenders in various incentives to prod them into modifying mortgages and prevent yet more foreclosures.
But after months of efforts, just 160,000 homeowners have had their mortgages modified – hardly enough to start putting a dent into the nation’s foreclosure rate, which continues to skyrocket.
“Pathetic’’ was the word used by Sen. Christopher Dodd, (D-Conn.), chairman of the Senate Banking Committee, to describe the lack of results in the government’s battle to stem the rising tide of foreclosures.
A month ago I wrote about my client’s quest to get a re-appraisal for her refinance. Well, she did just that and she got the loan she wanted. She writes:
Hi Rona, What a difference a few weeks make! I called the appraiser and told him what our situation was, and he was open to doing a new appraisal after [property address A] closed (for an additional fee of his labor expenses--$150) using new comps that post-dated the effective date of the previous appraisal. The bank decided that since we had originally gotten an exterior only appraisal, they would order up a full appraisal which would allow them to use the new number without any difficulties stemming from re-doing the appraisal. The appraiser came out last Friday, and used 3 new comps (not [property A], which still hasn't closed), all of which had closed in the past couple of weeks. New value: $512K, a difference of $42K. Unbelievable. FULL ENTRY
Remember those broken promises? Shaun Donovan told a room full of Realtors that buyers would be able to get their $8000 credit at closing. Then the back peddling two days later. Then, Shaun was at it again, promising the National Association of Homebuilders.
Well, the mischief has been managed by the Commonwealth today. [the link is https, so your browser may object]
First-time homebuyers who use MassHousing loans can now have their $8000 tax credit up front. Payback is due by June 1, 2010.
Here is the first set of details:
I love that line, which comes from a New York Times piece on the now absurd degree to which banks have tightened mortgage lending standards.
After years in which all sorts of fraudsters and folks with little or no income were able to walk away with out-sized mortgages, banks seem determined to reject any and all mortgage applicants now, including those who are pretty obviously solid credit risks.
The “stuck at stupid’’ line, which sums up perfectly the shift from no standards to a paranoid pat-down of all potential mortgage applicants, is offered by the owner of a Colorado mortgage bank.
OK, just when I am throwing my hands up in the air over hapless mortgage rescue programs, Congressman Barney Frank comes along with a pretty good idea.
It’s pretty clear the battle to save struggling homeowners stuck with crazy subprime mortgages is over.
Maybe not an abysmal failure, but given they skyrocketing foreclosure rates, it’s hard to see how these rescue efforts have made much of a difference.
But a second wave of foreclosures is building, this time among homeowners with traditional mortgages who are in danger of being chewed up by this meat grinder of a recession.
Is it time to pull the plug on some of these wonderful sounding, and frankly pathetically ineffective, mortgage rescue efforts?
The past two years has brought one dramatic announcement after another of big new government initiatives to curb the rising tide of foreclosures.
Each one sounds great, with a big price-tag to boot, a few hundred million here, a billion there.
President Obama’s newly launched drive to give $75 billion to banks and financial institutions to modify the mortgages of struggling homeowners is just the latest in a long series of such efforts.
But a recent Fed study, detailed in the Globe, raises some serious questions about whether the Obama effort and the myriad of other programs like it stand much chance of even putting a dent in sky-high foreclosure rates.
Here’s a good sign for the battered upper reaches of the real estate market.
It’s too early to say the market for jumbo loans is back, but the nation’s biggest banks are once again showing an appetite for such outsized mortgages, Bloomberg reports.
That’s good news given the jumbo lending shrank to $98 billion last year, down from $348 billion in 2007.
JPMorgan Chase & Co. has resumed buying jumbos from other banks while Citigroup has again begun offering jumbo mortgages through independent brokers.
In hopes of better protecting the consumer, our government has changed regulations that govern residential mortgages. I heard from Jill Buzny at Wells Fargo Mortgage about the changes that are afoot:
These changes are meant to protect consumers by not allowing lenders to charge fees until the application is completed, requiring that the consumer gets a copy of his/her appraisal in a timely fashion, and requiring that the Truth in Lending Statement be accurate and presented in a timely fashion to the buyers.
As these changes come into practice, expect delays in your loan processing. There will be times when the time-table will need to be shifted back because consumers need to get information before they can be charged for application fees (delaying the application), and closing may be delayed to give consumers ample time to review their appraisal and to get a correct Truth in Lending Statement.FULL ENTRY
A client of mine wrote me about her refi:
So, the question: we are in the midst of refinancing, and the appraisal has come in low ($470K). Got any advice on challenging an appraisal? Also, there are 2 potential comps on the market right now. Both are Sale Pending. One was listed as a comp but not weighed in the result, as far as I can tell (I assume because sale hasn't closed). The other was not considered, perhaps because it wasn't yet UAG as of the time the appraisal was done last week. I know they won't necessarily turn out to be helpful, but is it ever possible to find out from a seller's agent when the closing is supposed to take place, and even what selling price was agreed on? I think we have enough cash to basically repay a bunch of the principal and take a much smaller refi loan, but we'd prefer not to have to do that. If we can bump the appraisal up by even 20K, that would make a big difference.
This question brings up two things that I have been thinking about bringing up, here at Boston.com:
1. Should you time your refi, so that you can take advantage of the higher prices that show up in the spring?
In every market, bear and bull, the housing prices around here are higher in the spring and early fall, relative to the rest of the year. When the prices were double-digit inflating, it was harder to see. But even then, summer and the dead of winter were still the times for the lowest prices.
Even now, prices are going up in several towns compared to last winter’s sales. They are likely to go down as the year goes on. This happened last year, too. Many towns showed price gains in the first half of the year, but fell overall in 2008.
Has anyone had luck with timing their re-fi appraisals?FULL ENTRY
Last Friday, Rona touched on the risks that buyers take when lenders continue to review the loan documentation after issuing a commitment.
A mortgage “commitment” is a letter from a lender that is supposed to bind them to lend money secured by real estate. Note the word “commitment”. In my opinion, a commitment letter is like a marriage contract. The parties should expect loyalty without any ifs, ands or buts.
There are conditional and “clean” commitments. Simply put, conditional commitments contain clauses that give the lender a way out of funding the loan (a/k/a weasel clauses like “subject to MFHA approval, PMI company approval, or investor funding of the loan…”). “Clean” commitments contain only common conditions (like requiring good title and insurance) that also protect the buyer’s interests.
There is the practice among some lenders to issue conditional mortgage commitments (that they will not update) and continue to request paperwork from the borrower, causing closing delays and putting buyer’s deposits and rate locks at risk. Since few borrowers understand this, thorough buyer’s agents and attorneys monitor mortgage commitment dates and review commitment letters to protect their clients’ deposits. They also know that buyers should work with reputable lenders that adhere to dates and issue clean commitments.FULL ENTRY
Appraisal discrepancies… That’s broker-speak for “the house is not worth what the buyer wants to borrow on it. The investor will not cover that mortgage.” Jenifer McKim reported on this for The Boston Globe this week.
Usually, appraisal discrepancies happen when a market is going up. Let me explain:
Let’s use something fairly perfect: condos in the same building that are the same size. They should be worth about the same, unless one has over-improved the interior with some over-the-top kitchen or flooring. There will be slight variations for view and balconies, but let’s pretend that none of the views are much and everyone has the same balcony. Also, let’s say we are in 1999.
Condo one sells for $279,000 in January and closes in February. Condo two sells in February for $282,000; closes in March. Then the spring market hits. Everything in the town goes up 10 percent. February 15th, condo number three comes on the market at $299,000; March 1st, condo four comes on at $309,000. March 15th, condo five comes on for $319,000.
Some buyers start condo shopping in March. They see $299,000 as a bargain, compared to $309,000 and $319,000. Even if they looked at the properties that recently sold, this was 1999; buyers were more resigned than I was about accepting the presumption of an annual price increase.
Sometimes the first condo after the increase didn’t appraise. Rarely, the second one wouldn’t. The third one had no problem. That was the reality when the market was kicking up.FULL ENTRY
Appraisers have gotten so conservative they are getting blamed by unhappy borrowers who can’t get loans and folks in the mortgage business for killing sales inflicting more pain in a miserable market.
The new appraisal – a stunning $250,000. Needless to say, it’s goodbye to their hopes of refinancing their mortgage and saving $400 a month
A fellow broker met me at a property all stressed-out because a last minute closing snag. The buyer and the seller were ready to buy and sell, respectively. It was the lender that was the fly in the ointment. She bought up a perspective that I had not thought of before. Does the way the staff members are paid influence the service at a lending institution?
Never, ever work with ____________! Their loan department are all on salary. They couldn’t give a darn whether the loan gets processed on time or not. It took six weeks to get the loan commitment. Now, the day before the closing, they have a list of papers they want from the buyer…
I don't see the commission system as more motivating than salary work, but then again, I have put up with the commission system for years. Could it be that salaried workers don't care as much about whether the job gets done?FULL ENTRY
Thanks to this blog, I have found something of great value! I have found a lender who really knows his way around FHA loans. Robert Summers does FHA 203K loans (those are the ones with repair funds built in) and he does them successfully. He commented when I wrote about FHA 203K a few weeks ago.
I asked him what the most important benefits of are for borrowers:
Thanks to Connecticut Attorney General Richard Blumenthal it looks like we are about to get a glimpse at the inner workings of the foreclosure business.
And if preliminary indications are anything, it is not likely to be a pleasant view.
HUD Secretary, Shuan Donovan is at it again. On Friday, he told the National Association of Home Builders that FHA will be allowing borrowers to use their $8000 tax credit at closing toward down payment and closing costs.
Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate.
This time, it looks like it is for real.FULL ENTRY
Foreclosure, in this recession, has been a lose-lose scenario. Lien-holders make the re-purchase of short sales and foreclosed homes just not worth it to potential buyers. Buying a property as a foreclosure or a short sale* has been an exercise in patience, at best. It is most often an exercise in futility. You would think that lenders would streamline the process in order to get the properties off their hands…
In the step-in-the-right direction department, the Making Home Affordable Loan Modification Program has been modified to favor short sales for defaulting homeowners who can’t keep their places. If this actually works, then the lenders will take a hit (your tax money at work, finally), the defaulting homeowners will lose their homes, and someone can actually buy the properties and get them reoccupied.
Foreclosures are expensive; short sales are faster and yield higher return of equity to the lien-holder and possibly the defaulting homeowner.
Before starting foreclosure, servicers must determine if a short sale is appropriate.
There are incentives to avoid foreclosure option in favor of the short sale:
(1) $1,000 for servicers for successful completion of a short sale or deed-in-lieu of foreclosure;
(2) $1,500 for borrowers/homeowners to help with relocation expenses;
(3) Up to $1,000 toward the cost of paying junior lien holders to release their liens (one dollar from the government for every $2 paid by the investors to the second lien holders).
(4) No commission haggling between brokers and lien-holders.
(5) No fees to borrowers/homeowners for participating.
The problem with comparing mortgage rates before you have a property is that rates are a moving target. One day, Lender 1 will have the best program for you, and the next day it will be a different one. The lenders get hundreds of loan packages every day, and each one is a little different. They have to sort through them to find the best one for you. Most lenders pay most attention to the ones they usually use.
It is not in your interests to lock a rate until you have a signed P & S because there is a time-limit on the rate lock. It costs extra to extend it.
So how can you rate shop without stressing yourself out by picking a lender at the last minute?FULL ENTRY
Prices are starting to fall in some of the Boston area’s more expensive suburbs and resorts, from Weston to Nantucket.
But how much of this new trend can be traced to jumbo loan blues?
It’s a question raised in a new National Association of Realtors report, which finds that sales of homes above $750,000 have fallen by roughly half from 2007, Inman News reports.
Remember that promise that Shaun Donovan, HUD Secretary made at the Realtor mid-year meeting on Monday? The one about that the $8000 tax credit being made available for down payments? Well, the promise is broken.
I got this notice from NAEBA headquarters this afternoon:
According to contacts with both FHA and HUD, Mortgagee Letter 2009-15, which stated that first-time homebuyers would be allowed to use the tax credit for their downpayment, has been rescinded. On a phone call with FHA, Kim Kahl was told, "The mortgagee letter has been rescinded for the time being.” NAEBA President John Sullivan was told something similar when contacting HUD. Neither FHA nor HUD gave further details.FULL ENTRY
Soon, FHA's approved lenders will be permitted to "monetize" the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table. Shaun Donovan, HUD Secretary said yesterday,
We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a downpayment.
This is not really news, yet.
I got this email from S. He is going through loan processing heck:
… I was wondering what light you may be able to shed on the FHA 203k loan program. I was scheduled to close one of these loans on April 15th, but as of yet I haven't. The paper work needed is absolutely ridiculous. I am self-employed and have provided every necessary document needed. My recent fico score is 806 and I have stellar credit. What is MIP insurance and why does it cost over $5,000 up front? I feel the lender is taking advantage of me.
I have done numerous FHA loans, but no 203Ks; I haven’t had any clients who were willing to do what it takes to get one. I feel for S., because I have been frustrated, along with my buyers, by delays in FHA loan processing.
So, I asked my usual sources about them. All of the lenders agreed that they are not for the impatient borrower. For any loan, if you are applying at a busy time, like now, the lines are longer. (Think: Disney at school vacation week.)
FHA loans take even more time, the underwriting seems endless, and the paperwork could kill a forest. The consensus is this advice: if you are going to apply for a 203K loan, find a lender who does them on a regular basis. Like all FHA products, the process is different and it takes some experience to know where the traps are. If you barrel in without proper guidance, you will end up stuck for weeks, waiting for the next list of paperwork the underwriter asks for. Someone who works with FHA, and particularly FHA 203K, can anticipate the problems and help your prepare properly and avoid some of the delays.
Ask your loan originator for a time estimate. Ask how many of these loans he/she has completed.
Attorney General Martha Coakley has managed to wring $60 million out of Goldman Sachs for its role in subprime mortgage mess.
I am sure it wasn’t easy, but don’t expect those Wall Street types to be running for cover.
Goldman, like other Wall Street firms, made a lot of money securitizing subprime loans and selling them to investors.
We all know how that worked out.
Anyway, while $60 million may be a lot to most normal people, it’s lunch money on Wall Street
The conventional thinking is that a major driver of the foreclosure crisis was gullible, or worse, home buyers.
Folks so desperate to attain a piece of the American Dream they stretched well beyond their financial means to become homeowners with the help of subprime loans.
Certainly there was a good amount of that going on. But my sense is that many of these loans were so crazy that, in more than a few cases, otherwise good home buyers were left holding a ticking mortgage time bomb.FULL ENTRY
Whenever I mention Private Mortgage Insurance (PMI), the insurance that covers the lender against your default, readers get confused. Where is the insurance that covers us, if we can’t pay our mortgage? There are such programs for auto loans. Does such a thing exist for mortgage loans? Yes, Virginia, it does exist.
I have been reading about Toll Brothers. They are offering mortgage payment insurance for buyers who lose their jobs or have medical emergencies. Other builders and large companies have similar programs. The insurance covers up to $2500 of your mortgage if you can’t pay it for legitimate reasons. How great is that?
Toll Brothers currently have projects in North Attleboro, Bolton, Hopkinton, and Methuen.
No, Virginia, there is no Santa Claus… Before your sign on to something that sounds too good to be true, please be cynical with me. There are conditions, as you would expect.
As Kenneth Harney put it in the San Francisco Chronicle:
From a consumer perspective, job-loss protection - insurance coverage worth up to $15,000 (six months times $2,500 maximum) of monthly mortgage debt - sounds like a no-brainer. But there are some things you need to know about up front: -- Though there's no direct cost to the buyer, that doesn't mean it hasn't been tacked on subtly somewhere in the deal - possibly in the price of the home. -- There are key exclusions and coverage limits. For instance, the Rainy Day program doesn't kick in for two months after closing. Self-employed persons, independent contractors and active military members are not eligible. There's a 30-day waiting period after you lose your job before the first insurance payment is made. -- The Toll Bros. plan is available only to buyers who use the company's affiliated lender, TBI Mortgage Co. Borrowers who know of a coming layoff or "any impending job loss" are ineligible. The program excludes loss of income through voluntary resignations, "willful misconduct" and seasonal shutdowns. Bottom line: Even when it's "free," read the fine print.(Thank you, Kenneth.) FULL ENTRY
Subprime mortgage companies made a ton of money with deliberately confusing products that helped push many customers into foreclosure.
Amid the public disgust over the shady tactics of these subprime wheelers and dealers, is there a market for a mortgage operator who spells out all the costs up front, as clearly as possible?
In an interesting move, Bank of America appears ready to test this idea.
The banking giant acquired a potential powder keg of subprime problems when it bought troubled mortgage giant Countrywide last year.
Not surprisingly, Bank of America is ditching the Countrywide name as it promotes its Bank of America Home Loans mortgage unit.
Less typically in an industry that seems intent on confusing borrowers to their detriment, the bank is embracing a new campaign of cost transparency for mortgage customers.
I wrote about why your pre-approval letter should be clear, but not give away your personal finances.
BV mentioned a tactic that I used for years. That is: have a pre-approval letter tailored to the offer amount. But, BV ran into a problem with this:
In essence, we got preapproved for the offer price we wanted to make. The seller called the broker and asked it would be approved for more before rejecting our offer and asking for more.
Were I BV’s agent and I got a call from the listing agent about whether the pre-approval was their top financing level, this is what I would do:
I would have called BV. I would have passed the information that the seller is trying to make a counter-offer. Do you want to stick with your current offer, or do you want to give room for a counter-offer? The choice should be up to the client, not the agent. I honor that.
I used to recommend having the pre-approval letter match the offer price. However, the problem I saw was a variant on what BV experienced. A while back, some seller’s agents didn’t ask if the pre-approval was the top financing; instead, she rejected my client’s offer and counter-offered to another buyer. She thought, incorrectly, that my client could go no higher.FULL ENTRY
Remember PMI? That’s Private Mortgage Insurance. That’s the fee you pay every month to protect your lender in the event that you default. Humm… Why would anyone want to pay PMI?? Well, if you and the property don’t qualify for PMI, you don’t get a loan with less than 20 percent to put down.
This PMI waiver is not a waiver of the fees; it is a change in guidelines. In plain English, this means that people can still get a regular loan at a regular rate with 5 percent or 10 percent down. This avoids the additional point in rate that has been tacked on for borrowers lately. For some, this change is a ticket back into the market. If you have less than 20 percent to put down, but you have enough income to qualify for a conforming loan, you are no longer locked out. A conforming loan requires no more than 45 percent for total debt (that’s mortgage debt and all your ongoing installment and revolving credit debt.) This is good news for people with solid income that do not want to put all their savings into a house. In short, PMI guidelines are now getting back in sync with conforming loan lending requirements. Borrowers must meet all regular underwriting guidelines in regards to acceptable credit, credit scores, number and length of active tradelines on the report, job history, income assets and acceptable source etc. So, this is not a ticket back into the market for people who can’t pay their mortgage. If you do not meet the 45 percent total debt ratio, you cannot wiggle into a low equity loan.FULL ENTRY
As I learned more about real estate and investing, I learned that sometimes a seller will participate in financing the sale of a property if they have sufficient equity. Some will finance the entire sale after the buyer pays an acceptable deposit. Some will give the buyer a second mortgage with favorable terms. When sellers offer financing, a savvy seller or listing broker can use seller financing as a negotiating tool to get a higher price.
Seller financing is most commonly used with investment property and in sales between family members. It can be used in any transaction, provided that it is disclosed to the lender up front. Some banks will provide financing on a short sale or a foreclosed property that they are selling, while others refuse to finance that property ever again.
In a low interest rate environment, some sellers find it attractive to collect a higher rate of interest on a second mortgage than they could collect with a CD or bank account. In a high interest rate environment, some sellers offer low rate financing to make their properties more competitive and attract more buyers. When financing can be tough to get or a property needs significant work before it can be occupied or rented, long or short-term seller financing can keep a deal together.
Personally, I have used seller financing to purchase investment properties with little or no down payment. Since most lenders require PMI (Private Mortgage Insurance) for financing above 80% of the purchase price, I negotiated seller financing to make up the difference between my down payment and the amount needed to avoid PMI or meet loan program requirements. I favor seller financing with deferred payments that don’t start for a year or more.
It was absolutely ludicrous how easy it was for even third-rate scam artists to make money during the real estate boom.
Buy a couple run-down triple deckers in Dorchester, do a quick paint job and then recruit a few dopes to act as straw buyers. With a little help from a crooked mortgage broker, make up some jobs and income, find a more than willing sucker among the herd of subprime mortgage companies eager to keep loans flowing, and “sell’’ all three units, say, for $350,000 each.
Walk away with more than $1 million in your pocket, minus maybe a couple hundred grand for buying the property.
Now, with mortgage fraud cases popping all over the country, you have to ask where are all the high-profile Bay State cases?
On the credit card commercial, the saying is “what’s in your wallet?” I ask, “what’s in your pre-approval letter?” Does it say too much or too little?
Pre-approval letters are standard equipment for any buyer making an offer. Any seller will ask for proof that you can get your loan. I get a lot of questions about pre-approval and pre-qualification. The problem is that those terms have lost their meaning. A pre-approval, in my book, involves a review of all your financial information and its verification. If possible, I also like the mortgage originator to talk to an underwriter about anything that is not typical. That way, no surprises.
Next, your letter should say as little about your finances as possible, but say boldly, that your personal finances are in order.
Here’s an example:
“Based on the information you provided, you are “pre-approved” for your purchase of up to $_____ with a $____ mortgage amount. This is based on your current level of income, credit and assets, as well as prevailing interest rates.”
Is that good enough? It says that the lender knows your current income, credit and assets. This does not say that they have been verified. It does say what your expected loan amount will be. I’d give it a B-.
“I am pleased to tell you that based on the information that you have provided, you have been pre-approved for a purchase price of $_____. We have verified and approved your credit, income and assets. A final commitment is subject to a fully executed purchase and sales agreement, a satisfactory, certified appraisal and underwriter review. “
This one is a B+/A-. There is no loan amount or percentage of down payment expected. It does clearly state that you financial information is already verified.FULL ENTRY
Here’s another reminder of how the housing market collapse has spread its ugly tentacles into just about every corner of our lives.
Parents of college age children, already worried about their job security amid the recession, are also finding that the traditional piggy bank often used to pay tuition bills is just about empty, a recent New York Times article points out.
Taking out a home equity line or second mortgage to help pay your kids college education is as American as apple pie.
Long before the current housing market boom my father was doing just that to help put three children through college.
But with home values having fallen off a cliff, many homeowners now find themselves underwater, with no equity at all to tap.
Like most of you, my ears perked up when I started hearing about rates below 5 percent. Are those low rates for me? “No,” says Mary Beth Rooney at Monument Mortgage.” It will cost too much and get me too little. Those 4.75% rates that are being bandied around are not as neat and simple as they sound.”
Is there a 4.75 percent “no-no” (no fees no points) out there? Simple answer is “No.”
Fees are $2200-$3000 before you get to sneeze. There are appraisals and recording fees on every loan. Then there are tons of add-ons that will hit many a borrower. Add-ons include fees of .125 to 0 .75 points or more (a point is 1 percent of your loan amount) if you:FULL ENTRY
The program called Making Home Affordable is out. I know there will be two very different reactions on this blog:
A. Great! Do I qualify?
B. Darn…a give-away to someone who doesn’t deserve it.
Before you hit the comment button, look at who can get these loans.
Interest rates are below 5 percent! Run, run, run to your nearest open house! Buy, buy, buy!
Not so fast.
Just like the $8000 tax credit, lower mortgage interest rates do not change a non-buyer into a would-be buyer. Both the tax break and the low rates may change a struggling would-be buyer into a hopeful would-be buyer. For most buyers, the tax credit and this rate decrease are not the make-or-break point in their decision to buy.
Here’s how the rate decrease helps:
Suppose you buy a $400,000 home this spring. If you are borrowing 90 percent on it, your principal and interest at 4.75 percent is $1878. Last winter, the rate was about 5.25 percent; you would have paid $1988. In the summer of 2007, at the beginning of the decline, the rate peaked around 6.75 percent; your bill then would have been $2335, plus tax and insurance. Yes, that $450 savings is significant to your budget, but…
The home sales market may be on life support, but apparently mortgage fraud is alive and kicking.
Or at least that’s what a new report by a mortgage fraud watchdog finds. I’m skeptical, but a little more on that later.
For what it’s worth, Rhode Island tops this year’s list of mortgage fraud hotspots put out by the Mortgage Asset Research Institute.
Mortgage fraud reports soared by 26 percent in Rhode Island over the past year, beating out such perennial heavyweights as Florida, Illinois, Maryland and Georgia.
Overall, reports of mortgage fraud in the Ocean State were three times the norm given the amount of mortgage lending taking place there.
This is the second time in a month that a loan commitment* came in early. I’ve been a buyer’s agent a long time. This is not normal. I count on my lenders to get the commitment in on time. In most cases, they come in within one day of the due date. Maybe two or three days before, max. This month, I had one come through about ten days early and another coming in about a week ahead. What’s going on?FULL ENTRY
Looks like the foreclosure epidemic is getting its second wind.
The first wave of foreclosures featured homeowners duped into buying homes they couldn’t afford with goofy, subprime loans. Not to mention a whole lot of small-time investors who bought units in hopes of flipping them for big profits, as well as a just outright fraudsters who used straw buyers to create artificial sales.
But much of that first wave of crazy subprime mortgages gone bad has already crashed into the housing market and economy. Now we are starting to see the second wave, regular homeowners who are losing their jobs and their homes due to the economic downturn, of course triggered in part by the subprime fiasco.
Anyway, that is the way some are reading the latest foreclosure stats, with the number of troubled mortgages rising to 7.8 percent of all home loans, the highest since 1972, Bloomberg reports. Loans actually in foreclosure now amount to 3.3 percent of all mortgages in the country, an all-time high.
I spoke to a lender friend, Loren Shapiro at Asset Mortgage Corporation.
He’s been giving out a lot of bad news lately to people who are thinking about buying a condo or multi-family home this spring.
If you are thinking about buying a condo or multi-family home, you need a huge down payment (25 percent, sometimes as much as 40 percent for condos). PMI companies are getting very strict. They are looking for credit scores of 740 or more.
If you are buying a condo in a new development, you may have trouble getting a loan at all. This includes little developments of 2- and 3-family homes as well as new buildings with lots of units for sale. (Your best bet for small condo associations or multi-family homes is local banks, not mortgage companies.)FULL ENTRY
Apparently some homeowners have lost all faith in the real estate market ever coming back.
How else to explain the growing phenomenon of disillusioned owners simply walking away from overpriced homes bought during the boom years, in despair that prices will ever again reach the levels they originally bought at?
Well, it’s not just some strange California trend anymore. Just consider the recent email I received by a distressed Marlborough homeowner who is now considering the walking away option herself.
For the purposes of this post, we shall just call her “Sarah.’’ So Sarah, a marketing executive, and her husband, who works in the high-tech industry, shelled out $370,000 for a three bed, two bath home in 2004 in a new subdivision, just as prices in the Boston area were starting to surge into the stratosphere.
But now Sarah and her husband are full of regrets about their decision to buy a house in Marlborough, where it turns out they are just not happy. The school system is only mediocre, in their view. Both are tired of long commutes to work in Boston, which chews up 40 hours a week of their collective time as a couple.
Many of my peers are excited about the $8000 tax credit for home which that is part of the stimulus package. Prospective buyers that I’m meeting are not. They just do not see this as the stimulus of their decision to buy. Makes sense to me. If you understand this credit, you know that this $8000 credit will go for improvements, furniture, or towards replenishing your reserves. Economic stimulation for contractors or retailers, maybe. It doesn't make or break the ability to buy a home.
Before leaping in, consider these things:
1. It is a grant, not a loan; that’s great. But, it’s a tax rebate, so it is tied to your annual tax refund. The funds are not available as part of your down payment or closing costs.
2. There are income limits. If you fall within the income limits for the rebate, you also fall within these limits for your loan.
If you have strong opinions over the federal government's bailout of struggling homeowners, here's a chance to weigh in on the subject.
Do you pay your mortgage? Do you think it's unfair the government is
helping to reduce mortgage payments of people who aren't?
If so, direct your replies to email@example.com
Nothing about programs run by the government are ever simple. We know that. There is an $8000 credit for home buying couples with a Modified Adjusted Gross Income (MAGI) of $150,000 or less or home buying singles with a MAGI of $75,000 or less.
Great… So, how do you calculate your MAGI? Let me introduce Eric Heinrich from Mortgage Master, Inc. Below is a page he sent me on how to calculate your MAGI. Eric is a mortgage lender, extraordinaire. He is not a tax professional. These are the guidelines. When in doubt, contact a tax professional.
Would-be homeowners, use these rules when doing your taxes to establish your MAGI.FULL ENTRY
Shaun wrote me last week with a few questions. Two had quick answers, but the middle one, about foreclosures, is more complicated:
Good afternoon Rona, hope this finds you doing well…[I] was hoping to ask a few quick questions about the foreclosure process as I am a first time homebuyer.
1) Do you have any recommendations for a good attorney?
2) Do you have any primers on the foreclosure process?
3) Besides an inspector that comes with me to visit the property, whom else should I bring with me?
I have recommendations about attorneys. I also think any first-time home buyer should have their own agent.
I wrote on the basics of foreclosure purchasing in October. Here is “the primer” on foreclosure:
First a few definitions:
Mortgage holder or lender is the entity that is owned the amount of the mortgage.
Seller is the owner of the house.
A short sale means that the seller does not have enough money to pay off the existing loan on the property at the point of sale. (Example, the seller owes $350,000, but the sale will yield $320,000) This is sometimes called “upside down.” Most people are saying “under water.” The seller is short because the mortgage holder will get less than the mortgage amount when the property is sold. The seller is “short of cash” to cover the debt. In this case, the mortgage holder has a say in how much of a loss they are willing to take. If a seller can pay the entire mortgage amount, plus whatever closing costs are attached to the sale, then the seller is not short. The seller may have lost equity, but the lender does not have a say in the sale.
Foreclosure happens when the seller stops paying the mortgage holder. By right, lenders can take the house and sell it to get their money back.FULL ENTRY
Today and tomorrow, I am writing about divorce and housing. Tuesdays are mortgage days; Wednesdays are tenant/landlord issues day. Write me if you have questions on those subjects.
At one of my doctor's offices, there is a smart lady.Not only can she handle insurance companies effectively (I think that's magic!) She handles her personal life with the same no-nonsense attitude. She asked me for advice as she was making these changes, but I think she had it well in hand without my input.
When she divorced, she stayed in the family home with her children by refinancing her mortgage. She borrowed against equity to cover what she owed her ex-husband for his stake in the family finances. Most of the time, I scream “NO!” at the words “borrow against equity,” but in this case, I think she did the right thing.
That was over a year ago. Her divorce was final. She got on economic and emotional track. She had a 20-year mortgage with a payment she can handle.
I am getting mortgage questions almost every day. One that I haven’t answered yet is:
"I plan on selling my place soon, should I refinance to save money for the time I am still here?”
There are two snags in this plan. One we have already discussed, one is new.
The one we already talked about is whether you have sufficient equity. That depends on when you bought. If you bought in the years near peak, you may be behind in equity. The other factor is that 5 percent and 10 percent down refinance loans are few and far between now. Lenders are now looking for 15% equity, for the most part.FULL ENTRY
One thing that has amazed me is how the foreclosure crisis keeps going from bad to worse, even after the biggest subprime players have vanished.
It's the real estate equivalent of the energizer bunny.
The subprime lending industry began to implode more than two years ago. Many of the shady mortgage shops that were getting people into trouble are out of business or now part of larger financial institutions with tighter controls.
With the source of this atrocious lending drying up, you would think this would lead to a drop in bank auctions.
Now there are signs that at least the pace of bank auctions may finally be moderating.
Remember John Dough? You met him on November 6. He bought a bank-owned property with the intention of finishing the renovation and selling it for profit. You heard about his private financing on November 18th. Now, John has a loan, he has a deed, he has a budget. He's picking up his hammer and getting to work.Here’s John in his own words:
Getting to Closing in One Piece: It’s been awhile since I last commented on our progress so here is an update. After we secured our financing we had about three weeks until closing. It was pretty uneventful. Title was clear, taxes were owed, and the water/sewer bill had to be paid. The bank owning the unit agreed to pay the taxes, but would only pay a 1/3 of the water/sewer. So we had to pay the balance, which wasn’t much ($400 or so) and we also had to insure the property which meant that we’d be paying for the share of the other condos in the building that were bank owned. That cost was about $1200 for a half year master insurance policy. We plan to recoup 2/3 of that cost when the banks try to sell their units. With all that going on, we closed about a week later than expected but we weren’t subject to the usual fees that banks invoke when you don’t close on time. We now owned the condo.FULL ENTRY
Well, so much for that great surge in homeownership rates.
Remember all the bragging politicians on both sides of the aisle in Washington did during the late, great housing bubble about the nation’s ever rising homeownership rate?
Now, it is becoming clearer by the day that all those grand hopes of an ownership society were based on a subprime house of cards.
A new study by the Federal Reserve Bank of Boston finds the boom in subprime mortgage lending in failed to significantly increase minority homeownership rates in Massachusetts. Instead, the spike in foreclosures that followed these high cost, high-interest rate loans over the past few years has simply created churn in the marketplace.
Yesterday, I told N. that she needed an appraisal. Why didn’t I say she should get a Comparative Market Analysis (CMA) from a real estate agent? Because N. will be working with a lender. The value figure she needs is the amount that a lender will accept for collateral.
An appraiser uses the standards that lenders require to establish the value of property used as collateral. They also valuate in legal matters such as divorce and estate sales. That’s their job.
Real estate agents establish fair market value in order to help their clients sell and buy homes. Potential listing agents do a Comparative Market Analysis as data to establish fair market value. This is only one piece of the marketing plan to establish the highest price that a buyer may pay for the property. Buyer’s agents work a lot like potential listing agents. Their goal is to establish a fair market value as part of a negotiation plan. That information is one part of the advice on how to make an offer that is the lowest possible one that a seller would accept.
N. sent me an email about her improvement plans:
Hi … I am going to be doing a renovation on my current home located in…. It’s a… I am adding 680 sft. which includes a family room downstairs off the kitchen… a deck and a master bedrooom upstairs with master bath and kids bath. As well as a new 1/2 bath downstairs. I checked zillow.com to see what we are appraised at currently____.FULL ENTRY
I am trying to get an estimate of the new value , so I can re-finance when its done as we currently have a adjustable mortgage. With the zillow estimate is estimates our house at $___ per sft, although we bought at the height of the market 6yrs ago. Is this a reasonable sft price to use to calculate the new value?
What about the new bathrooms(one is new not included in the original ___sft) how are these calculated. In addition I plan to install a new kitchen.
.. we cannot get a loan to do the project, because of the credit crunch so I have to pay cash. … so I am trying to see if my projected numbers are about right, to see if I can re-finance once w e have the equity and take some can out to finish the kitchen. I am the general contractor on the job…I can do the whole project for $100,000, so I would double my investment. Are my estimates correct for the new value?
There’s no quicker way these days to draw the online equivalent of an angry mob than to start chirping about good news in the real estate market.
But falling mortgage rates, even if they haven’t yet sparked a resurgence in home-buying, are having at least one salutatory effect.
As the Globe reported Saturday, thousands of Massachusetts homeowners with adjustable rate mortgages that were poised to reset this year can breathe easier.
Homeowners who want to stay homeowners will pay mortgage every month. Unless you are planning to sell, lose, or walk away from your home, this is a good time to look around to see if you can position yourself for a lower debt service on your property. I am fielding calls from my former clients asking if this is a good time for them to refinance. It will put them ahead in monthly payments. Yesterday, I wrote about the positives of refinancing.
What’s stopping you from refinancing? The changes in credit rules have been blocking homeowners facing foreclosure for a year and a half. Now, with the carrot of lower rates in front of middle-class homeowners, some are finding that they cannot refinance, either. The so-called credit crunch has made it hard to find loans for borrowers with less than 10 percent equity.FULL ENTRY
When I wrote about the hidden cost of the additional years of mortgage payments, several people wrote in with very good reasons to refinance anyway. Today, let’s discuss those:
Cash flow: Paying less on mortgage every month gives you more money in your pocket for other spending. There is a value to money in your pocket. It may be needed for basic needs; it may be helpful in times of unemployment or underemployment. You can invest it. You can save it for a rainy day.
You will pay a higher proportion of interest to principal in your refinanced loan, but you will have money now for your life. Is that worth it to you? Why?
You will sell before you get to the end of the mortgage: For younger buyers who expect a trade-up or relocation in the future, this is true.FULL ENTRY
Apparently some federal bureaucrat in Washington has decided that if your mortgage is $465,750, you must be living in a luxurious mansion fit for a jumbo loan.
While that might be true if you live in Oklahoma or some other low-cost heartland state, a mortgage that size won’t get you much in some Boston suburbs, not to mention in the city’s pricey downtown condo market.
While rates on conforming loans, at or below $417,000, have fallen to 5 percent, rates on jumbo mortgages are in the 7 percent range, the Globe notes in a story on how some local homeowners are dealing with this situation.
The New York Times ran a series called “The Debt Trap.” In it, Brad Stone explained something that will affect those that are considering refinancing.
Do those offers to refinance or to take another credit card sound like they know just what you want? Well, that’s because they do. The people who are sending you these offers know important bits of your financial history from your credit applications, product registration cards, your consumer spending records, and of course, your deed and mortgage information. Also for sale is a profile with information about your marital status, your children, your education, your cable company, and your new car purchases. If you apply for a mortgage, Experian, Equifax and TransUnion can sell that information to rival lenders. It’s called data mining; it’s legal. This marketing tool is putting carefully worded temptation in the path of American consumers.
Sheesh. No wonder the right offer seems to come to your door at the right time. Except when the wrong one shows up.FULL ENTRY
The mortgage interest rates have gone down again. Does that mean that refinancing is the best thing you can do?
It’s a dirty little secret that most of the homeowners who are under water got there through refinancing, not by borrowing for their initial purchase. It was tempting to buy new kitchens, cars, vacations, college educations and just junk by using cash-out refinancing products. These products were given out like candy. (Let’s not even bother trashing home equity loans; that’s just too easy.)
While housing prices were going up, the “value” in equity was burning a hole in a lot of people’s pockets. You felt rich. If you paid $250,000 for a house that’s worth $500,000 five years later, you are $250,000 ahead, right? Wrong. It seemed perfectly reasonable to borrow only $50,000 or $100,000 of the profits. Right? Even more wrong.
At a time when real wages were not going up for Americans, borrowing on home equity became the way to feel prosperous. It was just a feeling. You still had to pay it back with your income, which was not going up in relation to inflation.
Not so long ago getting foreclosed on was seen as a mark of shame, maybe what bankruptcy was a few decades ago before it lost its sting.
But now the decision on whether to hang onto your home or let go and stop paying your mortgage is being reduced to a simple financial calculus.
In fact, there’s even an on-line financial calculator designed to help struggling homeowners decide whether they should stay or go.
The first question any seller wants answered by an Offer to Purchase is “how much?” The second is either “when?” or “are they good for the money?”
Increasingly, the question has been “when will I know that the buyers are good for the money?” In a purchase in Massachusetts, the offer is structured so that the deadline for the securing of the mortgage loan is part of the negotiation. (Called the loan commitment deadline.) Increasingly, buyers who are well-qualified and know how long it will take to secure their loan commitment are at an advantage in the marketplace.
Here’s the rub. Business for lenders was way down in the fourth quarter of this year. When things are this slow, mortgage companies lay off their processing staff, who works on salary. (Originators, or loan officers, are commission-based sales people. They will stick with the job as long as they can.) At the end of the quarter, the interest rates dropped. Refinance business started pouring in. The support staff were absent. The result: slow loan processing.FULL ENTRY
Is it too late for the mortgage industry to clean up the foreclosure mess it helped create?
Maybe, maybe not, but it is sure getting awfully late in the day.
With President-elect Barack Obama warming up on the sidelines, a group of lenders formed by the Bush Administration to tackle the foreclosure crisis is setting some lofty goals for 2009.
The Hope Now Alliance says it plans to modify 2 million mortgages next year, double what it did in 2008, Bloomberg reports.
Now here’s the holiday spirit.
Employees ING Direct, an on-line bank, gave up their annual Christmas party.
Instead they will be donating the cash to a worthy cause – helping some of their struggling customers make their mortgage payments.
All told, the firm, a subsidiary of the Dutch financial services giant ING, will cover the monthly mortgage payments of 500 of its customers.
The bank forgave more $860,000, on average $1,700 per homeowner, though how much actually came from the cancelled holiday party is not clear.
When I was a business reporter at the Herald, a popular game not so long ago was reporting on the latest gas price shocker.
It was a game that usually involved calling local gas stations to check on their prices. There was always some guy on Nantucket who was the market leader, at one point pushing $4 a gallon.
Gas prices, for now anyway, have retreated out of the news. But here come falling mortgage rates to fill the void.
The discussion about low down-payments reminded me of a problem that comes up occasionally for my buyers.
Some people think buying a home is a life event worthy of a cash gift. Just as when you marry, graduate from college, or give the birth of a child, you may find relatives being surprisingly generous. If you have relatives wealthy enough and generous enough to help you with your down payment, you are lucky, lucky people.
Before you transfer any funds from someone else’s account into yours, choose a lender and check with the lender about documentation.
Here are some situations I have seen over the years:FULL ENTRY
Landlords, where do you stand on choosing a tenant in these difficult financial times?
How do you separate the dead-beats from the struggling workers? Where do you draw the line on who is too much of a financial risk? Would you rent to a new college graduate who has no work experience and a new job? How about someone who is deep in credit card debt? How about someone who was bankrupt? Foreclosed upon? Out of work for six months last year? These are troubled times; how much of their problems are you willing to take on? Do you ask for first and last month’s rent, plus security to protect yourself?
Many landlords advertize in public sources like on-line lists, newspapers, and network sites. Most of the time, the would-be tenant is a stranger. If you don’t know the person how do you choose? Because of fair housing standards, it is important to treat everyone the same. So, no matter who comes through the door, good landlords ask the same questions, get the same background checks and ask for the same deposits. Once you make a rule, you need to stick to it or risk being accused of discrimination.FULL ENTRY
I saw the Boston Globe article on Tuesday about how many people were behind again after having reworked their mortgages earlier this year. I was reluctant to write about it. I didn’t want another round of same-old-same-old. You know, you’ve read it here before:
The prices were too high; the market needs to free-fall… The borrowers were stupid or greedy; responsible people didn’t buy, so the people over their heads deserve what they get…
Can we talk about solutions for homeowners in trouble?
The analysis from Credit Suisse shows that reworking loans out of adjustable rates has the lowest default rate. Is that the best route to keeping people in their homes?FULL ENTRY
PMI means “private mortgage insurance,” which is for non-FHA loans with down payments less than 20%. For FHA loans, there is a .55% “MIP,” (monthly insurance premium.) That fee is paid by the borrower. That rate, because it is fixed, is better at lower down payment levels. MIP is PMI and PMI is MIP, by another name.FULL ENTRY
Mortgage rates are dropping like a rock.
Now the question is whether the allure of dirt-cheap mortgages will be enough to restart the stalled housing market.
Clearly one side benefit to the global financial crisis and economic downturn has been falling mortgage rates.
Rates tumbled last week after the Federal Reserve announced plans to snap up $600 billion in mortgages and mortgage related securities from Fannie Mae and Freddie Mac, among others. And they are poised to go again after the Fed followed up this week with plans to purchase Treasuries and target long-term interest rates, Bloomberg reports.
Why should I care about owner occupancy? I have a big down payment.
Even if you have a large down payment (and don’t need PMI), you should think about owner occupancy of the condo association you are thinking of buying in. The actuaries that work for the PMI companies spend all day trying to identify a bad risk. Maybe they know something...
Generally, lenders and PMI companies like to see a high percentage of owner occupancy in a condo association. 50 percent has been the norm. They also want to see that the other 50 percent is not owned by one entity, like the developer. Why does this matter?FULL ENTRY
When I wrote about the freeze on foreclosures, I got this question:
Rona - as a new homebuyer with a few defaults on my credit report can I go to the bank and get a new "something I can pay for" for 40 years?
As a new homebuyer? I wondered, how new?
A little recent history:
Subprime mortgages were restricted about the time I started on this blog, summer 2007.
It was (and is) still possible to hang yourselves without being in a subprime mortgage. FNMA would allow 50% for mortgage debt in October 2007. Now, it’s hard to borrow with small down payments or above the jumbo limit. But debt is there for the accepting if you have the money to put down with your real estate purchase.
Today (!) no doc loans are still being advertised.FULL ENTRY
In a recent conversation with a fellow exclusive buyer broker, I found that we had different ideas about what is best for our buyer-clients. We both have been working only with buyers for more than ten years. We both learned our trade from another exclusive buyer broker. We disagreed entirely.
The subject was whether it is worth it for a buyer should hire a separate attorney to write their Purchase and Sales Agreement and to review their mortgage paperwork (especially the HUD-1 Settlement Statement) before closing. A buyer can have one attorney do both the P & S and conduct the closing for the lender. Because this is a legal question, we had an opinion only about the practical aspects of this decision. We always send our buyers off to discuss the pros and cons with an attorney or two. (For the record, I work with attorneys whose opinions vary on this topic. Not just attorneys who agree with me.)
Here are the options:FULL ENTRY
It’s a tough time to be in real estate, especially the business of selling homes.
But here’s one thing real estate folks can give thanks for. While the housing market is a mess, the Joe the Plumbers of the world are blaming the bankers, not their local real estate agents.
Bankers now find themselves one of the public’s favorite targets after the meltdown on Wall Street, according to a new Gallup poll. Nor can I imagine the sudden clampdown on credit – and the mountain of rejection letters sent out to would-be borrowers of car and home loans - is helping the industry’s popularity either.
Low down-payment lending and Private Mortgage Insurance (PMI) are important to anyone trying to buy without with less than 20 percent down payment. If you are not thinking about doing that, you may find this irrelevant. Instead of staying on it as the only topic for days on end, I will publish something on PMI or lending on a budget every Tuesday until I run out of new information or questions.
What Private Mortgage Insurance is not?
PMI does not insure you for anything. It is not the insurance you can buy that will pay off your mortgage in the event that you die before the end of the term.
What is PMI?
It is insurance the lenders require so the lender will get paid in the event that you cannot pay off your loan. Get it? If you lose your house to foreclosure, your lender is paid by their insurance company. You pay the insurance company every month. That’s the cost of borrowing without 20 percent down. PMI is expensive. And as you expected, it’s getting more expensive. The old rule of thumb for a 90% owner-occupied purchase loan was .52% of the loan amount, now it’s .62%; a 95% used to typically be .78% - now .84%. Here’s a chart calculating the rates.
In real dollars, that's Principle times the Rate, divided by 12, equals your monthly payment.FULL ENTRY
Fannie Mae and Freddie Mac have agreed to hold off on foreclosures from November 26, 2008 to January 9, 2009. The move is to help keep owners in the single family homes they live in. This does not help investors or multi-family homeowners. This program is linked to a loan modification program that is scheduled to launch on December 15, 2008. (Thank you, Eric for the link to information about this.)
Those who are already in foreclosure are still in foreclosure. Those who fall into foreclosure after the deadline are still going to see foreclosure. Those who did not buy because they turned down unsafe loans are still renting.
Before you say, “this is not fair,” consider what you mean by fair.
Here is an encore of an entry I published last December:FULL ENTRY
There are some new rules for Fannie Mae loans coming down the Pike, effective April 1, 2009. I do not see these as radical changes. Do you?
One: The first one requires that the appraiser review the sales contract. That seems pretty simple on the face of it: the appraiser needs to know the terms of the sale. Why would this be a big deal to a lender? The answer: concessions. If a buyer is getting money back toward repairs or closing costs, this should be known to the lender. Home mortgage lending is not supposed to pay for the Mercedes in the garage along with the house. If the contract is changed after the appraisal, the lender needs to know that, too. The lender, and their investors, should be informed about what they are lending on.FULL ENTRY
Maybe it’s just me, but I suspect not. But how is it that every other day we have some federal agency or state governor announcing a new foreclosure plan, and the number of people losing their homes just keeps soaring?
For those of you who have never applied for a mortgage, the Good Faith Estimate is the form your lender gives you so that you can estimate your eventual closing fees and escrow account set-ups. This form is important because many new buyers get blind-sided by the money they need to have on hand to close. The Good Faith Estimate was designed to help buyers, but many found them too confusing to make comparison shopping possible.
Now, a little about closing costs:
These are not fees, they are prepayments:
At closing, you begin an escrow account for the lender. The lender starts this account at closing with a lump sum. Then, every mortgage payment includes funds to keep that account full enough to pay your tax and insurance bills when they are due. From that escrow fund, lender “pays” your tax and insurance bills.
Depending on where you are in the tax cycle, you may pay as much as six months of taxes into that account at closing.
You also buy a year of homeowner’s insurance starting the day of closing. Then, at the closing, your lender will start collecting for the next year. Usually the lender wants another three months of insurance so that there is enough when the bill comes due next year.FULL ENTRY
T. wrote to me:
Hi Rona, ... I have a general question about mortgage approvals in these tight economic times... 1. How does pregnancy effect a family's pre-approval, and later when buyer how does it affect the mortgage? 2. Can a bank discriminate against pregnancy? It seems as though this is a very unfair business practice. How can a buyer address these issues?
... I am pregnant and currently am the head bread-winner in our family. I am due this winter and my husband and I have been trying to buy a home for over a year and half with little to no luck. We are hopeful that we might have some luck with the slower winter market, but we have been told by a mortgage broker that my being pregnant will negatively effect our pre-approval and we might get denied a mortgage as well. This doesn't seem fair, or legal. Can you provide some insight? [emphasis mine]
My first thought was discrimination! My second was about income. Lenders look for steady employment. If she has been steadily employed and will be through closing, the lender should look favorably on the loan.FULL ENTRY
JPMorgan Chase & Co. has jumped on the mortgage modification bandwagon.
Late last week, the bank said it is launching a new program to stem the number of foreclosures it undertakes, according to the Associated Press. The bank will not put any homes into foreclosure for the next 90 days while it implements the program, which is expected to help as many as 400,000 customers with about $70 billion in loans.
The modification program will also be offered to customers of Washington Mutual, which JPMorgan Chase recently acquired, and EMC, which was a mortgage unit of Bear Stearns Cos. and bought by JPMorgan in February, according to the AP. The program is apparently designed to help rework multiple mortgages, instead of going through time-consuming case-by-case reviews.FULL ENTRY
Last week, I mentioned the increased scrutiny that appraisals are now getting. Today, an attorney-colleague told me there is also a trend for underwriters to not accept unrecorded condo document drafts; they want to review only final, recorded documents. I am wondering whether the underwriters care whether the rules make sense to owners, or if they will just be checking that they are recorded.
I have seen some questionable condo rules in my day. I have heard of even more. I have seen rules that require:
The outward facing side of all curtains had to be white or off-white.
No flags, furniture or satellite dishes on balconies.
No dogs and cats. However, this was a change. The existing animals were grandfathered-in. (I showed a condo where the owner had to sell because his dog died and he got a new one -same breed- but was found out and fined.)
One of my clients was a trustee in a big condo association before he came to me in search of his single family home. He told me, I paraphrase:
A lot of readers don't understand what short sales and foreclosures are. I am getting comments and emails. This is foreclosure and short sale 101. Skip it if you know this stuff and have no advice for those who don't.
Tim responded to Monday’s post. He is in a situation that has become more common since the sub-prime meltdown in the summer of 2007:
One of the problems we are facing is, when we tried to sell it, we asked if we could just pay off the difference to our mortgage holder, that was unsuccessful as they tried to push us into a short sale, which I didn't understand because we're current on our mortgage. We tried to take out a personal loan, however the amount was too much and exceeded personal loan limits. We've tried to refinance to make the mortgage lower - so we would actually want to keep it and maybe break even or make money off of the house (with the rental), but we cant refinance since the value has dropped so much we'd have to finance more than 100%, and banks just dont do that now-a-days. What does a person do!?
I promised to report on my current clients' adventures in the financial chaos. The persistent rumors that no one is getting mortgage loans are just that, rumors. The lenders I work with are still writing loans and buyers are still buying. My buyers are facing competition for houses, so I am not the only broker with buyers who can borrow for a home.
These are the financing issues I am seeing:
1. Weird rate trends.
2. Appraisal scrutiny.
1. Thursday, the daily rate sheet that I get from a lender had “N/A” marked on the adjustable-rate chart. What does that mean?
Adjustable-rate mortgages have occasionally been nearly equal to fixed-rate products in the past. That made them useless. But this week, they are higher than fixed-rates, which make them worse than useless. Therefore, good lenders did not advertise them. The new Fannie and Freddie rules have driven up adjustable-rate loans. There are a few portfolio lenders who have adjustable-rate products that are lower, but there are only a few.FULL ENTRY
Federal officials have started 151 criminal mortgage fraud cases since last October, according to a
New York Times story.
That number comes from a review by researchers at the Transactional Records Access Clearinghouse at Syracuse University, who looked at data from the Justice Department. The Justice Department only recently began tracking mortgage fraud, so the Syracuse researchers had no previous data to compare the current caseload with. So there’s no way to tell if the 151 criminal cases represents a big increase from previous years.
Half the cases are being run by the FBI, while the FDIC has undertaken about 25 percent of them.
Most of the federal cases are concentrated in certain areas of the country, including Florida, which accounts for a large chunk of the cases, California, New York, Ohio, Pennsylvania, and Vermont. Apparently the Pittsburgh area has produced the second highest amount of federal prosecutions, with 24 cases. Southern Florida has the most, with 69 federal prosecutions.
FBI investigators are also helping out with 1,400 other probes on the state and local level, which the FBI said is nearly double the number of cases they assisted with in 2005.
What do you think of federal investigators' efforts so far? Do you think federal officials should be doing the brunt of the investigating on mortgage fraud cases, or do you think local authorities should be handling prosecutions?
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The average interest rate for a 30-year, fixed-rate mortgage dropped below 6 percent this week, according to a weekly survey by Bankrate.com. At 5.8 percent, it’s not the lowest rate we’ve seen in recent memory, but it’s still decent.
Interest rates are expected to remain low as a result of the ongoing economic turmoil.
With rates apparently declining again, the Mortgage Bankers Association reported that home loan applications were up 2.2 percent last week.
“From the standpoint of a home buyer, interest rates aren’t in any way a barrier,” Bankrate.com financial analyst Greg McBride told the Associated Press. He said a bigger problem for prospective buyers might be the higher down payments many lenders are requiring.
This leads me to my question of the day: Are any prospective buyers out there encountering problems getting a mortgage? If so, what issues are you dealing with? Or are you finding it easier than you expected to get a loan in the current environoment? Why do you think that is?
Correction: Sorry folks, in my rush to post a comment before my deadline this morning, I made a couple of errors. My point of reference was a Bloomberg News story from Thursday about mortgages and the possibility we could see a trend of mortgage rates declining. (Click here to read the story.) The story indicates that 30-year, fixed-rate mortgages were 5.8 percent earlier this week. However, on Thursday Bankrate.com said the national average for 30-year mortgages fell to 6.20 percent this week from 6.41 percent the week before. Again that's a national average.
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Looks like the appropriate parties may be starting to pay for the subprime mortgage mess.
Eleven states, including those hardest hit by foreclosures, have struck an agreement with Countrywide Financial that will offer assistance to distressed homeowners, according to the
New York Times. To settle lawsuits accusing it of predatory lending practices, Countrywide will provide $8.4 billion in direct loan relief to borrowers in those states who were placed in the riskiest loans. Countrywide has also agreed to waive some late fees and prepayment penalties, and will offer help to homeowners who are already in foreclosure, which may include help moving to a rental unit.
The states involved are California, Arizona, Florida, Connecticut, Iowa, Illinois, Michigan, North Carolina, Ohio, Texas, and Washington.
Though Countrywide and other lenders have promised officials around the country that they would consider re-working loans for borrowers who became trapped in loans they couldn’t afford, lenders haven’t always followed through on those promises. In this new settlement, the loan workout program is mandatory and will be monitored by state officials.
Countrywide, the nation’s largest lender and loan servicer, was bought by Bank of America earlier this year. A BOA spokesman told the Times the company had anticipated the cost of such a program before buying the troubled lender.
Countrywide settled without admitting any wrongdoing, the Times reported.
It seems fitting that one of the companies that helped create the subprime lending/foreclosure mess has to help clean it up. What do you think of this deal? Is it appropriate? Do you think Countrywide should have acknowledged “wrongdoing” in settling this case?
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It seems that homeowners over the age of 50 are not immune from the foreclosure crisis.
study released yesterday by the AARP, an organization that lobbies for people in that demographic, found homeowners age 50 and over represented about 28 percent of all delinquencies and foreclosures in the last half of 2007. There were 684,000 homeowners over 50 who were in trouble with their mortgage, and of that figure about 50,000 had already lost their home or were in the foreclosure process.
The study also found that older Americans who had subprime loans were about 17 times more likely to be in foreclosure.
Apparently it was thought folks in this demographic would not be as likely to fall behind on payments or lose their homes because they would have enough equity at this stage of life to protect them. However, that was before the market started to turn and home values began to sink.
I got an email from a reader who signed a Purchase and Sales Agreement on a short sale. He was unhappy when his agent called to say there would be a two-week delay in closing. He was paying cash. He had no lawyer. What should he do?
First thing, if you don’t hire a lawyer you should read your Purchase and Sales Agreement. Most people don’t. They almost all have an automatic thirty day extension to perfect title (get liens and encumbrances off the title.)FULL ENTRY
Four members of the Senate Banking Committee have asked the federal agency now running the show at Freddie Mac and Fannie Mae to freeze foreclosures for 90 days on mortgages the companies own, and to ease the companies’ policies on modifying mortgages.
The senators, including New York Democrat Charles Schumer, contend “this action would provide immediate relief to many homeowners” and would let the mortgage giants “turn these nonperforming loans into performing assets to minimize losses.” A “time-out” would buy the new CEOs of Fannie and Freddie time to come up with a plan, as well as give struggling borrowers some time to straighten out their own financial messes, according to the New York Times.
A spokeswoman for the Federal Housing Finance Agency said they are reviewing the proposal.
My brother worked in the World Trade Center and was there the first time that a bomb went off, in 1993. He was not there on that fateful day in 2001. I dedicate this blog entry to those who banded together to help one another on that day, and to all those who lost their lives.
In real estate, the closest I got to a personal 9-11 story was regarding a buyer of mine who was selling her home. Her agent was told to expect an offer when the husband of an interested couple returns from a business trip to California. He never got to California that day. In the losses experienced by that widow, not buying the house was way down on the list, I'm sure.
Real estate is important to me, but at times it is important to realize that life is fragile. We are all just renting here on earth.
Since I am talking about lenders this week, this is my advice on 9-11 is about insurance:FULL ENTRY
I keep a list of reliable lenders for my clients’ use. There are lots and lots of good loan originators out there. I know twice as many as I have on my list.
These are the things I expect from my lender-contacts:
1. No over-promising. If you can’t get a conventional loan for these buyers, don’t say you can.
2. Be available. Answer questions.
3. Provide a pre-approval letter that does not disclose more personal information than is necessary.
4. Get the loan commitment in on time. (The loan commitment is the promise that your file is 100 percent approved and the funds are allocated for your mortgage.)
5. Offer a range of loan options, with full explanations.
6. The “Good Faith Estimate” and the actual closing costs should be about the same.
I get asked regularly about how deep the discount for short sale and foreclosure homes are in my area. My answer is “barely deep enough to be worth it.” When I work with buyers of this kind of property, I prepare them for a long wait, more aggravation, more risk...and some financial reward.
Only undertake a short sale if you have time, flexibility, and risk tolerance. Some things that I regularly see:
1. Slow communication with the investor’s office, which must approve all contracts.
2. Generally poorer condition of the property.
In one of the many stories that I read yesterday about the Freddie Mac and Fannie Mae takeover I came upon one comment that really stuck with me.
The story, by Associated Press reporter Tom Raum, delves into some of the risks the takeover poses to taxpayers. At the end of the story, he quotes Peter Morici, an economist and University of Maryland business professor, who sees the potential for “political chaos” if the folks in Washington can’t compromise on how Freddie and Fannie should be organized in the future.
“They have to go back to what they were before -- but adequately capitalized -- and politically independent,” Morici said of the two mortgage giants. “And Americans are going to have to be introduced to a ‘new’ concept: saving for your down payment as opposed to borrowing for it.”FULL ENTRY
In honor of the adoption of Fannie and Freddie by our government and its taxpayers, I am dedicating this week to a future of intelligent lending practices. May borrowers smarten up and may lenders be fair!
What’s a mortgage broker and how is that job different from a loan officer?
A mortgage broker represents many different lenders (banks, mortgage companies, private investors) similar to the way an independent property casualty insurance agent has the ability to price car or home insurance with different insurers. A mortgage broker arranges loan with mortgage lenders. Lenders provide the actual funds. A loan officer or loan originator is just a title for someone who works for a mortgage broker or a lender/bank.
How does a loan officer get paid?
He/she is a commission-based sales person. There is a commission built into your loan, which your loan officer gets at closing.
What is his/her job?
He/she is paid to find qualified borrowers and to prepare documentation to show that the lender is taking an acceptable risk.
Massachusetts officials have launched a website aimed at providing senior citizens with guidance on reverse mortgages, which let homeowners over age 62 borrow against the equity of their homes.
Some seniors trying to get by on fixed incomes have used them to help pay unexpected bills, or help stretch out Social Security payments. The loans can be disbursed in several ways, including a lump sum or a line of credit, according to state officials. Repayment is not usually required until after the borrower dies, sells the property, or moves.
But the loans should be seen as "a last resort," according to a statement by Len Raymond, executive director of Homeowner Options for Massachusetts Elders. Seniors, he said, should "be wary of high pressure sales tactics to obtain a reverse mortgage or use the proceeds of a reverse mortgage to purchase annuities or other financial products."
Gillette Stadium in Foxborough.
The Federal Reserve Bank of Boston is rolling out all the stops tomorrow to help homeowners who may be facing foreclosure, and the organization is teaming up with an unusual partner for the event – the New England Patriots.
Homeowners from around New England who are struggling with mortgage payments will have the chance to work out their problems with lenders from 1 to 8 p.m. at a free foreclosure prevention workshop being held at Gillette Stadium in Foxborough.
Sponsored by the Boston Fed and the New England Patriots Charitable Foundation, the workshop will include 20 mortgage servicers and 80 of their representatives. In addition, 50 housing counselors from nonprofit and government agencies will be there to offer advice.
Yesterday I wrote about a bunch of Indiana mortgage brokers who basically lost their license to do business in that state, after state lawmakers passed tougher licensing rules in hopes of stemming the number of foreclosures there. Anyway, that got me thinking about how buyers choose a mortgage lender.
This is a key decision in the home buying process. And I’m sure most people don’t enter into the decision lightly.
If you’ve purchased a home before, how did you find a mortgage lender? Did you talk with multiple lenders, or go with the first lender you spoke with? Did you use a local bank? Go to a broker? Did you get recommendations from friends and relatives? Or did you search the Internet for rates and lenders?
Would you do anything differently now that you have been through the process? What advice would you give someone who is shopping for a lender for the first time?
About 40 percent of Indiana’s mortgage brokerages had lost their license to do business as of yesterday because they hadn’t complied with a new state law tightening licensing standards, the Associated Press reported.
Indiana set a Tuesday deadline for brokerages to comply with the law, which requires each brokerage to name a principal broker -- who has at least three years experience and has passed a state exam -- to oversee his company’s business affairs, according to AP. Industry members had backed the law, which was passed last year. It also requires background checks and boosts the annual licensing fee from $100 to $400.
As of yesterday, 361 of Indiana’s 950 brokerages hadn’t met the deadline and another 143 had voluntarily surrendered their licenses, AP reported.
Here’s an idea whose time has come: a public rating system of mortgage lenders.
Massachusetts officials are working on such a system as part of the Act to Preserve Home Ownership, according to David Cotney, who is the chief operating officer for the state Division of Banks. The act was signed into law in November. The legislation also included a “right-to-cure” provision, which took effect May 1 and says lenders must grant delinquent homeowners a 90-day grace period before foreclosing, and prohibits them from tacking on fees to the overdue balance during that period.
The division is still working out regulations to implement some aspects of the law, including creating a system for evaluating mortgage lenders in several areas, like how they deal with loan modifications, Cotney said. Many consumer advocates and government officials have been encouraging lenders to allow struggling borrowers to modify mortgage terms that have trapped them in expensive monthly payments.
The regulations that are being developed are similar to the Community Reinvestment Act regulations, which already apply to banks and credit unions. The state is basically extending those regulations to cover mortgage lenders.
After a system for evaluating mortgage lenders is in place, the division will launch a public rating system, Cotney said.
We have rating systems -- government and non-governmental -- for many other common purchases. You can check Consumer Reports for the scoop on a new car, get restaurant ratings from Zagat, and check an airline’s on-time arrival rate with the US Department of Transportation. So seems like it’s time for consumers to be able to check mortgage lender ratings.
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Fresh on the heels of yesterday's somewhat good news from the Case-Shiller Home Price Index that house prices were up a tad in the Boston area, we have more bad news on the foreclosure front.
Foreclosures more than doubled in Massachusetts during the first half of 2008 when compared with the same period last year, according to a report released today by Warren Group, which publishes real estate data.
There were 6,707 foreclosure deeds recorded in the first half of 2008 -- up 117.6 percent from 3,083 in the same period of 2007. Foreclosure deeds indicate completed foreclosures.FULL ENTRY
We all agree that it is cheaper to rent than to buy. We haven’t discussed how hard it is to rent here without a pretty hefty income.
In order to afford fair market rent in Massachusetts for a two-bedroom apartment, and in order to pay 30% or less, of their income for rent, a household needs an annual income of $47,719. That’s full-time at over $22 per hour, or nearly three full-time jobs at minimum wage ($8 per hour.)
It gets worse when you look at the Boston-Cambridge-Quincy area, where you need $54,120. That’s full-time at $26 per hour, or more than three full-time jobs at minimum wage. It is no better in “non-metro areas,” which is the Commonwealth with the city areas taken out of the mix. There, on average, you need $58,520. That’s $28 per hour full-time.
This week, Fannie Mae and Freddie Mac have been generating scary headlines. There has been speculation the agencies, which basically buy loans from banks to keep mortgage money flowing to borrowers, may require a government bailout. Yesterday, Fannie Mae’s stock fell 14 percent, to $13.20 -- its lowest price in three decades. While Freddie Mac fell 22 percent to $8. And several politicians, including presidential candidate John McCain, have weighed in saying the government couldn’t let anything happen to Fannie and Freddie.
In a story in today's Washington Post, one analyst essentially says that talk of this nature can affect people’s mind-set and basically turn into a reality.
What do other people think? Is too much being made of Fannie and Freddie’s financial situations? Or are the agencies' executives and the country’s policymakers not acting fasting enough to head off a potentially big problem? Furthermore, should this subject be getting more attention in the presidential race?
This morning Worcester officials will unveil a public-private partnership aimed at jump-staring local real estate sales. With the help of area businesses and government agencies, a program called Buy Worcester Now will allow prospective buyers to become owners.
It’s an effort to stimulate sales by knocking people off the fence if they’ve been waiting for prices to plummet further.
Eleven local banks and credit unions have pledged more than $60 million in loans, at below-market rates, for the program, according to City Manager Michael O’Brien’s office. That money could provide an estimated 250 mortgages -- ranging from $300,000 to $400,000.FULL ENTRY
In America, boom-bust cycles have a standard third act: Prolonged litigation. And so we have the news over the last two days that the states of Illinois and California are suing the nation's largest mortgage lender, Countrywide Home Loans.
First the news from Ilinois:
"The nation's biggest mortgage lender engaged in "unfair and deceptive" practices to get homeowners to apply for risky mortgages far beyond their means."
Then the news from California:
"Countrywide and its top executives, beginning in 2004, plotted to loosen or ignore lending standards so they could make more sub-prime mortgages and other adjustable-rate loans that were promoted by emphasizing low initial rates."
Countrywide told the LA Times it had no immediate comment.
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Remember the client I told you about who came in second of five offers on a condo? Well, they were the bridesmaid, not the bride, again this week. They were second of three offers. The top offer had the most flexibility regarding closing time. My buyers were unwilling to allow more than two months until closing.
That brings me to today’s topic:
What is the cost and risk of delaying a closing beyond the typical 4-6 weeks between offer and closing?
I am starting a series on bad behavior on both sides of the landlord-tenant relationship. Please write me an email if you have stories and want an opinion. If you comment here, please remember no naming names, no identifying properties.
Recently, I got this first-hand account of a landlord who tried to get a little more money before falling into foreclosure:
The declining real estate market has taken from many Americans the option of borrowing money against the value of their home. The finance blog Calculated Risk reports that home equity extraction fell to $51.2 billion in the first quarter of 2008, down from $135.7 billion during the first quarter last year. The graphic comes from Calculated Risk.
Foreclosures are the most obvious and most dramatic consequence of the housing crisis. They also tend to concentrate in lower-income neighborhoods, fostering the impression that the crisis is concentrated in those neighborhoods. The home equity numbers are a less obvious and less dramatic consequence, but they are a good reminder that the crisis is hitting more affluent families, too.
There are people, including New York Times columnist David Brooks, who saw the boom in home-equity borrowing as evidence that America was overcharging its national credit card. Worse, it was evidence of moral decline. Which makes the current crisis a judgment on a spendthrift nation.
"The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.
"Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money." [Emphasis added]
Or maybe it's just business.
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The federal government encouraged Fannie Mae and Freddie Mac to buy more than $400 billion in subprime mortgage loans between 2004 and 2006, helping to fuel the boom in risky lending, the Washington Post reports.
The story underscores an important issue: The federal government didn't just fail to prevent the subprime lending explosion. Rather, it encouraged, abetted and participated in the subprime lending explosion.
Fannie and Freddie were created by the government to buy loans from lenders -- basically, to repay loans upfront and then collect the money from the borrower -- so lenders could make more loans more quickly.
The two companies literally defined the prime loan market. Loans they were willing to buy were defined as prime. Everything else was not.
How did they wander into the subprime lending business? The Post reports that the federal government in 1992 started requiring the companies to purchase a certain number of loans to lower-income families. Basically, the companies bought huge numbers of those loans without effective quality controls.
They failed to make sure the loans were affordable to the borrowers.
You know how the story ends, or at least where it stands now.
About 60,000 Massachusetts borrowers were behind on their mortgage payments at the end of March, and about a quarter of those borrowers faced imminent foreclosure. Thus says the Mortgage Bankers Association, which released quarterly data this morning.
The good news, I suppose, is that things are worse in other places. About 7 percent of Massachusetts borrowers are behind on payments, compared to more than 8 percent nationwide.
Also, fewer Massachusetts borrowers are behind on their payments than in the fourth quarter of 2007. The overall delinquency rate fell from 7.46 percent to 7.16 percent. On the other hand, the share of seriously delinquent borrowers rose from 1.94 percent to 2.28 percent.
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Meet WMALT 2007-OC1. W, for short, is a pool of mortgages collected by Washington Mutual and sold to investors in May, 2007. These were not subprime mortgages. The average credit score was 705. But something has gone very wrong. At the end of April, less than a year after the pool was created, 29 percent of the borrowers were badly delinquent. Six percent already have lost their homes to foreclosure.
The story of W has been carefully tracked by a blogger named Mike Shedlock, of Mish's Global Economic Trend Analysis. Shedlock writes that W has one determining feature: 88 percent of the borrowers were allowed to state their income. That is, instead of asking the borrower to bring in a paystub, or a W-2, or any proof of income, the lender simply allowed the borrower to write down a number.
The industry has a nickname for such stated-income loans. They are called "liar's loans," because most people lie.
In a recent piece on Slate relating the history of the liar's loan, Mark Gimein recounts that an examination of 100 "liar's loans" in 2006 found that 90 borrowers had overstated their actual income. About 60 borrowers inflated the actual number by at least 50 percent.
People who made $3,000 a month were getting loans based on a supposed income of at least $4,500 a month.
Gimein calls this epidemic of lying "an astounding breakdown of social norms."
I tend to agree. It is the part of the mortgage crisis that I least understand.FULL ENTRY
A struggling borrower sends an email to Countrywide Financial Corp. pleading for help.
"My number one goal is to keep my home that I have lived in for sixteen years, remodeled with my own sweat equity and I would really appreciate the opportunity to do that. My home is not large or in an upscale neighborhood, it is a “shotgun” bungalow style of only 900 sq. ft. built in 1921. I moved into this home in May of 1992…this was the same year I got clean and sober from drugs and alcohol, and have been ever since, this home means the world to me."
The borrower soon gets a response from the very top, the company's chairman, Angelo Mozilo. But it's not a very nice response:
"This is unbelievable. Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the Internet. Disgusting."
Listen, Angelo Mozilo is a good candidate for "The One Person with The Most Responsibility for The Mortgage Crisis."FULL ENTRY
Hyacinth and Andrew Doman bought a Dorchester home last August, paid $220,000, and this story isn't headed where you might think. Today I'm writing about good news. The Doman's mortgage bill is $1,350 a month, an amount they can comfortably afford. And this morning, state officials gathered to celebrate Hyacinth Doman as the 10,000th recipient of a loan from a state program designed to encourage home ownership.
The SoftSecond program basically reduces the cost of ownership by as much as 20 percent for buyers who qualify and agree to take ownership classes. The program, which began in 1991, has a foreclosure rate of 0.35 percent, lower than the rate on loans to borrowers with the best credit and qualifications.
Demand is on the rise: The program made 1,138 loans last year, the highest annual total in its history.
"If foreclosures are a hurricane, then this is an eye of the hurricane," said Ruston Lodi, a spokesman for the Mass Housing Partnership, which administers the program.FULL ENTRY
Many borrowers understand very little about their mortgages. That was the predictable but dismaying finding of a study published last fall by the Federal Trade Commission. The results were recapped in a recent article at Forbes.com:
Of those surveyed, 25% could not identify the annual percentage rate of their mortgage, and 25% could not identify the amount of settlement charges. Half could not correctly identify the amount of the loan. Two-thirds were unaware of prepayment penalties that could be charged during refinancing. Three-quarters did not recognize that the loans included charges for optional credit insurance.
That's not good. And it has occurred to some people that better-educated borrowers might be less likely to take loans they can't afford. Therefore the Senate held a hearing last week, entitled: "The More You Know, the Better Buyer You Become: Financial Literacy for Today's Homebuyers." You can read some of the testimony. It basically expands and elaborates on the hearing title.
I don't doubt this is true. One of the great mysteries of American life is why so few public high schools provide any kind of financial education. Sex education, driver's education, but no how-to-balance-a-checkbook education. Go figure.
But it's also important to understand the limits of education. Mortgages are by their nature highly complex financial instruments. Mortgage sellers are full-time experts. Borrowers only borrow once every so often. So there's an inherent imbalance.
Even harder to overcome is that many borrowers simply aren't susceptible to education.FULL ENTRY
The housing bubble was basically an auction attended by middle-class families desperate to live in the best school districts. Historically, bidders were restrained by lending guidelines. When mortgage companies were allowed to dispense with guidelines, prices went through the roof.
So writes Cornell professor Robert Frank in Sunday's Washington Post. The point of his version of recent history? The federal government should regulate the mortgage industry, basically as a means of regulating the conduct of middle-class families.
Primary responsibility rests squarely on regulators who permitted the liberal credit terms that created the housing bubble.... If a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up....
The financial deregulation that enabled them to bid ever larger amounts for houses in the best school districts essentially guaranteed a housing bubble that would leave millions of families dangerously overextended.
Frank's storyline seems basically sound. Clearly non-parents and empty-nesters also drove up prices, but I'm willing to believe prices generally soared more in towns with the added value of better public schools. The Boston area, with its atomized system of town schools, would appear to offer a compelling case in point.
But Frank's facts strike me as unlikely to move people on the other side of the regulation debate. Some people look at the absence of self-control and see a need for government intervention. Others see a need for more self-control.
What are your thoughts: Do we need the government to save us from ourselves?
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Six months ago, an epic disaster was widely predicted. Interest rates on many adjustable-rate mortgage loans would rise sharply. Borrowers would be overwhelmed. Foreclosures would rise. It was said the number of resets would peak in the spring of 2008. Right about now.
Then the crisis was defused by the Federal Reserve, whose rate cuts reduced the magnitude of the resets. But foreclosures keep rising anyway. Has anyone been helped by the lower rates?
Just like every other respectable newspaper, we published an ominous piece last September predicting the consequences of the rate reset wave.
These rate increases will add hundreds of dollars to homeowners' monthly mortgage payments, and some housing specialists predict hundreds, and perhaps, thousands of borrowers will be unable to afford the higher costs.... "This is an unprecedented wave of resets," said Wellesley College economics professor Karl Case.... "People are getting hurt badly when their houses are taken away from them."
The good news: Everyone was completely wrong!FULL ENTRY
We've received an amazingly steady flow of stories from readers who have lost access to their home equity lines of credit (HELOCs). No post on this blog has drawn a more sustained reaction than my January post about Countrywide's decision to start suspending HELOCs. Since then, other major lenders have done the same, spreading the pain.
The latest response, submitted last night by Lilah Noleston, is particularly poignant:
We took out this line of credit as our very last attempt to pay for the costs of adopting a child. After years and years of trying, and then going through the adoption process, we were finally so close to the end. Now our line of credit has been frozen. We have never defaulted or even been late on a payment, but they said our home value declined. So after all of this, they brought much more than a home improvement project to a screeching halt.... We had no idea that this could happen, wish we had read the paperwork more thouroughly.FULL ENTRY
What's the matter with jumbo loans? Kimberly Blanton writes in the morning Globe about the latest attempt to reduce interest rates on mortgage loans larger than $417,000. The basic problem: The average interest rate on smaller loans is about 5.875 percent. Above that amount, the average interest rate is at least 6.75 percent.
Here's a short history of the reason: Two companies created by the federal government basically promise to buy loans below the magic size, known as the conforming loan limit. Loans above that size, known as "jumbos," must be sold to private investors. And right now, private investors don't want to buy jumbo loans.
The reluctance is understandable. Mortgage companies and bond-rating firms basically stand accused of lying to investors over the last several years about the quality of packages of mortgages called mortgage-backed securities. Their actions were the equivalent of taking a quality assurance label trusted by shoppers and slapping it on all manner of products, some of which deserved it and some of which did not. The label in this case was a AAA bond rating, and it was supposed to indicate a high likelihood those mortgages would be repaid. But many of those mortgages were not repaid.FULL ENTRY
The latest victim of the mortgage crisis? How about the Mortgage Bankers Association. The trade group is scheduled to close on a new $100 million headquarters in Washington, D.C. this spring. But what once seemed a fitting statement for a rising industry has become a different kind of metaphor. The Washington Post reports that the group is struggling to pay the bill.
Tightened lending standards mean the Mortgage Bankers must pay a 10 percent larger downpayment than originally planned, and their loan will carry a higher interest rate. The bill is coming due just as the trade group's revenues are in sharp decline. The group lost 500 of its 3,000 members in the last year. It expects revenues to fall by a similar amount from the $47 million collected in 2006.
But don't accuse the Association of hypocrisy. It is standing by the notion that it's a good time to buy. "Anytime is the best time to buy," said Kieran P. Quinn, chairman of the association. "Over a 10-year horizon, [the purchase] looks great."
Here is the issue with mortgage brokers in a nutshell: A new study finds that among borrowers with good credit, those who go to mortgage brokers get better interest rates than those who go directly to a lender such as a bank. Which is great. But among borrowers with bad credit, those who go to mortgage brokers get much higher interest rates. Which is not.
In fact, the typical subprime borrower who uses a mortgage broker pays more than $1,000 a year in additional interest.
It's as if there are two industries using the same name: One that helps its customers, and that doesn't.
The study was released today by the Center for Responsible Lending. The borrower advocacy group has been hammering on this issue for years. It wants the government to regulate and restrict the fees that mortgage brokers receive -- particularly "premiums" they are paid for convincing customers to accept a higher-than-necessary interest rate. The higher the rate, the larger the premium.
The authors argue that brokers are less likely to try overcharging customers with good credit, because the loans are relatively easy to process and the customers are presumed to be knowledgeable. By contrast, customers with bad credit may seem vulnerable.FULL ENTRY
A California mortgage broker, probably trying to fill time once spent arranging mortgages, has taken to writing haikus about the present predicament. Each of his poems is printed on a piece of Japanese art.
The broker, Mike Mueller, told the San Jose Mercury News that he wrote the haikus mostly for an audience of other real estate professionals. Consider the example at right, which bemoans the industry's plight.
Others, however, will resonate with borrowers, too:
or a financial nightmare?
I am your mortgage.
Accusing a mortgage broker of creativity generally is not a compliment, but of Mueller I mean it in the nicest possible way.
Have a real estate haiku in you? The standard poem is three lines of five, seven and five syllables. Post yours below.
Fascinating new tool from the New York Fed, allows users to customize maps showing the impact of non-prime lending on communities across the U.S. The nice thing about the Fed is they have tremendous resources to create this kind of stuff. Too bad they didn't care about nonprime lending until the day before yesterday. Somebody might have noticed a pattern.
Have fun playing with the map, and come on back tomorrow.
An interview with an "investment banker" on the subject of how the world came crashing down and what should be done about it, performed by the British comedy due of John Bird and John Fortune. My apologies to those of you who may have seen it already. I had not.
It reminds me of Dave Barry's summary of the housing mess in his eulogy for 2007:
"There was a major collapse in the credit market, caused by the fact that for most of this decade, every other radio commercial has been some guy selling mortgages to people who clearly should not have mortgages. (''No credit? No job? On death row? No problem!'') It got so bad that you couldn't let your dog run loose, because it would come home with a mortgage. The subprime-mortgage fiasco resulted in huge stock-market losses, and the executives responsible, under the harsh rules of Wall Street justice, were forced to accept lucrative retirement packages.
"So they did OK. But for the rest of us, it was another bad year..."
Ah, 2007. Glad we put that behind us.
The Federal Reserve keeps cutting interest rates, but interest rates on mortgage loans aren't falling. Just the opposite. The chart above, from the front page of today's Globe, shows the pattern nicely.
The basic reason is that the Fed keeps cutting the price banks pay for short-term loans. But that's not the money mortgage companies, including banks, use to make mortgage loans. Instead, companies mostly borrow the money from investors. The interest rates they pay those investors determine the rates they charge borrowers.
Right now, mortgage companies are searching hard for investors willing to provide money, which is forcing the companies to offer higher returns, which in turn means they must charge borrowers higher interest rates.FULL ENTRY
In the debate about the future of Massachusetts housing prices, I'm inclined to pay particular attention to the opinions of those with the most money at stake. Wells Fargo & Co., one of the nation's largest lenders, quietly sent mortgage brokers this week a list of areas where it believes real estate prices are most likely to decline. In those areas, the company is cutting the maximum amount it will lend relative to the value of the home -- basically, requiring larger down payments or limiting the size of refinance loans.
No Massachusetts county appears in the worst category, "Severely Distressed Markets."
The next, "Distressed Markets," includes Barnstable, Berkshire, Norfolk, Plymouth and Suffolk counties.
The last, "Soft Markets," includes Bristol, Essex and Worcester counties, along with Rockingham and Strafford counties in New Hampshire and all five counties in Rhode Island.
The exact implications are complicated, but basically the most you can borrow in soft markets is 85 percent of the home value, and in distressed markets 80 percent of the home value. In many cases, the maximums are even lower.
To paraphrase and summarize, Wells Fargo thinks our prices are going to keep falling, but things are even worse in other places.
An interesting map of January foreclosures in Boston, from John Keith's Boston Real Estate Blog. The map underscores that foreclosures tend to cluster. When they do, the surrounding neighborhood tends to suffer. Hendry Street in Dorchester is so far the worst-case example.
I mention this apropos of two stories in the news this morning. First, the Wall Street Journal reports that several major philanthropies are considering how to help stabilize neighborhoods. Proposals include spending money on counseling, on refinancing loans and on buying foreclosed homes.
Second, the executive branch is voicing its opposition to the various bailout plans for mortgage lenders circulating in the legislative branch. Senior Democrats are talking with industry groups about the possibility of buying large numbers of loans, which would limit lenders losses and preserve borrowers from foreclosure. Treasury Secretary Henry Paulson panned the idea yesterday. Today, Paulson's boss chimed in.
The plan, said President Bush, would "do more to bail out lenders and speculators than to help American families keep their homes."
Many of you responded with outrage to the idea of the federal government buying up bad mortgage loans, described in my last post. The latest developments probably are not going to improve your mood.
The New York Times reported Saturday that Bank of America is circulating a proposal to members of Congress that the government:
1. Buy loans that might fail from the companies that might lose money.
2. Forgive debt in excess of the value of borrowers' homes (Meaning taxpayers would swallow the losses that lenders otherwise might bear.)
3. Refinance the borrower into a government-guaranteed loan with a lower interest rate.
More than 10 percent of American homeowners owe more on their mortgage than the value of their home, according to a new study by Moody’s Economy.com. This is what happens when buyers make minimal down payments, and then housing prices start falling.
The consequences are all bad, which you can tell by the term the industry uses to describe the situation. Such borrowers are said to be “underwater” -- they are drowning.FULL ENTRY
The role of mortgage servicers -- companies that collect payments from borrowers -- is starting to receive more attention. These companies don't make loans, and they don't own properties, but they generally are responsible for deciding who will be foreclosed, and for reselling foreclosed properties.
Maryland has just become the second state, after California, to require loan servicers to provide the state with lists of home owners who may face foreclosure. The emergency regulation is intended to help the state contact those borrowers before they fall so far behind on payments they can't be helped.FULL ENTRY
The window to refinance may be closing. Average interest rates on new 30-year loans climbed to 6.09 percent from 5.71 percent last week, the Mortgage Bankers Association reported this morning. It's a big jump that may seem bigger to some borrowers because rates are now back above 6 percent.
The reasons for changes in mortgage interest rates are always a bit obscure, but historically, rates never stay below 6 percent for very long. That window may just have closed. Did you manage to seize the opportunity?
You can’t tell the mortgage boom is over from the advertising on radio and television. Companies such as East West Mortgage Co. continue to heavily promote their ability to arrange loans, even for people with credit problems.
In part, companies are advertising more because they’re having more trouble convincing people to borrow money. The New York Times reported yesterday that the industry’s spending on advertising hit $409 million in the third quarter of 2007, more than companies spent at the peak of the housing boom in 2005.
Some of the pitches are surprisingly brazen for an industry whose leaders and lobbyists have lately been spending time acknowledging past excesses. One example recently delivered to the home of a colleague featured a picture of a baby on the front. Inside, it offered to lower his monthly mortgage payment by refinancing him into an Option ARM. The loan works like a credit card: You can pay less than your balance each month, but if you do, the balance grows larger as the interest accrues.
Readers: Are you being bombarded by offers to refinance? Have you heard or seen an ad that made you feel like we were living 2005 all over again?
Mortgage rates rose again last week. The average rate on a 30-year fixed-rate loan climbed to 5.72 percent from 5.61 percent, according to the Mortgage Bankers Association. Rates on other types of mortgage loans rose by similar increments.
As might be expected, the number of applications for mortgage loans dropped about 2.1 percent, though the trade group said demand for new loans remained 65 percent higher than during the same week last year.
Application volume surged as interest rates declined through the fall and into January. The great unanswered question is how many applicants actually are qualifying for loans. Tighter standards mean many applicants may be turned away. And the tighter standards may themselves be causing an increase in the number of applications as people work to find a lender willing to give them money.
Major mortgage companies and the federal government held another press conference yesterday to talk about helping troubled borrowers. Meanwhile, the Wall Street Journal reports this morning that the Hope Now hotline, touted this fall as a source of help for homeowners, has provided counseling to just 36,000 people in the last two months. That is well behind hopes and projections.FULL ENTRY
Finally, someone has stepped forward to defend the subprime lending industry. The chief executive of a luxury home builder, writing today in the Washington Post, says rising home prices forced the rise in subprime lending because the financial system failed to provide borrowers with alternatives.
The truth is that subprime lenders, by responding to demand, were the finger in the dike for the whole housing market. The real problem is affordability and the incongruity between incomes and home pricing.FULL ENTRY
Countrywide, the nation's largest mortgage lender, is suspending withdrawals from some borrowers' home equity lines of credit (known as HELOCs). The company said about 122,000 borrowers nationwide would be affected.
An internal memo is posted at the Mortgage Lender Implode-O-Meter. Perhaps the most interesting line:
This is not unique to Countrywide and our competitors have implemented similar initiatives with their HELOC customers as well.
Keep reading for details:FULL ENTRY
It's the nightmare of the mortgage industry: The possibility that home owners stop making payments before they run out of money -- walking away from their homes because they have no equity -- or worse yet, remaining in the homes and living rent-free.
A Los Angeles Times story on Wednesday quoted one Leandro Hernandez on the subject of what he would tell his lender if the company doesn't agree to modify his loan
Foreclose me.... I'll live in the house for free for 12 months, and I'll save my money and I'll move on.FULL ENTRY
Here is your chance to get some answers. Holden Lewis, senior reporter at Bankrate.com and author of the blog Mortgage Matters, will answer your mortgage and refinancing questions in a noon chat today at Boston.com.
Subprime mortgages and foreclosures, are you sick of hearing about them yet? Obviously not! Back in August, I wrote on this blog defining subprime mortgages and showing why there was incentive to entice consumers to buy them. In July and October, I wrote again about wide-spread use of subprime loans among minorities and women – even those with good incomes.FULL ENTRY
Seven states including Massachusetts have created a shared database to track the licensing of mortgage loan originators, including mortgage brokers and loan officers at banks.
The Nationwide Mortgage Licensing System, launched today, will allow regulators to prevent loan originators banned in one state from working in a different state. Eventually, perhaps by 2009, customers also will be able to search the database.FULL ENTRY
Boom. The Federal Reserve tightened the screws on the mortgage industry this morning after years of insisting that increased oversight was either inappropriate or impractical.
The proposed rules (read them here) are stricter than many observers had expected.
What are your thoughts on the Fed's action?
The administration's proposal to freeze interest rates on certain subprime loans (a Globe story here describes the plan) is drawing plenty of heat.
The Washington Post reports borrowers who took prime loans feel punished for their financial probity (here).
The New York Times says the plan may help lenders more than borrowers (here).
And Bloomberg News reports it just may not make much of a difference (here).
What are your thoughts?
Mortgage brokers maintained, even in the midst of the subprime loan crisis, that the specialized mortgages for people with poor credit histories had a purpose.
But it appears their role in the housing market may be much smaller, however, according to new information on the industry's loan volume.FULL ENTRY
Now that foreclosures finally have the attention of the Boston Fed, the institution plans to focus some of its research muscle on a pair of questions:
1. Is there a better way to pay mortgage brokers?
2. How can help people understand the risks before they take adjustable-rate loans?
Keep reading for more on these questions, then tell us what questions you think the Fed should be exploring. I'll forward the best ideas to the Boston Fed's research staff.FULL ENTRY
New research by the Federal Reserve Bank of Boston shows more than half of subprime borrowers have yet to miss a mortgage payment, and many may be eligible for cheaper loans.
Eric Rosengren, president of the Boston Fed, said Monday that 26 percent of subprime borrowers in New England likely were eligible to refinance to loans with lower interest rates based on their credit scores, the equity they held in their property, and their original loan terms.
He urged a focus on helping these borrowers refinance rather than attempting to save borrowers who have already fallen behind on their mortgage payments. He said a focus on borrowers in better shape was likely to be more productive and "may avoid much greater costs later on."
Rosengren spoke at a breakfast meeting convened by MassInc, a local think tank, at the Omni Parker House hotel. (The text of his speech is available here.)
A coalition of consumer groups plans to ask bankers at five of Wall Street's largest firms to donate their year-end bonuses to a foreclosure prevention fund.
The coalition wants to highlight the role of investment banks in funding -- and thereby fueling -- the loose lending now resulting in record numbers of foreclosures.
In a new report (available here), the coalition argues that the boom in subprime lending was primarily driven by Wall Street's hunger for mortgages it could package as bonds and sell to investors -- and not by consumer demand for the high-risk loans.FULL ENTRY
An article in The New York Times today said the agency charged with monitoring the US Bankruptcy Court is looking into two Florida foreclosures.
The agency issued subpoenas to Countrywide for the borrowers' mortgage records. The move comes amid a growing realization that mortgages were sliced and diced and sold to Wall Street investors in so many packages that it may be difficult to determine who is the true holder of an individual mortgage.
Politicians and regulators at multiple levels are moving quickly with measures and ideas to stop the wave of foreclosures sweeping the country.
In Massachusetts, the state Legislature passed a bill late Tuesday that gives borrowers who fall behind on payments 90 days to catch up. It also limits the fees lenders can charge for converting an adjustable-rate loan to a fixed-rate.
Meanwhile, in California, Gov. Arnold Schwarzenegger struck a deal with four major loans servicers--the bill collectors--to agree to freeze the lower, introductory rates of borrowers with adjustable rate subprime loans. The governor's office said there are a half-million borrowers in California with subprime loans that will adjust to higher rates--and higher monthly payments--over the next two years.
Those of you who have followed this blog since its beginning know that my father taught me how to understand the use of numbers found in newspaper articles.
In the Sunday Boston Globe, Trey Skehan explained the use (and misuse) of averages, medians and means in discussions of income.FULL ENTRY
A new congressional study projects 22,292 Massachusetts homeowners will lose their homes to foreclosure by the end of 2009. The study by the Joint Economic Committee, available here, estimated the foreclosures will reduce property values by $3 billion and cost the comunitiesin the state almost $26 million in property tax revenues.
The study ranked Massachusetts only 19th among states in the number of expected foreclosures. But the state's relatively high property values mean Massachusetts ranks 6th in terms of the expected economic damage.
According to the authors, the studies methods and assumptions likely underestimate the total number of foreclosures, and the impact, over the next two years. For example, the study looked only at borrowers who took subprime loans.
Plymouth County's Register of Deeds reported 738 foreclosure deeds were filed in the county last month -- that's more than double the 304 deeds in October 2006.
However, initial notices of foreclosure filed by lenders against homeowners are down sharply: 147 in October, compared with 259 in March, the Register said in a memo on activity in the county.
But, as more adjustable mortgages have their interest rates reset to higher levels and push up borrowers' payments, "we are likely to see that volume of foreclosure notices continue," the Register, R. Buckley Jr., said.
Property sales recorded in October were 7,102, down 7 percent from 7,594 sales a year earlier.
A federal court has temporarily prevented the Department of Housing and Urban Development from fixing a gaping loophole in the federal program that encourages lending to lower-income families.
The Federal Housing Administration insures loans to lower-income families, promising to pay lenders if borrowers don't. That encourages more lending. As for borrowers, there's only one major restriction on participation: They need to make a 3 percent down payment.
Borrowers who fall behind on mortgage payments are often reluctant to contact the lender.
Perhaps not surprisingly, it turns out that a lot of borrowers don't trust the mortgage industry. Many feel they got into trouble by talking to lenders. Why should they do it again?
At a closing, there is a piece of paper that flies by the borrower that says something like, “Disclosure: lenders may not discriminate in regard to race, gender, national origin...” Well, it is becoming pretty clear that there was a lot of discrimination going on.FULL ENTRY
US Treasury Secretary Henry Paulson Jr., called on mortgage lenders and their affiliates to move more quickly to help struggling borrowers avoid foreclosures on their homes.
In a speech this morning at Georgetown Law Center, Paulson noted that an industry group is already working on ways to intervene with troubled borrowers before they get too far behind in their mortgage payments.
But, he added, "We have an immediate need to see more loan modifications and refinancing and other flexibility. For many families, this will be the only viable solution. The current process is not working well. This is not about finger pointing; it is about putting an aggressive plan together and moving forward."FULL ENTRY
Frank, a Massachusetts Democrat, is the chairman of the House Committee on Financial Services.
According to Frank's office, the hearing will focus on mortgage lending disparities in the Boston area, including data that reveal that black and Latino borrowers were much more likely than whites or Asians in this area to receive higher priced loans.
(By Chris Reidy, Globe staff)
Last week, I wrote about the difference in buying power for consumers who spend 50 percent of their income for housing costs, instead of the 33 percent that is conventional wisdom.
I made a mistake. I calculated the ratios based on net income, not gross.
In response to a comment, I also confirmed that people with big down payments and excellent credit can borrow more than 50 percent for housing costs, still! These are conventional loans, not “Alt-A” or subprime loans.
Fannie Mae allows borrowers to spend up to 50% of their net income on their mortgage for a conventional loan. Really. Today! Granted, to borrow that much, you must have great credit, work history and little other ongoing debt. Here’s the problem:
Suppose Family A earns $52,000 a year. Assuming 25% income tax, they have a net income around $39,000. Divide by 12 months, and their monthly net income is $3250. If they spend one third on housing, their mortgage payment would be $1083. That will get them a loan of about $160,000. That’s not enough. So they stretch to half their income. They get a loan of $260,000. That leaves them $1625 a month to pay all their other bills. Now, they are headed for trouble; there is not enough cushion, IMHO.
If we double the income to $104,000 a year for Family B, their net monthly income goes up to $6500. A third of that allows a loan of $320,000 and spending half allows $510,000. (Taxes are higher; that’s why it isn’t just double the figures above). They have $3250 left every month for groceries, medical, daycare, transportation and home repairs.
You can easily see how a family earning $150,000 or $200,000 would still have lots of expendable income, even if they spend half their income on housing.
People at median income who spend 50% on housing are locked into being house-poor. But for people with large incomes, especially young, upwardly mobile ones, this may not be so risky. I still don’t recommend it; I’m financially conservative.
The Mortgage Bankers Association today released its weekly index of mortgage applications, and they're down.
Applications have declined 2.8 percent since last week.
But since the beginning of August, when the mortgage crisis gained momentum, the index hasn't shown any clear pattern -- it's up about half the time and down the other half
However, there are numerous reports that some people who apply for mortgages are being rejected. Or if they do qualify, they are finding rates are too high, making their ideal property unaffordable.
Timothy Warren, chief executive of The Warren Group, which reported yesterday the state's housing sales declined 5 percent in August, says the mortgage meltdown's impact hasn't yet affected the market.
What do you think?
Although I do not predict, I have been happily anticipating the fall real estate market. I have reason to expect it will be a good market for buyers who are financially prepared.
It is still pretty quiet out there in real estate land... Mostly, I’ve been house-hunting in “Greater Cambridge.” I’ve seen lots of quiet open houses this September. There have been some “lightning strike” busy open houses and a few fast sales. But, overall, I expected more activity. I checked this perception with my office-mates, and they sensed the same thing: we all have good clients, but there is not much in the way of new and interesting listings for them.
Maybe it is because the Red Sox played “them” this past week, or because the Patriots were making news, but this fall seems to be a bit anemic.
For buyers, things just got even better! The reduction of the benchmark interest rate is a good thing for people who are buying now. Whatever you were going to spend every month on your principle and interest just went down.
Now, all you need is a property you want to live in!
The Fed reduced the benchmark interest rate, a move to side-step a possible recession. Reducing the rate allows more money back into circulation by encouraging borrowing. The reason to not reduce this rate is that reducing this rate encourages stock market speculators.
Alas, this may help stock market speculators, but real estate speculators are still up that famous creek without their paddle. Mortgage loans are long-term products. If you are mired in an adjustable-rate or interest-only product, you are still mired in it. If you are developing a property for resale, that timeline is still long and those buyers are still skittish. Nothing has changed there.
Now the TV part: As soon as a window is open for speculation, offers on how to borrow to speculate pop up on TV. This afternoon, while at the gym, I spotted a commercial offering to invest your home equity into the stock market. Uggh! In June, I remarked how daytime TV offered quick-fix remedies to your financial woes. These ads are seductive, but if you listen to those ads, you risk a visit from “the repo man.” Well, here we go again.
Plus ça change, plus c'est la même chose
The more things change, the more they stay the same.
More confirmation about a bright corner of the mortgage market: Freddie Mac, one of the largest purchasers of US mortgages, said that interest rates for 30-year, fixed-rate mortgages dropped to 6.31 percent today, down from 6.45 a week ago.
The rate hasn't been in that range since May.
And homeowners and buyers appear to be responding to the lower rates. Earlier this week, the Mortgage Bankers Association said that its index for applications for mortgages has increased by 5.5 percent since last week. (In its own survey released Wed., the MBA reported slightly lower mortgages rates than Freddie, with the overall trend very positive.)
Inman News has a pretty interesting clip about a new survey of mortgage deals. One of the more startling facts: one-third of buyers had their home-purchase deals fall through in August, often for mortgage related issues such as failing to qualify under tougher scrutiny or because the lender didn't honor the offer, withdrew from the business or even went bankrupt.
Of borrowers of subprime mortgages, the survey said that more than half who had already signed a purchase and sale agreement had their home purchase deals fall through in that period.
Moreover, Inman reports the survey found that nearly 60 percent of borrowers who have an existing adjustable mortgage that is due to reset, no doubt to a higher rate, were unable to refinance their loans. That suggests another huge wave of foreclosures is coming, as tens of billions of dollars worth of mortgages are facing interest rate adjustments in the coming weeks.
The Federal Trade Commission today issued letters to more than 200 mortgage brokers, lenders and media outlets warning them the ads they are running are "potentially deceptive" or may violate federal law such as the Truth in Lending Act.
The agency said some of the ads failed to disclose important terms and conditions that could make the loan far more expensive than the costs touted in the advertisements. These include not adequately disclosing how short introductory teaser payments would be, potential payment increases and other matters, such as the annual percentage rate, which is used to help consumers shop around.
As August winds down, I took a quick look at the number of foreclosure deeds and orders of notice recorded here at the Middlesex North Registry of Deeds in Lowell. The official statewide foreclosure statistics for August usually aren't released until mid to late September, so our stats provide an early glimpse into what's in store for the rest of the Commonwealth. The foreclosure situation is not getting any better. Last August, we recorded 22 foreclosure deeds and 51 orders of notice here in Lowell. This August, we recorded 54 foreclosure deeds and 84 orders of notice.
When chatting with the attorneys who come here to record documents, two themes have emerged this month.
The first involves the availability of mortgages, particularly for home purchases. If you have stellar credit and you're looking for $300,000 or less, you have a good shot at getting your loan approved. If you're seeking a larger loan (and who isn't, with the still-high prices of real estate?), your odds of locking in a loan are greatly diminished.
The second observation is that current homeowners who are in adjustable rate mortgages are growing increasingly concerned that the next upward adjustment will be devastating to their home finances, placing many into unsustainable positions. Because of much tighter credit (see point one above) and because the value of the home in many cases has slid below the outstanding balance of the mortgage, these folks must try to ride out the increase by tightening the family financial belt in other areas.
The mortgage crisis, which has made it extremely difficult to refinance delinquent mortgages or sell a home to exit a bad mortgage, won't help the worrisome foreclosure trend.
The number of foreclosure auctions advertised in Massachusetts newspapers in July exceeded 1,000 for a fifth month in a row, according to The Warren Group's report today on foreclosure activity in the state.
"July held more of the same for Massachusetts homeowners," Timothy Warren, Warren Group's chief executive, said.
"More people who get into trouble are having a hard time getting out. They are finding it more difficult to refinance or to sell, so more foreclosures are making it to the auction process," he said.
There were 1,128 scheduled auctions in July -- up 130 percent from last year. That is below April's peak of 1,647. During that time, state regulators began assisting some delinquent borrowers in renegotiating their mortgages or halting foreclosures to give the homeowners a reprieve.
But it seems too early to gauge whether foreclosure auctions are truly in decline.
That's because lenders who initial filed notices of potential foreclosure in Massachusetts Land Court continued to increase: 2,185 in July, up 66 percent from a year ago. July marked the 10th month in a row in which filings exceeded 2,000 statewide.
If I were house-hunting right now, I would be scared about getting my loan. The lending rules are changing daily – sometimes a couple of times a day – in reaction to the credit crisis. I can’t really blame those giving out the money; these are hard times for mortgage lenders.
I am self-employed, so I don’t fit into the “standard” categories for great borrowers. If the rules change in regard to how my self-employment income is counted, I might fail to qualify. My options for getting a loan based on my stated (but undocumented) income have all-but disappeared. If I need a second mortgage to avoid PMI, I may be out of luck. The pre-approval I got last month may no longer be accurate. I am a good borrower, but not a great one.
What makes a great borrower?
1. Good credit score.
2. Steady employment (on payroll is better than self-employment – that’s my weak spot.)
3. Good income to debt ratios: One measures how much you will owe for the house compared to your income. The second measures how much you owe on all your debt compared to your income.
What can you do if you are not a great borrower?
The obvious thing is to check with your lender. Also, check again before you make an offer to purchase. If the lending rules continue to shift like sand under your feet, you may need to borrow less, or improve you credit score, employment or ratios before you can buy.
What's remarkable about the results of the Federal Reserve Bank's new survey of lenders is not that some indeed are tightening standards for residential real estate loans; it's how many report they are not!
The Fed survey found 14 percent of respondents tightening lending standards on prime loans, those to customers with good credit. Around 40 percent said they tightened standards for non-traditional loans, and 56 percent for subprime loans. That leaves a healthy percentage of lenders who did not change lending practices in July despite the extreme blowups in the mortgage and credit markets.
Events of the past few weeks confirm that our real estate woes are not limited to the subprime market. The latest casualty seems to be mortgages in excess of $417,000, the so-called “jumbo mortgages.” I say “so-called” because with the high price of housing, a loan of $400,000 doesn’t exactly buy a mansion in most communities in the northeast. Loans of this size either are not being made or they are being offered with extremely high interest rates. The consequences are widespread. Buyers cannot get funding to consummate purchases. Sellers are left hanging when deals fall through because of no financing, and existing homeowners with soon to reset adjustable rate mortgages are trapped in their existing loans. While the current credit crunch has implications beyond the housing market, it is still the housing market that suffers the most.
President Bush today said a tad more about his position on the current turmoil in the housing and credit markets, reiterating his position that he does not support a government-financed "bail-out" of homeowners facing foreclosure.FULL ENTRY
Every mortgage broker I interviewed for today's article had the same message: Frustration.
This is the worst credit market they've seen in 20 years -- or ever.FULL ENTRY
The mortgage mess is a now a presidential campaign issue. Democratic Senator Hillary Clinton today in New Hampshire sketched a plan to crack down on unscrupulous lending and offer assistance to troubled homeowners facing foreclosure.FULL ENTRY
Subprime mortgages, are you sick of hearing about them yet? They are bad news, yes? Does everyone know what a subprime mortgage is and why they cost you so much more?
Let me explain:
Prime Lending Rate is set nationally. It is the base rate of all loans. Residential mortgages rates are higher than that prime lending rate. The subprime residential mortgage rate will be even higher than conforming residential mortgage rate.
The opposite of “subprime mortgage” is not “prime mortgage”; it’s a “conforming” mortgage. To get a conforming (or conventional) loan, borrowers must conform to rigid standards developed by mortgage lenders. These standards are not exact; there is some judgment involved. An applicant is judged on these factors: income to support the requested mortgage plus all other debt the borrowers has outstanding, credit history, job stability, and assets. So, someone with an unsteady job may still get a loan if he/she has a good credit history, a good income, and a hefty down payment. Likewise, someone with no down payment may get a prime mortgage if his or her job is stable and credit is excellent. Someone with a lot of debt, but good credit and income could get one.
Subprime mortgages have higher interest rates. They are frequently Adjustable Rate Mortgages that will go up in 2 or 3 years. They often have high up-front costs added into the debt. They are a significantly more expensive way to borrow money.
If you do not qualify for a conforming loan, it should be a warning sign. If the lender’s actuaries think you are a risky borrower, you may be. Check with another lender. If multiple lenders are tell you that you should not borrowing money, maybe you shouldn’t.
The trouble began when subprime lenders made it possible for almost anyone could borrow anything, for a price. It is a good thing that those days are over.
Massachusetts has opened a new hotline for low-income residents who are struggling with their subprime mortgages and need help.
Attorney General Martha Coakley said her office recruited more than 100 attorneys and law students, who have agreed to provide free legal assistance to borrowers having trouble paying their mortgages, facing foreclosure or trying to negotiate a payment plan.
If you read my story today about the Martinelli's of Lawrence and their efforts to renegotiate their loan and save their home from foreclosure, you might get an understanding of how complex mortgage financing is today. I certainly did.FULL ENTRY
Rob Gavin’s front-page story in today’s paper personalizes the foreclosure statistics so many of us write about.
He documents the plight of a family whose medical crisis morphed into a credit crisis, leaving them unable to refinance away from their adjustable rate mortgage. The most recent “adjustment” to that ARM brought their monthly payments from $2,100 to more than $3,000.FULL ENTRY
The smart folks at Economy.com, the economics firm owned by Moody's, issued an analysis today that said the housing market and, in particular, the mortgage sector are really going to be awful over the coming months.
How bad? The foreclosure rate for subprime adjustable rate mortgages is now 4 percent. By midyear, 2008, it will be 10 percent. Those loans made in the fourth quarter of 2006? Try a foreclosure rate of almost 20 percent. In 2011!FULL ENTRY
Patrick administration officials held preliminary discussions Wednesday with mortgage lenders on proposals that include making lenders pay relocation costs of those who lose homes to foreclosures.
Lenders didn't dismiss the proposals, some of which still need to be fleshed out, and agreed to meet again, according to an executive briefed on the meeting. Kofi Jones, spokeswoman for the Executive Office of Housing and Economic Development, said the talks made progress and another meeting will be scheduled in early fall.
It was the second meeting with lenders as the Patrick administration seeks ways to ease skyrocketing foreclosures. In addition to the proposal on relocation costs, the administration is considering a foreclosure prevention initiative that calls on lenders to delay foreclosure proceedings in some cases; reduce loan amounts and waive prepayment penalties in others; and work to transfer vacant, foreclosed properties to first-time home buyers or nonprofit agencies. (Robert Gavin)
With an explosion in foreclosures driven by the huge numbers of high-cost subprime loans, the Federal Trade Commission is investigating mortgage lenders for possible violations of fair lending practices.
“The current fair lending investigations are part of a broad and aggressive law enforcement and consumer education program to protect consumers from deceptive, unfair, and otherwise illegal credit practices, particularly in the subprime mortgage market,” said Lydia Parnes, Director of the FTC’s Bureau of Consumer Protection, in a statement today at a Congressional hearing. Read more.
Countrywide Financial, the giant mortgage lender, spooked financial markets yesterday when it reported that loan delinquencies were spreading into the so-called "prime" market--that is, borrowers with good credit histories, and predicted housing prices won't rebound until 2009. The situation here in Massachusetts could be different.FULL ENTRY
The bill for subprime mortgage lending frenzy is coming due--to the lenders. Countrywide Financial, one of the nation's largest mortgage lenders and subprime issuers, today reported simple awful earnings numbers that included $417 million in impairment charges, much of which is related to rising defaults and delinquencies.
Among the not-so-comforting news from the company: the housing situation is going to get worse in 2007, or in the vernacular of earnings reports, "increasingly challenging for the industry and for Countrywide."
Don't look to cheap money to bail out the slumping housing market. The latest survey of mortgage rates from lending market specialist HSH Associates shows 30-year-loans hitting a 52-week high last week, with an 6.88 percent average rate. Rates in Massachusetts are a couple of ticks higher, averaging 6.90 percent last week.
The viewing public isn't buying the ads of the lending industry. so says the results of a new Harris Interactive poll.
Two-thirds of those surveyed said they do not view the advertising and marketing of mortgage products as "credible." Ouch.
As noted earlier, Federal Reserve Chairman Ben Bernanke said his agency will likely issue new rules under the Truth in Lending Act to mortgage firms about the type of promises they make in advertising.
The Federal Reserve said it will be using tougher measures to deal with problems in the subprime mortgage industry. Previously the Fed had issued guidelines and suggestions to the lending industry to ensure they do not stick borrowers with loans they cannot afford.
But in testimony before Congress today and yesterday, Fed Chairman Ben Bernanke said the central bank is reviewing new measures to protect borrowers and consumers from abusive practices.
One big target: those easy money ads mortgage companies and brokers endlessly flash. Bernanke said the Fed would be issuing new rules under the Truth In Lending Act "to address concerns about mortgage loan advertisements and solicitations that may be incomplete or misleading and to require lenders to provide mortgage disclosures more quickly so that consumers can get the information they need when it is most useful to them."
Bernanke told lawmakers the Fed has already required lenders to better disclose the terms of adjustable rate mortgages, including such risks as "payment shock and rising loan balances."
Are there legitimate uses of subprime mortgages? Of course there are. However, these loans have higher rates to offset the higher risk of delinquency or default for the investor. The overwhelming majority of subprime mortgages are also adjustable within a two to three-year time period. No one should choose one if he/she can get a prime rate mortgage.
Sometimes people find they just can't qualify for a conforming mortgage, but don’t want to wait. Imagine the computer consultant who has been going from start-up to start up with periods of unemployment, the professional who was bankrupt but is back on her feet, the young professional with monstrous student loans and a good income.
I'm holding a perky, orange piece of junk mail from my online bank asking this very question. The "get-richer" pitch? A mortgage with super-low closing costs (Good!) a low rate with no points (Good!)...and a 5/1 Adjustable Rate (Now, wait just a minute....)FULL ENTRY
Three federal agencies, led by the Federal Reserve, are teaming up with state regulators to keep a closer watch on lenders with large subprime mortgage operations. Subprime loans are made to borrowers with less than impeccable credit, and predatory and sometimes fraudulent practices in this market have contributed to the surge in foreclosures. The federal and state agencies will select a sample of subprime lenders each regulates and assess credit standards and compliance with federal and state consumer protection laws. They will take enforcement actions if necessary. In addition to the Fed, other partners are Office of Thrift Supervision, Federal Trade Commission, Conference of State Bank Supervisors, and American Association of Residential Mortgage Regulators.
The heat is now on lenders as foreclosures rise and questions arise even faster. Friday’s “Borrowers Sue Subprime Lender, allege race bias” reports a suit against Countrywide. But the real news to me is the data behind the suit.
James Campen, a mortgage analyst, has very damning data about the loan industry. Based on 2005 lending data, he concludes that:
“70 percent of African-Americans and Latino borrowers with incomes between $92,000 and $152,000 bought homes with subprime mortgages in Greater Boston, compared with just 16 percent of whites.”
Holy Cow! This is so unlike the example of the couple described on July 12th, who earned $32,000 yet borrowed $529,000. Mr. Campen’s info says nearly three-quarters of all African-Americans or Latinos in a very good income bracket were considered bad risks for a loan. These are middle-class people, probably a lot like my buyers. Yet an astounding number of them have been put into sub-prime loans, where they pay more to borrow money.
My heart has resisted believing that the foreclosure problem was created by masses of people getting greedy and stupid on the same day. I have also resisted the idea that lenders are followers of Voldemort. However, I think I just saw a Dark Mark somewhere over a nearby lender...
Greater Boston is one of nine US regions targeted for a new foreclosure prevention program by a partnership of the Federal Deposit Insurance Corp. and Neighborworks America, national nonprofit that encourages home ownership. The goal: Find and help struggling homeowners before they end up in foreclosure. "The worst thing for them to do is put their heads in the sand and think its going to go away,'' said Douglas Robinson, spokesman for Neighborworks.FULL ENTRY
I am generally cynical about government efforts to correct problems in the real estate industry. A while back, Massachusetts officials considered creating a disclosure about non-fixed mortgages; my reaction was “big deal.” Now, Kim Blanton reports that a fund is being established to financially help those harmed by the recent wave of sub-prime lending. See article. The State promises to “play hard ball” to get lenders to carry some of the costs. And, lo and behold! Martha Coakley has already gotten a response from one of the big lenders. See article.
On the face of it, this seems like the perfect balance; it places the financial onus on both the borrowers who failed to protect themselves and the lenders who offered magic solutions instead of real financial help.
Still, the example in the July 12th article is a borrowers who had a $32,000 annual income who signed on for a $529,000 mortgage. I wonder how that borrower failed to ask “how much are the payments?” before getting to the closing table. Does that lender have salesmanship skills far beyond anything I can do? Or was there an out-and-out lie about how much this would cost when the question was asked earlier on in the loan process? The devil will be in the details here. I wish our Attorney General and her staff good luck in the huge task she has taken on.
Statistics from the 54 cities and towns of Middlesex County corroborate the news that the rate of foreclosures eased slightly in June. In May, 243 foreclosure notices were filed in Middlesex County (in both the Northern and Southern Registries combined) while in June, only 214 were filed, a decrease of 12%. The trend was reversed for actual foreclosure deeds (107 in May vs. 118 in June), but those numbers are less of an indicator of any trend since foreclosure deeds flow proportionally from the foreclosure notices filed several months earlier.
Foreclosure activity across the U.S declined 7 percent in June, from May, according to data provider RealtyTrac. Massachusetts, however, had an even larger drop in such filings--nearly 28 percent.FULL ENTRY
California-based Fremont Investment & Loan agreed to postpone foreclosure proceedings against 2,200 Massachusetts homeowners after state officials determined the lender gave subprime mortgages to borrowers who could not afford the loan payments.
Attorney General Martha Coakley secured the 90-day moratorium from Fremont, once the state’s second-largest issuer of subprime loans, after she threatened in May to sue the California company over lending practices she alleged violate the state’s consumer-protection laws, such as making mortgages without fully disclosing the terms.
The moratorium ‘‘got the clock stopped so the people facing foreclosure get a little bit of breathing room,’’ she said.
Fremont, which has now exited the subprime lending business, declined to comment.
Coakley said her office will review the company’s internal documents on its Massachusetts mortgages to determine whether the loans were made inappropriately or whether a foreclosure is warranted. The state would use that information to determine whether some Fremont customers deserve financial relief, she said.
Financial regulators and housing activists have accused Fremont of routinely failing to detail to customers the full implications of their loans, of not properly documenting information such as borrowers’ income, and of making loans that borrowers could not afford.
Losing one’s home to foreclosure must be one of life’s most distressing occurrences, so the state’s effort to aid subprime borrowers in distress is commendable, but it’s far from a bailout of either lenders or borrowers.
The program is only available to those who are less than 60 days in arrears, so few will be eligible because most don’t even realize they are in trouble until they are already deeper in the hole.FULL ENTRY
Another nudge upward in home loans. The Mortgage Bankers Association reported today in its weekly survey that average interest rates on 30-year fixed loans rose to 6.65 percent, from 6.50 percent, and to 6.31 percent from 6.20 percent for 15-year fixed mortgages. Average rates on adjustable mortgages also went up, to 5.60 percent from 5.49 percent.
Lots of strong reaction to my story about Gov. Patrick's state-sponsored bailout of deliquent borrowers of subprime mortgages.
"What a joke," one reader wrote me in an email. "Here's Massachusetts rushing in once again to bail out a bunch of people who should have known better."FULL ENTRY
On the heels of our story that Gov. Deval Patrick and the MassHousing agency have developed a $250 million fund to help refinance trouble homeowners, Attorney General Martha Coakley announced another major development this morning.
Coakley said she had gotten large subprime lender Fremont Investment & Loan to agree to hold off making more foreclosures against its delinquent customers in Massachusetts for 90 days. During that period, Coakley will review Fremont's pending foreclosure cases and "may object to any foreclosure that it determines may be tainted by unfair or deceptive lending practices," her office said in a statement.
Fremont will halt foreclosure actions on more than 2,000 loans during this period. Coakley's office had previously warned Fremont it was potentially facing an enforcement action over concerns its lending practices violated state consumer protection laws.
I like this prayer: “Dear Lord, some days I am greedy and some days I am stupid. Please keep me from being greedy and stupid on the same day.”
This brings my attention to Kris Frieswick’s piece about foreclosure. She says, don’t blame the institutions who have been offering to loan us enough cash to hang ourselves. Instead blame the greedy fools who take the loans.FULL ENTRY
Rob Gavin’s Wednesday article on the rate of foreclosures in May made the important point that not all foreclosure filings result in actual foreclosure sales.
But what’s not widely known is that the ratio between those two events fluctuates significantly depending on the relative health of the housing market.FULL ENTRY
In the last few weeks, mortgage rates jumped about three-quarters of a point, to about 6.75 percent. This increases a mortgage by an extra $50 per month for every $100,000 borrowed. For most buyers out there, that is $200-300 per month for the next 30 years.FULL ENTRY
OK, breathe...Mortgage rates are up from 6 percent to 6.75 percent. What does this mean to someone who is thinking about buying a home?
Mortgage rates have risen nearly 1/2 a percent in a little over a month, and some analysts are saying homebuyers will now hurry up and buy, for fear rates will climb even higher. My response? Not so fast.FULL ENTRY
There's a glimmer of good news in June's mid-month foreclosure statistics. Up here in Lowell, in our deeds courthouse, orders of notice - the document that commences the foreclosure process - have been recorded at a rate of 96 per month so far in 2007. During the first two weeks of June, only 39 were recorded which projects to 78 for the entire month. If the early June pace persists, it will represent a significant slow down in the rate of new foreclosure filings.