Minnesota Mortgage Man

A large majority of the U.S. homeownership public believes their homes will hold their current value or gain in value over the next year. That is the highest percentage on record since the first quarterly of 2008.

Along with that optimism, 60 percent came to terms with the fact that their homes probably lost value over the past 12 months, though in reality, 83 percent did so.

When asked about plans to sell their homes, 29 percent said they would be at least “somewhat likely” to put their homes on the market if real estate showed signs of a turnaround which would create a demand for move up properties. Employment figures was the leading indicator of those surveyed when asked what what instils confidence.

The newly released Home Data Index from Clear Capital Research shows small local areas of price stabilization are appearing even within largely troubled markets such as Cleveland.

According to Clear Capital president Kevin Marshall, these data are fueling expectations that there will be more neighborhood-by-neighborhood-based pricing recovery that will increase investor interest in areas across the country.

For example: an area in Cleveland in the index has "returned the first quarter-over-quarter gain since its downturn began in mid-2005, signaling some very specific investment activity," Mr. Marshall said. Another example is Sacramento an area hit incredibly hard, where several of its MSAs are now outperforming not just that region but the national trend as well.

In addition, Clear Capital said that although price declines continue across the country, they appear to be slowing down — especially in the Midwest and South. Clear Capital's index report includes a national and regional overview and ranking of the country's 15 highest and lowest performing metropolitan statistical areas. Highlights include quarter-over-quarter price gains of 8.9% in Birmingham, Ala., and 6.7% in Cleveland. The biggest losses were seen in Phoenix, Ariz., (17%) and Las Vegas, Nev. (15.5%).

The average price of a 3bd 2bath home slid about 20% since the start of this downturn. The deals are there but the buyers aren't, what a shame.

Minnesota offers a wonderful lifestyle with great schools and incredible natural beauty. In my office we're wondering when the dam will break and the flood of buyers will finally realize what kind of deals they have in front of them.

The below home was listed for $227,900. It's a 3bedroom 2bath 2000sq ft home located in Minnetonka which is in the suburbs of the Minneapolis area. The home is located in one of the States best school districts and near some of the most beautiful recreation areas in the country.  

Its just a short matter of time before people realize the getting is too good.

NAMB Wants Full Disclosure With Fannie Mae and Freddie Mac Fee's

NAMB, The National Association of Mortgage Brokers, has constructed a good faith estimate form with additions to it in order to disclose loan fees that brokers MUST collect on behalf of Fannie Mae and Freddie Mac. Brokers are required to disclose fees that direct lenders are not required to. Though banks still earn these same fees, due to Federal loopholes (and strong lobbying efforts) banks are not required to fully disclose certain line items to their borrowers.

The two GSE's (government sponsored enterprises) have been forced to substantially increase their loan fees over the last 12 months due to market conditions, rising default risks and years of horrible mismanagement. The fees can add $2,000 to $10,000 to the cost of a mortgage toward closing fees or increase mortgage rates offered to borrowers by up to .75-1%. This would in some cases raise a borrowers rate from 5.5% to 6.5% precluding some borrowers from being able to refinance or purchase.

The Good Faith Estimate will have additional line items referring to the fees as a "GSE adverse credit fee." Brokers see these additional fees as a way for the GSE's to increase profits to cover expenses now incurred for bad decisions made in prior years. If you remember, both Fannie and Freddie spent 100's of millions of dollars on lavish salaries and millions towards lobbying efforts to House and Senate members.

Brokers rightly argue that good borrowers, otherwise known as prime borrowers, are now solely paying for; the current crop of faulty homeowners, greedy Fannie and Freddie executive compensation in years past, the lousy lending habits of poorly run mortgage banks that were given preferred status with the GSE's and horrible regulatory oversight by the House and Senate. See our article on the affair between D-Rep Barney Frank and Fannie Mae Executive Herb Moses.

"We will explain to the consumer, for transparency sake, that these are profits that go to the GSEs and not to the originator," NAMB chief executive officer Roy DeLoach said.

Higher conforming loan limits are a part of the 2009 stimulus package signed into law by President Obama in Denver.

The $787 billion bill will put the high cost conforming loan limit to as high as $729,750 in the more expensive regions of the country such as California. This will be a substantial boost to high cost area that has been very hard hit. Some estimates state that California acounts for up to 15% of the nations foreclosures.

Jumbo loans which with loan amounts above $417,000 offer rates much higher than conforming loans and also with more difficult underwriting guidelines since the financial crisis started last year.

In 2008 the high cost loan limit was raised to $729,750 but the limit fell to $625,500 at the beginning of 2009 when last years stimulus expired. This effort by itself should help a lots of borrowers in more expensive but downtrodden areas such as California and Florida.

I was floored when I heard this, this morning. How could the Congress not pass such a much needed provision.

Many buyers, Realtors, Builders and Bankers were counting on this feature to help with recovery. I imagine the politicians didn't like the fact the Fed would lose income. Its more about what the government gets rather than what the public is able to use. 

After 350 the 350 billion dollar boondoggle, now taxpayers are getting it in the shorts again with the politicians. Did Dodd, Frank or the others really consider what was best for us when they allowed this?

The house loaded the bill with pork for their fatcat supporters at the expense of taxpayers. Now they undermine the American public AGAIN.

This economy is full of two edged swords right now. Great rates, low confidence. Lots of great priced homes, fearful buyers. If the government bails the banks out, consumers are upset (with good reason). If the government cuts taxes, they lose the revenue required to do the things they have promised to do in order to stimulate the economy. No easy set of decisions for this President and Congress.

Another one of these catch 22's is the adjustable mortgage reset concerns that may interupt the road to recovery. Starting in 2009 option arm resets are supposed to start kicking in. As a segment of borrowers, these particular ones may not be able to keep paying the negative amortization and may not be able to refinance into stable fixed mortgage products due to appraisal valuations. The saving grace for these folks and possibly the market is that the indexes used to price these loans have come down substantially over the last year. The result is that many of the holders of option arm loans may be able to postpone reality for a short short time. 

If you have an option arm loan, or any type of adjustable mortgage I urge you to get out now if you can. The payment pressure may have subsided, and you may not be feeling the urgency but I recommend not getting too comfortable. Get to work now- do whatever you can to exit the adjustable quickly.

For a short while early on the Fed purchases looked like they were going to help pull mortgage rates below 5% and keep them there, but in the past week other market forces helped push these rates atop 5.25%, according to Freddie Mac's recent weekly mortgage survey. Currently rates are comfortably in the mid to high 5's if you don't want to pay points.

The effect of the Fed's purchases continues to remain consistent to purchase a half-trillion dollars worth of mortgages in the six months from Jan 2009 to June 2009.

Most of the activity this week has been worse for rates. Risk premiums which have been a point of contention in the business have improved but they are far from where they should be right now considering the week economy and poor performance of the stock market.

Risk premium spreads on mortgage bonds are arround 80 basis points (.08 percent) off their widest point in November 2008. This got a little weaker in the last week and losing a bit of ground.

Most of what the Fed is buying is Fannie Mae paper, which is great but I would have thought we'd see more buying in the Ginnies (government bonds FHA/VA). The Fed purchased over $11 billion in Fannie bonds and just over $10 billion in Freddie and Ginnie so you can see the difference. These were mostly 30 year fixed mortgages.

Adjustable rate mortgages have their place in the world of mortgage lending, primarily for the big risk takers and more specifically, the short term investor looking for quick cash flow.

Why the investor? Adjustable rate mortgages or variable rate mortgages or whatever you want to call them, are typically great short term cash flow tools. I don't recommend them for anyone that is thinking about holding the property for more than a year. They are also a great product for mortgage brokers and bankers to sell because the retained profit can be hidden very easily in the margin. We'll talk about that more in a bit. If you are not an investor and you are being recommended an adjustable mortgage, be careful and watch the details. Not only can they be loaded with traps but they also require additional underwriting which may cause loan approval concerns.

Let's look at the structure of an adjustable mortgage and its features. Afterwards you may be better able to understand how they work, and why they may or may not be a good program for you.

Adjustable rate loan programs are comprised of two or three components: the margin ( margin of profit for the bank ) and the "index" ( cost of money ). A simple way to think about what an index is, is to compare it with a retail product. A retailer will by a product at a cost, in the banking world that's called an index. The bank lending you the money for your property purchase or refinance borrows that money from an investment money supply source at an indexed rate. Lets say the specific money source ( could be national or international ) such as the Bank of London, which is offering a LIBOR index. The rate (cost) of this index is, lets say 6.5%. This means that the bank is getting the money at 6.5%. If the index adjusts every three months, then the rate of 6.5% will adjust (mostly up) every three months for the bank or consumer.

If the bank "buys" the money at 6.5%, can they really lend it to you at 6.5%? Obviously not. The bank must add on a profit MARGIN. This is called... you guessed it, the margin. A typical margin will range anywhere from between 2% to 4% depending on the lender or mortgage broker. So, now we have two components: Margin and Index. Translate that to numbers and you'll have what's called a fully indexed rate. In our example, 6.5% index plus a 2% margin, equals an 8.5% fully indexed rate. Your principle and interest will be based on the fully indexed rate.

Wait a second... my mortgage broker and abcmortgagescalpers.com and Sly Savings and Loan was offering an adjustable rate loan with a start rate of 1.95%. you don't know what you're talking about.

au contraire...

A start rate (third component) really doesn't have much to do with a fully indexed rate. A start rate is a lovely little invention of adjustable rate mortgage sellers that is tantamount to a spider web. And guess who is the fly. Go ahead guess.

If borrowers knew exactly how adjustables worked, they wouldn't give these loans a second look. That's why lenders created the "start rate feature". The lenders that promoted these loans most were Washington Mutual, World Savings, Downey Savings, Countrywide and IndyMac Bank. Guess what all these banks have in common?

Typically the start rate on an adjustable is what's known in the industry as a "teaser" rate. It can be anywhere from 1% to 3%, and last anywhere from one month to one year. We are not seeing very many that last more than six months, and truth be told, most actually are lasting from one month to three months.

So how does the start/teaser rate work? The start rate is a negativily amortizing rate. That means that if you pay the 1 or 3 or whatever percent start rate, your loan is not going down like it should. It's actually growing and eating at your equity, or simply put, making your $300,000 loan into a $350,000 loan.

Because the bank is paying 6.5% for the money plus the 2% margin they require to make a profit, and you as the consumer are only paying, say 1.95%, then the difference between what you're paying, and what the bank HAS TO EARN AND PAY must be put back on top of the balance of what you owe.

Yes, some banks actually make the 1.95% a fully amortizing loan rate BUT BUT BUT that is only for a very short period of time. In retailing, that's called a "loss leader". After this teaser period, the loan has to start catching its fully indexed rate or the bank is paying you to take their money. That means that the rate starts increasing at each payment cycle.

The loan can't jump wildly, we know that because someone mentioned "caps" in an earlier article. Caps are nice but often more like the proverbial bucket of water on a camp fire, they do just enough to cool the effect of the fire but not enough to put the fire out.

The typical cap on adjustable loans is 7.5% of the payment. This means that each payment can't increase more than 7.5% of the previous payment amount. If payment one is $500, then payment two can't increase more than 7.5% or $37.50 for that $500. So payment two will be $537.50 and so on and so on and so on until the rate catches its fully indexed rate of 8.5%. In essence, a borrower could have a loan that does NOT stop increasing until it reaches the indexed rate or its "life" cap or annual cap.

Life cap, Annual cap? What are those? Annual caps don't get reached usually so I'll talk about life caps. The explanation works for both annual and life.

Life caps are a safety feature Uncle Sam requires on most of these loans. Life caps hold a loan rate from going up unlimitedly. Typical life caps are 5 or 6% above the index. If your index is 6.5%, then your life cap may be 11.5% or 12.5%. These loans also have "floors" which are usually the index of 6.5%.

Are there different indexes? Yes. There are lots of different indexes. Some quicker to adjust and some slower. Some more volitile and some less so. Popular indexes are the LIBOR, MTA, COSI and COFI. You'll have to check here to see what your index is today because they change daily with the markets: Public Market Snapshop

Did I overload you? Let me throw one more piece of the puzzle out. How are margins established? I said earlier that a margin could be anywhere from 2 to 4% or more or less. Margins are set by the bank or broker depending on how much the bank or broker wants to make. A margin has nothing to do with the start rate. You can be offered 1.95% as a start rate but have any margin- 2, 3, 4, 5, etc.. The bank will be paid less on a margin of 2 than on a margin of 4. Again, it doesn't effect your start rate. That's the trap. Everyone, including you is looking and drooling at the start rate. No one looks at the margin and that's where the trouble starts and has started.

Here's a chart on adjustable mortgage resets.

When applying for a home loan or mortgage loan with a conventional,alternative finance or portfolio mortgage lender, the underwriter will want youto have at least two years job stability. Job stability for lenders across thecountry means that the borrower must be stable in a narrow career field for thepast two years minimum.

If a borrower has been a manager of ABC grocery store and moves into car sales,this would not qualify. If the borrower went from ABC grocery to XYZ groceryobviously this would be fine. There are lots of gray areas such as: Someonethat went from tire sales to auto sales, this may not be acceptable withcertain lenders and might be with others. The type of loan that the borrower isgetting will also impact the employment stipulations. With large loan financing,with lots of risk, it would be difficult to expect much wiggle room.

With the recent default rates accelerating, expect that narrower guidelineswill be applied. Lenders have set the low bar at two years income. This is theminimum job time allowed, which means that having two years is the earliest aperson can qualify for a conventional home loan. Most lenders would love to seemuch more career time, including stability.

Are there times when less than two years of job times is notrequired? Rarely except… A fireman, policeman, state employee, teacher with acontract or other stable profession deserves the benefit of the doubt. We thinkthat these jobs are typically stable and worth the risk. Many of the investorsbuying these loans on the secondary market are starting to expect higher levelsof security, job time being one of the components to loan strength. 

My Realtor partners are always complaining about their home sellers. They state that the sellers have unrealistic perceptions of their homes value and will not budge on price ( we all do ). I ask them what they as Realtors are doing to back up their ascertions and I get a lot of anecdotes. Most Realtors, I'm sorry to say, aren't ready to handle the complexities of this new market. They still think a slap on the back and a friendly smile is the way to get a good listing. They may get the listing but it will stay on the market far too long. 

I recommend all real estate agents the use of the Case-Schiller reports that are posted free online. This is one of the most powerful tools an agent can use to help get price reductions. I bet if you ask 100 agents, maybe 1 has looked at the report or understands how it can be used during listing presentations.

Until price reductions start taking hold more quickly and inventories start coming down, the market will continue to be a wreck. As an industry we have to approach the recovery with a multi pronged approach if we are going to turn this complicated market around.

1) Lenders need to start accepting shortsales much more quickly and start closing foreclosure sales transactions NOW. Stop acting like fools and start processing these transactions faster, much faster. Get inventory off the market now even at deep discounts.

2) Realtors need to stop misleading their sellers about how much they will be able to get for their home. Stop flooding our market with overpriced homes and stop buying the listings with false promises.

3) HUD, Fannie and Freddie need to start pouring low interest loans into the market. Low interest yes. High debt ratios, poor credit and no income documentation NONONONONONONONO.

4) Builders need to dramtically reduce production and stop acting like the recovery will happen next summer. Inventory levels are too high to continue building homes.

5) Banks, Credit card companies and auto loan companies need to stop lending like madmen.

6) The most important item: Consumers need to stop acting like sheep when it comes to credit.

Who's tired of hearing about subprime borrowers? You can put your hands down now. Remember these folks? They are back in the FHA food line and or the modificaton line and will probably mess this up too. We could just tell from doing loans for them that these folks would never get it together. When you asked them for their loan documents the package was a wreck. As loan officers we weren't allowed to judge them, had to give them a loan as long as it was available, or we'd seem like a racist or a snob, but you knew exactly what was going to happen.

These borrowers beat the heck out of us with their careless messy paperwork submission with one excuse after another. Yes, our office did its share of subprime because that was the loan dujour but if I had my way I'd take the whole lot of those borrowers and the loan officers that whored the bottom of the barrel loans and toss them all into the lake. Look what the residual effects are doing to our neighborhoods and our markets now. 

Subprime borrowers are habitual credit abusers no doubt. You'll never change the 40% that will always pay late and always have an excuse. Grace is always going to be available for the occasional borrower that had a job loss, a medical issue or another unavoidable catastrophy. I'm deeply saddened for these people and will always go the extra mile for them. These aren't the people I'm talking about. I'm talking about the people that always have a "problem": their paperwork is always a mess, they spend more on their cars or boats than on their childrens school books, they seem to always be the parents of the kids that are bullies at school, etc.. Sure I'm a little upset at this stuff but its time to call a spaid a spaid and quit making excuses for bad behavior.

No modifications. Make them sell the home to someone that will appreciate the American Dream.