Bailout and Home Builders

The Bailout for the financial sector is not completed and now the homebuilding sector is asking for help.

They contend that the $7500 tax credit for first time home buyers did not stimulate demand and they want a $15,000 tax credit for all home buyers.

I don’t know if they get it. They were one of the biggest causes of the current crisis.

Why do I say this? Just a few years ago builders figured out how to work the financial system. They started their own mortgage companies or partnered with lenders and then advertised for low quality borrowers. You remember the ads. No money down, bad credit, in bankruptcy, one day out of bankruptcy, etc. these ads worked very well and brought lots of buyers who under normal circumstances could not qualify for a mortgage. Then the builder who was making a huge profit on the home pressured their own people or their partner lender to make the loans. These builders lined their pockets with millions of dollars using this tactic.

If you don’t believe what I am saying all you have to do is drive through builder communities that were built within the last 6 years and count all the foreclosures. Now that their bad practices are biting them back they want relief.

Here is what I think should happen to make sure we do not end up in the same financial situation that the Country is in today.

First we must eliminate builder owned mortgage companies by making that an illegal practice.

Second, we need to eliminate recommended lenders that pay to do business with the builder. The builder hides this illegal activity by saying the lender is paying for advertising but everyone knows that the lender is paying for mortgages. Which happens to be illegal?

Third, the government needs to eliminate computer underwriting. This is one of the main causes of the current crisis. Once the computer underwriting was instituted the ratios that a borrower could have went up dramatically. I saw mortgage application with back ratios above 60% turned down by our bank (because we manually underwrite) and that same borrower would be approved and close with another lender who used this automated system. Now those lenders need bailed out.

Forth, they need to increase the funding for the SEC to enable them to do there jobs. This can be done by letting the SEC keep the fees it currently collects from public companies.

Fifth we need to have mortgage brokers as strongly regulated as other financial institution. Many brokers have acted like it's the wild, wild, west. You have read the stories of inflated home values, fraud, and a variety of illegal activities. They need regulation.

If we change our ways we can turn this ship around and get this economy moving again.

Should this mortgage have been approved?

It seems that I hear the same question from my customer’s every day. The question asked the most in our current economic environment is “is there money available and are rates and cost still low”.

Money is still available to those borrowers that should be able to borrow money. It is not available to those borrowers that never really qualified but were given mortgages just a few years ago. Here is an example in the Indianapolis Star there was an article with the headline “Housing crisis has spread to well-to-do” and the article talks about a borrower in Sarasota, Florida. He bought a home for $2.5 million in 2003 and is currently behind on his $10,500 monthly payment. The article claims that he is losing his home because he lost his job at an auto-sales chain.

Let’s look at the facts. When qualifying a borrower for a mortgage the first item we look at is the income to debt ratio. The first ratio is the new mortgage payment (which includes principle, interest, taxes, insurance, and homeowner association dues) we use 26% as the guideline for this ratio. The back ratio is made up of the mortgage payment plus all other minimum debt payments. We like the back ratio to be 36%.

Let’s look at the front ratio for this Sarasota, Florida borrower. We take the $10,500 mortgage payment and divide it into gross monthly income ($250,000/12 = $20,833). The equation looks like this $10,500/$20,833 = 50.4%. This means that this person was spending over 50% of his gross income to make his mortgage payment. That ration is way too high and this borrower should have never been allowed to borrow this much money. They did not lose their home because he lost his job they lost the home because they could not afford the home on their income.

This mortgage would not be made today.

Now let’s talk about rates and closing costs. Rates have increased artificially due to the market. Freddie Mac and Fannie Mae just added a .50 adverse market condition fee which raised mortgage rates a 1/4%. Costs have not gone up at our Bank but I have seen many lenders raising closing costs. There is no reason for these increases that I can see but you should be aware of the situation.

Freddie, Fannie, and AIG

Dear Mr. and Mrs. US Government,

I think it’s admirable that you are helping all these poor corporations in their times of need. Just a few years ago these same corporations showed how much heart they had and bail me out. They didn’t even care that I had just come out of bankruptcy and had lots of credit problem. I just told them how much money I made (I made it up I really didn’t make that much) and they gave me a mortgage. It certainly wasn’t my fault that we had bad credit, I had just made some decisions that turn out to be somewhat risky. Unfortunately those risky decisions turn on me, through no fault of mine, it really wasn’t my fault.

I remember back then fondly. I applied at an apartment complex and was turned down because of my bad credit but the nice lady there told me that I should buy a home. She said that buying a home didn’t require the same high standards for credit, job stability, or income that apartment complexes had. So I went to a large builder in town, they hooked me up with their lender and WOW I moved into my new home.

These guys really helped me out back then. Now they did charge me a high interest rate, it was like 9% on the first mortgage and like 13% on the second but I didn’t have to put any money into the home. This was really helpful when home prices took a dive because I didn’t lose anything when I gave the home back.

Yes, I am suing them now because I don’t remember them telling me about the ARM rate increasing, the pre-payment penalty, or how much my payment would increase when the rate went up and property taxes kicked in. It really wasn’t fair. I was naive and I do not have a history of making poor decision.

I have made most of my decisions by watching what you do. I noticed that when you want something you don’t care if you can afford it. You go ahead and buy it and worry about paying for it later. I think that really works well for me. I’m not sure how you do it but you always seem to have the money to pay for everything. It’s like you print the stuff. I wish I could do that.

Sorry I’ll get back on track. I applaud you for bailing out these guys. You are showing you really care about. It’s not there fault they’re in trouble; they were doped into putting their money into risky investments.

Take me for an example. Who would have thought that I wouldn’t be able to pay for my home? They didn’t know my income was half of what I said. They also couldn’t have known that after my bankruptcy I wouldn’t be able to pay my mortgage payments. They certainly couldn’t have seen home prices dropping. So I say bail em’ out.

Or, wait a minute, I have a better idea. Why don’t you take all that money and bail me and my cohorts out? You could pay off our mortgages we could stay in our homes and the money goes to the lenders. That would take care of the housing crisis, the liquidity crisis, and save many homeowners. Man I like that a lot better.

Yes! I say, “BAIL ME OUT”!

Sincerely,

Itsnot Mi Fault

Lehman files for bankruptcy after 158 years

Lehman files for bankruptcy! This was a 158 year old company.
Freddie Mac and Fannie Mae in conservatorship!
Bank of America to acquire Merrill Lynch!

Greed does affect us!

Greed is what took these institutions down. They invested in very risky mortgage loans and those mortgage loans destroyed these companies. This is not the last we’ll hear of destroyed mortgage investors.

We have known for quite sometime that the waters had not settled and we were still in trouble in the financial markets. These announcements prove that correct. And rumors have it that there are more big fish ready to implode.

One example is AGI the insurance giant. They have to raise cash now or they will go under.

How can you benefit in these rough economic times?

With the fall of Freddie and Fannie it appears there is an opening for those of us with good credit and higher mortgage rates to refinance our homes. Mortgage rates are falling and the 30 year fixed rate looks to be headed to the lows of 2003 when we hit the lowest rates in 45 years.

Or

Buy a home. If you have to sell yours you may not receive the price you would have received two or three years ago but you will also not pay the price you would have paid two or three years ago. With mortgage rates dropping and home prices depressed it is the best time in decades to purchase a home.

You can take advantage of the greed of the past. Refinance or Purchase a home today.

It's Refinance Time!

Volatility remains in the mortgage bond market and that means mortgage rates are volatile also. I know it seem funny because with all the volatility rates are moving very little and that is because the movements happen through out the day and by days end rates are only a little up or a little down.

In Indiana people say “if you do not like the weather wait a few minute and see if you like that weather better”. It is the same way right now with mortgage rates. If you don’t like what you see, wait a little bit and see if you like that better.

My take is still the same I believe rates will continue on a downward trend. I also think it is a good time to refinance and buy a home and that will continue for the next six months to a year.

Get ready its refinance time.

Should you refinance your mortgage?

Most mortgage loan officers would tell you that you should. They will tell you even more so now with mortgage rates coming down. But it is never that easy to answer this question. There are so many variables that go into making the correct decision. However; I will go through the basics.

On the home we would look at the current amount owed including all mortgages on the home and the payments associated with those mortgages. We would also look at the value of the property; it is important to know the equity position on the home.

On the situation we need to look at; how long the homeowner expects to stay in the home and if they need cash for other purposes.

On the borrowers we need to look at debt and credit information and risk tolerance.

You should look at the new rate and the closing costs. Never forget the closing cost.

Almost every call I receive from someone shopping for a mortgage starts with this question from the caller. I answer the phone and they say something like “I am calling around looking to refinance my home and I wanted to know what your rates are.” The reality is that rates are relative. Today you have adds to the rates for credit score, cash out, loan to value, second mortgages, when closing will occur, and loan amounts. So no one can quote you an accurate rate until they have a little information from you.

I heard a radio ad the other day and they quoted 5.5% on a 15 year fixed rate with an APR of 6.187%. Does that sound like a great deal? If you just hear the 5.5% fixed you would think it is an excellent deal. But to get that 5.5% if the APR is 6.127% on a 150,000 mortgage amount would cost $6800 in closing cost. Do you know how long it would take to get your money back on a deal like that? Let’s look at it.

You could get 5.875% on the mortgage with only $325 in closing costs.

The payment at 5.5% would be $1220.04
The payment at 5.875% would be $1249.56 or $29.52 more.

You take the closing cost for the 5.5% of $6800 and subtract out the closing costs from the 5.875% of $325 and you would pay $6475 more in closing cost for the 5.5%.

You then take the cost difference of the 5.5% of 6475 and divide the monthly savings of $29.532 into it or 6475/29.52 which give you 219. 35. The 219.35 is the number of months it takes to receive your money back from the additional cost. Yes it would take 219 months or just over 18 years to get your money back. Since this is a 15 year mortgage you would never recoup your cost. In this case you would want the higher rate with the lower cost.

Always look at the cost compared to the benefit. Since we are talking about money the benefit is almost always in the money.

There is a lot more to this which I will discuss at a later time.

Home Builders have they learned there lesson?

I was talking with a prospect the other day and he was trying to buy a home from a very large national builder. He put a substantial down payment down on a spec home. He did not like the builders financing options and wanted go to a lender that the builder did not own. His contract with the builder stated he could use any lender he chooses. However, he was told by the builder that they would not sell the house to him if he did not use their lender.

Why would a builder do this? They must be making a great profit on the financing and you know they are because their rates and terms are not competitive. Why does the contract state you can finance anywhere when they force you to finance with them? My guess is that the builder knows that they are in violation of RESPA but feels they can keep out of trouble if the contract says you can finance with anyone.

This is the type of behavior that got us in this credit crunch predicament in the first place. We need to stand up and put a stop to companies running over our rights as consumers. My advice since the government won’t put a stop to it, we as consumers must put a stop to it.

Stop buying homes with builders that want to control the financing, it is not in your or the countries best interest. Of course, it’s in the builder’s best interest or they wouldn’t be so deceptive and forceful.

I went through that because it shows that with all the talk some of the causes of the mortgage crisis are still alive and well. We need to put companies that disregard the laws of our country, put themselves ahead of their customers, and put our economy in danger out of business. Some will say I am over reacting but that is what I was told when I warned about the abuse of mortgage programs just a couple of years ago.

If you are buying a home from a builder protect yourself and the rest of us. Tell them you will not finance with their mortgage company. If they insist then do not buy from them. If they don’t care about us then we should not care about them.

What is going to happen with Fannie and Freddie?

We certainly have a dilemma with those two don’t we. We (us through our government) allowed both companies to do what they wanted with very little oversight and now that it back fired they want us to bail them out. We are being told that if we don’t it will send our economy into depression.

How did this happen?

I believe it started years ago. Back in the mid 90’s qualifying for a mortgage became easier. The rules were eased and home sales increased. Then huge national builders and some savvy large local builders figured out that owning your own mortgage company or having one in your back pocket would increase the approval rates and home sales. This occurred slowly and as it became more prevalent the rules were eased even further. Why, because everyone was making a lot of money. So what really happened was greed.

I had an associate of mine, who was living in an apartment at the time; bring me all the mailings he received from builders. Over a two year period from 2003 through 2005 he received on average 58 builder mailings each month. All the mailings sold the same thing buy a home with no money down, monthly payments below his rent, and credit did not matter. The message was if you had a pulse you could buy a home.

Could anyone with a pulse buy a home back then? Let’s look at some of the mortgage options and you decide.

- One day out of bankruptcy not a problem you could buy a home.
- Home foreclosed on. No problem you could buy a home.
- No income? We’ll use stated income and you can buy a home.
- Credit score 580, no money down? No problem you could buy a home.
- How about this finance 125% on a refinance of your home.

There were more programs that would horrify you but were used regularly just a few years ago.
What is going to happen with Freddie and Fannie? It looks like the We the People will bail them out. What’s up in the air? Our elected officials really want to run Freddie and Fannie. As bad as Freddie and Fannie have been run of late it is still better than the government runs any business they have tried to run. God help us if they take over.

In my next post I’ll talk about some of the items that caused this problem that are still being used today.

Mortgage rates are poised to drop!

Non-farm Payrolls were expected to come in with a loss of 75,000 jobs the actual number was a loss of 84,000 jobs. That’s a big miss. Along with that number we had the unemployment rate increase to 6.1% much higher than the 5.7% predicted. These bad economic reports are likely to move mortgage rates lower.

Currently rates are steady and this is due to profit taking in the 30 year mortgage back security bond market. Over the next few months I expect fixed rates (10 year term or longer) mortgage rates to drop near or below 6%.

Additionally there is very little chance that the Federal Reserve will change the federal fund rate this year. This means Prime would not increase. This should be good for home equity lines and credit card rates.

I think great days are ahead and it might behoove you to look at refinancing now or in the near future.

Where did GMAC go?

Big news today: GMAC is closing all of its mortgage offices.

In my area over 350 mortgage brokers did not or could not comply with a new law and shut their doors.

These changes show that the mortgage lending business is not out of the wood yet. It appears to me that we will have more failing giants in the business while local and regional banks will flourish. This in the long run will be good for all of us.

With these types of changes you will see more mortgage brokers leave the business. This will happen due to the way the mortgage business is set up. You have three types of lenders: you have direct lenders which are banks and you have two types of brokers.

The first type of broker is one that does not have the financial wherewithal to fund a mortgage. When they close on a mortgage it is immediately sold or usually closed in the investor’s name, if XYZ mortgage broker closes on a mortgage they have a direct lender like Countrywide fund the mortgage and the broker is paid for bring the customer to Countrywide.

Then you have brokers who have what is called warehouse lines. These lines allow the broker to close the loan in their name and take a little time usually less then 30 days to sell it to an investor. Brokers do not service the loans and at the end of the day need a direct lender (Bank) to stay in business. If the banks decide not to buy loans from the brokers they have no choice but to close down.

You must be wondering why an investor would stop buying loans from broker. That is a great question. Let say you own a business and 50% of your business comes from a company you pay when they sell your product. One day you decide to look at the delinquencies on the sales your company makes and the sales the outside company makes, you find that the outside company has a delinquency rate 100% higher then yours direct sales. Then you look into the reason why and find that it is due to misleading or inaccurate information given to you by the outside company. You would sever the relationship.

That is some of what has happened in the mortgage business and we are seeing the results. The unfortunate part of this scenario is that there are many honest and trustworthy brokers however, as the saying goes “one bad apple ruins the bunch”.

The rumors of my death has been greatly exaggerated

One question I’m asked every day: Rick how is business.

Everyone hears from the news media that the mortgage business is in trouble. They have pretty much declared our business dead.

The great Samuel Clemens (Mark Twain) upon reading about his death wrote to the newspaper that ran his obituary the following: "Gentleman, the rumor of my death has been greatly exaggerated." I say to all of you "the rumor of the death of the mortgage business has been greatly exaggerated."

In 2008 my mortgage production is up 100% over 2007. Our office mortgage production is up 300%. This is due to adding additional loan officers, excellent product, and hard work. Does that sound like a dead business to you?

Are there problems in the mortgage business? Definitely! Are there problems in most industries? Absolutely! However, problems do not equate to death. They show us areas that need to change, areas we need to work on and improve, but not dead areas. I believe that the business is better today than in the past few years. We are back to making mortgage loans that make sense.

As hard as it is for us individually and for the entire country to go through this mortgage and real estate ‘crisis’ as the media call it, we will be better for it. Lending was out of control at many lenders over the last decade. Now the pendulum has swing the opposite way and with any luck we will end up with the pendulum neither right or left but right down the middle. We will be making good loans to well qualified individuals and companies. The borrower will be investing a down payment into the process and will work hard not to lose that investment.

Yes there are better days ahead for American business and for the United States. So smile!