It’s been a Roller Coaster in the Mortgage Business

Keeping a deal together has never been more difficult! I have loans that teeter totter on the precipice before deciding which way they’ll go.  And I say it that way because loans take on a life of their own depending on the underwriter, the program and the investor.  The loan to value, credit scores and income have no influence on the level of scrutiny on the loans.  One refinance has a $150,000 loan on a $700,000 appraised value with 7% debt ratios, $2 million in the bank and 800 credit scores.  The investor has questioned the employment, the income and whether the borrowers’ second home is actually a second home or an investment property.  Thank goodness the borrower has patience.

The markets continue to move sideways.  Economic news continues to be negative.  Yesterday, I read an article that stated that job losses were higher by 500,000 than originally stated in 2007.  If that information had been made public, the meltdown would have been much worse.  The public sentiment remains mostly negative.  I have attended a few networking events where some of the attendees have said that they feel some thawing.  That is few and far between.

People need to contact their Federal legislators to pressure them to back off on some of the mortgage regulation.  Tightening lending standards and regulations on lenders further than they already have will not stop the bleeding.  Most of the delinquent mortgages and short sales date to occurences prior to the housing melt down.  We can’t stop that from happening.  Rather than encourage home ownership and mortgage lending, most current policies have the opposite effect.  Underwriting standards no longer consider the viability of the loan.  People that have demonstrated the ability to pay their bills, save money and live responsibly should be able to procure a mortgage loan.  I have to turn away borrowers every week that fall into that category because they won’t get approved for a loan. 

I keep trying to find something positive in the industry.  I’m not having much luck.  True, we’re still in business, have a pipeline and continue to close loans, but it’s no fun! 

Thanks for reading.

A Challenging Year in Real Estate and Mortgages

This year is shaping up to be one of the most challenging in our industry for a variety of reasons. The most compelling may be a total lack of direction and confidence in the markets, equity, bond, real estate and manufacturing. Many experts continue to predict a double dip in the equity and real estate markets this year. Employment continues to show weakness and no one can predict a strong rebound.

Many professionals in our industry have been experiencing a strong purchase market. Hopefully that trend will continue even though the tax incentive ends soon.

HUD and Congress have amended RESPA and have threatened to change requirements for FHA approved mini-eagle brokers. The changes to RESPA have added layers of regulation and disclosure requirements to mortgage applications, causing delays and added expense for borrowers. Everyone should expect delays and confusion in the process as each lender interprets the ambiguities in the regulations differently. Additionally the new Good Faith Estimate is confusing and cumbersome. Borrowers have already complained about this document. It’s illogical and hard to interpret.

Most of the regulations introduced by the regulatory agencies have produced many unintended consequences, mostly negative for the consumer. Consumer choice has been reduced because the cost of complying with the new laws makes the process too expensive for small mortgage companies to stay in business. Real estate appraisers have been put out of business because the appraisal management companies now receive the majority of the fees for appraisals. In addition, the management companies have raised the fees for appraisals and are controlled by the large lenders such as Wells and B of A. This is only the tip of the iceberg. As the variety of outlets for mortgage loans continues to dwindle, the lack of competition will cause higher rates and fees for consumers.

None of the architects of the new laws bothered to consult with any experts actually involved with mortgage lending. Most people who make their careers in the mortgage business are honest and hard-working. We saw trouble on the horizon, but were powerless to stop the juggernaut. The pendulum has swung too far. Write your congressmen and senators to take back your consumer rights!

The Real Estate Market and the Prognosticators

I’ve read a lot of contradictory information over the last two weeks.  I have read that the momentary rise in interest rates has occurred because of low trading volume and not because rates are necessarily on the way up.  I’ve also read that our economy has begun to recover much more quickly than Europe and our rates are headed upwards before Europe’s.  The Fed has said that they will keep rates near zero for the forseeable future with little or no inflation threat.

On the real estate side, some ”experts” have said that we’re in for a double dip because foreclosures continue to flood the market diluting existing inventory.  An article in the New York Times this weekend quoted several north Jersey real estate agents that indicated that housing prices are going up and the market’s hot.

 I’M SO CONFUSED!!!!

What we’re witnessing is a market that is volatile and doesn’t know where it’s headed.  Nobody knows where rates or prices will move in the near term.  The mood of the markets remain uncertain and lack confidence.  Unemployment continues to weigh on everyone’s mind.  One thing’s for sure, the markets have to get better, eventually.  I know that I haven’t said anything definitively, but neither has anyone else. And many of those other people know a lot more than I do.

Now let’s talk about the new RESPA requirements.  RESPA stands for Real Estate Settlement Procedures Act.  The new requirements call for a Good Faith Estimate (GFE) that exactly matches the HUD-1 settlement statement that the borrower  receives at the closing, a nearly impossible task.  This new rule has caused lenders and providers to disclose over estimated closing  costs because lenders and brokers don’t want  responsibility for paying borrower’s underestimated closing costs.  In addition certain features in the new law discourage borrowers from closing loans with brokers and small mortgage companies.

Other good stuff that’s coming down the pike from Congress and HUD will cause further pain for consumers and mortgage professionals.  You can be sure that the complexity of the new disclosure process has already begun to cost consumers more money.  Mortgage lenders now need individuals designated to ensure compliance with the new laws to avoid problems with HUD or the banking departments.  Real Estate professionals and consumers should be up in arms over these new regulations.  WRITE YOUR CONGRESSIONAL REPRESENTATIVES AND COMPLAIN LOUDLY!!!

Rates Move Higher for 2010

Generally, I’ve noticed more positive sentiment emanating from the business community over the last month.  That positive mood has started to migrate into news reports and economic statistics.  Good financial news causes higher rates.  Also, the bond market generally looks six months ahead.   This may be a good sign for 2010.  Even though rates may be higher, lower unemployment and a positive mental outlook can help keep the real estate market moving forward.

Now for the bad news, many economists have predicted a double-dip for 2010.  They feel that the end of the government tax credit for home buyers along with more foreclosures flooding the market will cause home prices to decline and slow down the resale market.  The key word for the beginning of 2010 is volatility.  No one can predict the direction of the markets nor has any credible authority stepped up to give an opinion.

One thing is for sure, rates will change.  The economy will eventually improve.  The new wunderkind on Wall Street will make the same mistakes again, 1987 as compared to 2007.  Just keep your seat belt on for the ride because it’ll be bumpy.

The End of the Mortgage Broker

Beginning on January 1, disclosure requirements for closing costs will change.  Certain closing costs on the Good Faith Estimate (GFE) must exactly match the HUD-1 settlement statement issued by the attorney at the closing including yield spread premium.  Therefore, a broker must know exactly how much he’s earning on the loan at the time of application.  He can’t estimate his disclosed profit and then make less than disclosed at closing.  If the broker earns less than he had disclosed on the GFE then the difference must be paid to the borrower.  In other words, if the broker discloses 1.5% yield spread and then earns 1.25% because he’s agreed to give the borrower a break on the rate, then he has to pay the borrower .25% of the loan amount at closing.  Money he never earned.

Congress wanted to do away with yield spread premium and institute some sort of flat fee arrangement.  That is essentially what they’ve done while making the disclosure process confusing and onerous.  Between new disclosure requirements and tightened underwriting, the process of providing mortgage loans has become much more expensive than in the past.  In an effort to save people from themselves, our legislators have increased the cost of procuring credit for consumers.  Banks and mortgage companies will have to increase fees to pay for the extra manpower required to comply with these new regulations.  Lenders have to remain cautious about compliance because fees for violations will cost $10,000 per occurence.

The new disclosures have sent brokers and small mortgage bankers out of business in droves.  They are signing up as loan officers with banks or becoming net branches of larger institutions.  Choices for consumers have dwindled dramatically.  In Lancaster County, PA, 2 years ago there were 48 brokerages.  Now only 7 remain.

So, let’s review.  Compliance and regulation for the mortgage industry has increased to unprecedented levels.  Outlets for procuring mortgages have disappeared at an alarming rate. The cost associated with the mortgage application process has increased dramatically.  Overall, I’d say our legislators have done a great job of fixing the mortgage mess.  Write your Senators and congressman to complain.

Lots of New Mortgage Stuff!

First of all the big banks have nearly successfully made it impossible for brokers to do business.  The RESPA laws state that the initial Good Faith Estimate issued to a borrower at the time of application must match the HUD-1 settlement statement at closing exactly or the broker must reimburse the borrower for any cost overruns.  This includes the way that yield spread premiums are disclosed.  If a broker reduces the profitability on a loan by reducing the rate for the borrower, the broker must refund to the borrower money that he has never earned.  Who thinks of these things?  I believe that the big banks have lobbied congress to make changes designed to put brokers out of business.  Consumers continue to take the brunt of much of the new legislation designed to protect us from ourselves. 

I have successfully closed thousands of loans as a broker.  My borrowers send their friends and family to me.  I have real estate agent referral sources that have been sending me business since 1991.  Most brokers do business the way I do, honestly and ethically.  The mortgage industry is our livelihood.  We can’t afford to jeopardize our careers. 

Executives at most of the major wall street houses and the large banks did not view their sources of income the same way.  As Mr. Greenspan pointed out before the U. S. Senate several months ago that he could not envision the executives of these companies making decisions that would endanger their future existence.  Now these same institutions are trying to regulate mortgage brokers out of business for their own convenience.  And our legislators go along for the ride.  I have no faith in our government these days.

On the positive side, the market in northern New Jersey remains robust.  We have seen transactions in price ranges from $190,000 to $1,000,000.  We continue to do refinances at a comfortable pace as well.   We usually see a lull beginning in the middle of December, no lull this year

Fannie Mae, Freddie Mac and Ginnie Mae continue as the major source of funds for residential mortgage loans.  The mortgage-backed security market has not been attracting private investors.   With tightened guidelines and the total lack of any common sense underwriting, risk levels for mortgage defaults for new mortgages should be at all time lows.  Affordability indexes remain near multi-decade lows.  Home prices can’t go much lower.  Now’s the time to buy both real estate and the underlying loans for 1 to 4 family homes.  The commercial side is a different story.  When the government stops subsidizing the secondary market, rates should increase by a half of a percent.

This week Amtrust Bank was effectively put out of business.  We have been spoiled over the last few months because the rash of bank closings had subsided.  We can’t lock loans with Amtrust and have a pipeline that can’t close even though they’ve been sold to The New York Greater Community Bancorp.  This has caused a great inconvenience to us and some of our borrowers.  Amtrust has been a valued business partner and a company where we have closed hundreds of loans.

From Turkey and Trimmings to Mortgages

Having a few days off from the grind felt great.  The first day back after a long weekend of too much food, wine and relaxation was not easy. 

Usually we don’t experience much activity the first few days after Thanksgiving.  This year seems to be different.  It’s the first day of December and the phones are ringing.  Our pipeline has remained steady as we consistently replenish our closed loans.  What a difference a year makes.

Even though business remains steady, uncertainty about the economy keeps the environment  oppressive.  We continue to hear news about friends loosing their jobs or feeling that it’s only a matter of time.  Apparently many others feel the same.  News about Dubai caused a big shake up in the markets this week.  That news caused yields on the 10 year Treasury moved 15 or 20 basis points right before the holiday.  Yields have started to move back up again as fears of Dubai’s default have subsided. 

Yields on mortgage-backed securities followed the treasury yields lower.  Lenders have resisted offering lower interest rates.  Yields on the MBS’s point to rates in the low to mid 4% range.  Banks have not reduced rates much below the  4.75% to 5% range, go figure .  The banks are profit taking at consumers’ expense.

Washington has tried to force banks to loosen up their lending standards over the last few days.  Most of the new regulation and oversight enforced over the last few months will make it difficult to loosen up the markets.  The government needs to make up their minds.  Do they want more regulation or freer markets?   They can’t have it both ways.

Today’s Housing News

Bloomberg reported that mortgage applications are at 12 year lows this week.  Nearly 1 in 6 FHA loans are in default.  Default means that the payments are late, but not necessarily in foreclosure.  The unemployment rate remains higher than its been in nearly 30 years.

Historically, the housing market has pulled the economy out of recession.  A very high unemployment rate and the fear of further job losses will keep many potential buyers on the side lines.  Most economists don’t think we’ll see any sustained recovery for over a year.

Just call me Mr. Doom and Gloom.

Mortgage Thoughts

I just finished reading “Julie/Julia” by Julie Powell.  I know, it’s supposed to be a chick book, but I think Ms. Powell is funny and entertaining.  That book caused me to think that perhaps writing about some of my adventures in the mortgage industry might be more interesting than most of the mortgage bologna that I generally discuss here.

When people talk to me about the mortgage process, they provide personal information that they usually don’t discuss with anyone.  Some borrowers would rather discuss their sex lives than their financial information.  Maybe the confrontation with their own finances causes them too much discomfort.  For the most part, most people’s stuff is not that interesting.  Nor is most people’s stuff much different from anyone elses’ stuff.  Occasionally someone’s stuff is interesting, entertaining or tragic or all or some of the above.  I am in the unusual position of significantly impacting the lives of my clients on a regular basis.  People get divorced, get  married, put their kids through college, deal with their loved one’s estates and usually real estate and/or a mortgage is involved.  These events cause significant stress in most of our lives.

Not all of these stories take place on the borrower’s side of the transaction.  Individuals that work in the mortgage industry tend to overlook the fact that real people depend on us to successfully complete their transactions.  I remind the underwriters, closers and anyone else involved about the people who are our borrowers to move the transaction along.  Instilling a little Jewish guilt can really grease the gears once in a while.

I shall endeavor to share some of these anecdotes.  Perhaps you’ll find these stories as entertaining as I have.

A Mortgage Conversation

This week I had conversations with two friends of mine that work for large banks, Wells Fargo and Bank of America respectively, one in retail and the other in wholesale.  We all have a similar opinion regarding the state of our industry and how we got here.  First of all, the three of us have made our careers in mortgage banking for twenty years or more.  We take the state of our industry seriously.  Forces remain at work that continue to weaken our industry and limit consumer’s choice and voice.

If you listen to our legislators and the large banks, brokers are the bad guys in the industry.  In their opinion, brokers should be neutralized.  Conversely, brokers do have to share in the blame.  From the brokers’ perspective, large banks and Wall Street houses created product with lax guidelines to encourage unqualified borrowers to take loans they couldn’t afford.  In fact, the big banks had a huge appetite for the questionable loans and encouraged brokers and other retail outlets to produce as many loans as possible. 

Whenever easy money becomes available, someone will figure out a way to capitalize on the opportunity in an unethical manner.  Just like the dot-com market of the late 1990’s, unscrupulous individuals entered the mortgage industry.  The internet and telephone solicitation produced billions of dollars of ill-gotten loans for unsuspecting consumers.  Many guidelines, laws and regulations built into the system were ignored.  The rating agencies gave AAA ratings to no-doc loans with zero down payment and poor credit.  What were people thinking?   Greed and Wall Street profits encouraged bad behavior on everyone’s part. 

Now our legislature has been creating laws and guidelines designed to protect consumers from themselves.  Short term credit facilities have become extremely difficult to procure.  Consequently, smaller mortgage banks continue to have difficulty providing loans.  Most of the lobbying in congress comes from the large financial institutions that want to consolidate their power and market share.  Many of the new regulations apply to mortgage companies and brokers, but not banks.  For instance, if a person has ever been convicted of a crime that could have resulted in a punishment of one year in jail, that individual remains banned for life from working for a mortgage company.  That individual can go work for a bank.  Good Faith Estimate disclosure laws apply to mortgage companies, but not to banks.  HVCC third party appraisal laws apply to mortgage companies, but not banks.

Laws and regulations exist that if enforced would have prevented our current situation.  Legislators, and even the Fed do not understand the nuances of the legislation they have created and its effect on the industry and consumers.  The new legislation will not prevent future market abuses.  They have closed the barn door after the horse has escaped.  Let’s watch the next two or three years with interest.  We’ll witness history and inept behavior at its best.