December 22, 2024

Long Overdue Mortgage Regulations To Curb Lending Abuses

September 2, 2009 by 1 Comment

Feds React To Mortgage Lending Fiasco

In a move that can only be described as better late than never, various new Federal laws that restrict certain lending practices become effective on or after October 1, 2009.  Other regulations that mandate improved disclosures and early disclosures of loan costs and terms became effective on July 30, 2009.    Additional HUD regulations requiring the use of a standardized good faith estimate form and HUD-1 settlement statement will become law effective January 1, 2010.

The intention of the new regulations is to protect the consumer from unfair  and abusive lending practices and to ensure that the mortgage borrower is provided the necessary information to fully understand the costs and terms of a loan.  In general, the rules are a positive for both borrowers and lenders but are likely to add considerably to the time it takes to close on a mortgage loan.

If these lending regulations had been in effect during the late great mortgage mania boom of the early part of this decade, it is very likely that the current foreclosure and banking crises would have been a far less serious adverse economic event.   Borrowers would have been prevented from borrowing money that couldn’t be repaid and lenders would have been forced to make more intelligent underwriting decisions.

Lending Prohibitions Effective October 1, 2009 – Federal Reserve Board

  1. Mortgage lenders and brokers are prohibited from coercing or encouraging real estate appraisers to misrepresent the value of a home.   Per Glenn Gimble, FDIC Senior Policy Analyst, “That’s intended to ensure the integrity and accuracy of an appraisal, so that a consumer is not overpaying for a home or borrowing more money than the home is worth.
  2. Mortgage loan servicers must credit payments on the date received and must inform the borrower of an late-payment fees.
  3. For those applicants considered a subprime credit risk, a lender is prohibited from making a higher priced loan without regard to the borrower’s ability to repay the loan from income or assets (other than the home’s value).  All income and assets used to qualify for loan approval must be verified.

Several points of interest on the new regulations.  Although there has been vociferous industry objections to the new appraisal restrictions under the Home Valuation Code of Conduct (HVCC), it is interesting to note that the HVCC rules do not apply to FHA mortgages.  Thus, for FHA loans, the lender or broker can still communicate directly with the appraiser and is also allowed to chose whatever appraiser is likely to “bring in” the highest value.

Self employed borrowers who have the income to make mortgage payments but who chose to evade taxes by not reporting their full income for tax purposes are going to have a very difficult time obtaining any type of mortgage financing.  Furthermore, tax evaders may chose to rent in the future, since the IRS is now matching mortgage payments to reported income to catch obvious tax evaders.

Wage earners without sufficient income will also be required to “borrow within their means”.  The only option now available for previous “stated income, no income” borrowers will be the local “unregulated” loan shark.

New Fed Rules On Costs And Terms Of Loan – Effective July 30, 2009

These new rules require earlier disclosures on purchases and refinances, a minimum waiting period of 7 days  between disclosure and closing, resending disclosures if the APR changes and restriction on charging any fees (except for a credit report) prior to receipt of loan disclosure documents.

New HUD rules effective January 1, 2010 require all brokers and lenders to use the same good faith estimate forms and a new uniform HUD-1 settlement statement.

Advertising Restrictions

Deceptive or misleading advertising regarding payments or teaser rates is prohibited.

Mortgage Loan Originators Subject To Federal Regulation

All loan officers at financial institutions and mortgage brokers will be required to register with the government and disclose information about their background and disciplinary history.  The information will be in a database available to consumers.  In addition, the law will require state governments to establish licensing and minimum educational requirements for loan originators.

The new background checks and educational requirements for loan originators is another long overdue reform.  During the height of the mortgage mania boom, it was common to see “loan originators” who should never have been allowed to work  in the mortgage industry.

Fly by night “mortgage companies” were hiring ex truck drivers, high school drop outs, ex waiters, etc. and putting them to work with little training or supervision.   Previously unemployable, uneducated individuals who would never have been hired anywhere else suddenly became “loan officers” during the mortgage boom.  Despite the low quality of applicants being hired by the mortgage industry, it was also common to hire loan originators without conducting basic financial or criminal background checks.

Too bad it took a major financial disaster before the Feds got around to figuring out that the mortgage industry was out of control.

Filed Under: Banking Industry, Mortgage Basics, Mortgages Tagged With: , ,

The FDIC Deposit Insurance Fund (DIF) – A Risky Game Of Confidence

August 27, 2009 by 1 Comment

FDIC Rightly Worries About Public Confidence

Due to the large number of bank failures during 2009 the FDIC Deposit Insurance Fund (DIF) has fallen to the lowest level since March 1993.  Numerous headlines are screaming that the FDIC is bankrupt and that the DIF fund is depleted.  Considering the perilous financial condition of the banking industry and the possibility of perhaps another 1,000 or more bank closings, the FDIC is probably not capable of fulfilling its mission without substantial loans from the US Treasury.  (The last time this happened was in the early 1990s during the savings and loan crisis when the FDIC had to borrow $15 billion from the US Treasury.)  This does not mean, however, that the upcoming FDIC  Quarterly Banking Profile will report a negative balance in the DIF.

The FDIC has made it clear that they consider it important to maintain a positive DIF number to avoid causing a lack of confidence in the banking system by the public.

The FDIC believes that it is important that the fund not decline to a level that could undermine public confidence in federal deposit insurance. A fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.

In addition, the FDIC has increased assessments on FDIC insured institutions to replenish the DIF fund and predicted that the DIF would remain positive in 2009.

May 22, 2009 – With the special assessment adopted today, the FDIC projects that the DIF will remain low but positive through 2009 and then begin to rise in 2010. However, Chairman Bair also cautioned that given the inherent uncertainty in these projections and the importance of maintaining a positive fund balance and reserve ratio, “it is probable that an additional special assessment will be necessary in the fourth quarter, although the amount of such a special assessment is uncertain.”

Even though the FDIC has significant authority to borrow from the Treasury to cover losses, a fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.  The FDIC views the Treasury line of credit as available to cover unforeseen losses, not as a source of financing projected losses.

The DIF Shell Game

So how does the FDIC manage to report a positive DIF when the March 31, 2009 balance was $13 billion and estimated FDIC losses on bank closing since March 31 total $19.3 billion?  Determining the DIF balance is not a matter of simply subtracting the banking failure losses from the DIF fund.  The FDIC uses accrual accounting to establish reserves against the DIF fund for estimated future losses.

For example, during 2008 the FDIC heavily reserved for anticipated future banking failures in 2009.  The FDIC established provisions for losses of $41.8 billion compared to actual losses on 2008 bank closings of $17.9 billion.  The reserve fund at March 31 had a balance of $28.5 billion against which the FDIC year to date losses since March 31 of $19.3 billion could be charged.  This would still leave the FDIC a reserve balance for future banking failures of $9.2 billion.

In addition, the FDIC has imposed large assessment on FDIC insured banks to replenish the DIF fund.   The assessments earned by the FDIC have increased steadily throughout 2008 as the banking crisis unfolded.   In the first quarter of 2009, the FDIC collected assessments of $2.6 billion to rebuild the DIF fund.  This compares to total assessments for all of 2008 of $2.965 billion and only $643 million in 2007.

In summary, if the FDIC offsets its losses against previously established reserves,  and collects an additional $3 billion in assessments, the FDIC could actually report an increase in the DIF fund to approximately $16 billion.   My guess is that the FDIC will only use a portion of the reserve balance, and report a DIF positive balance in the range of $10 to $13 billion when the Quarterly Banking Profile is released.   It’s all about confidence and an uneducated stupid public – the DIF balance of around $20 billion allegedly “protects” over $6 trillion in deposits! The only thing that would expose this “confidence game” is if the financial results for the banking industry come in much worse than the last quarter.  Stay tuned.

DIF

DIF

Disclosures:  None

Filed Under: Banking Industry, Confidence, DIF Fund, FDIC, Problem banks, Regulatory Reform Tagged With: ,

Dear Congress – Thanks For Doubling My Credit Card Interest Rate

August 26, 2009 by Leave a Comment

Congress Takes Bow For Credit Card Act of 2009

The Credit Card Act of 2009 was intended to curb certain practices of the credit card industry that were deemed abusive to consumers.  With a great deal of public fanfare, Congress passed legislation that provided the following benefits to credit card holders:

  • Credit card bills would be mailed at least 21 days before the payment due date
  • Customers would be given a 45 day advance notice of contract changes
  • An increase of the interest rate could be rejected by consumers who would then be required to cancel their card and pay off any existing balance within 5 years, possibly with a much higher minimum monthly payment
  • Payments would have to be applied to that portion of debt with the highest interest rate
  • Interest rates could not be raised on existing balances unless the borrower was more than 60 days delinquent
  • Prohibited “universal default” provisions and double cycle billing
  • Better disclosure of fees, card rules and interest costs

Senator Dodd of Connecticut, Chairman of the Senate Banking Committee, stated that “The new rules of the road established by the Credit Card Act will shield credit cardholders from widespread abusive practices”.   Whether or not the Senator (who faced an ethics probe relating to the special low rate mortgage he received from Countrywide) actually succeeded in providing any real benefits  to credit card holders remains questionable.

Credit Card Industry Response To Credit Card “Protection” Act

The credit card industry is not based on philanthropy – they seek profits and  have been exceptionally proficient in doing so historically.   Faced with huge losses from defaulting customers and the prospect of legislated profit limitations, the credit card industry reacted to these threats with the following changes:

  • Reduced or eliminated fixed rate credit cards; when interest rates increase, card rates will increase commensurately
  • Instituted annual fees, higher balance transfer fees, international transaction fees, higher cash advance fees, reduced award programs, slashed credit limits, canceled over $500 billion dollars in credit lines, summarily closed accounts deemed risky, raised monthly minimum payments and imposed strict standards for new credit cards
  • Increased interest rates by as much as 10 percentage points or more across the board, regardless of credit or payment history.  Unable to adequately assess risk or price accordingly, every credit card holder was assumed to be a potential default and charged accordingly – See Capital One Can’t Identify Their Low Risk Customers.

I have heard countless cases of people telling me that their card rates have been raised to 20% to 28% for purchases and cash advances.  Personally speaking, virtually every credit card I have has had the interest  rate increased substantially, with Capital One taking first prize by going from 8% to 17.9% on purchase balances.

Ironically, my General Motors credit card has actually dropped the interest rate from 14.15% in 2006 to a “low” 9.9% currently.  I assume that the low rate from General Motors has something to do with the fact that GM has an unlimited credit line with the US Treasury and does not have to worry about silly things like making a profit.

Why The Credit Card Companies Are The Biggest Winners Under The Credit Card Act Of 2009

What was supposed to be a major consumer protection act has turned into a future profit bonanza for the credit card companies.  Many credit card customers may go under financially but the credit card companies will do just fine, judging by the price performance of their shares and their actions taken cited above.  The credit card industry has adjusted their business model to the new reality and will prosper.

While the S&P 500 has increased by 52% since March of this year, the stocks of credit card companies have performed dramatically better.   Since March 2009 the stocks of companies such as American Express and Capital One have tripled in value even as write-offs of credit card debt hover in the 10% range and new restrictions on credit card companies become law.

“I Am From The Government And I Am Here To Help”

After bailing out the banking industry, our government (perhaps inadvertently) managed to provide even more help to the credit card industry.   Thanks for trying to help Congress – I feel much better now that I am paying 18% instead of 8%.

COF

COF

AXP

AXP

Disclosures: None

Filed Under: American Express, Capital One, Congress, Credit Cards, Interest Rates, Regulatory Reform Tagged With: ,

If You Buy A Lottery Ticket In Connecticut Don’t Go On Vacation

August 17, 2009 by 2 Comments

Living Beyond Your Means

Connecticut is facing a projected $8 billion dollar plus deficit over the next two years.  In an attempt to prevent raising taxes which are already among the highest in the nation, Connecticut is following the  familiar tactic of borrowing to cover spending that the State’s citizens can’t afford.

Aug. 4 (Bloomberg) –– Connecticut, which faces an $8.55 billion budget deficit over the next two years, may borrow almost $1 billion to close a gap left over from the fiscal year that ended June 30.

“We would agree that it is necessary and appropriate” to borrow to fill the deficit, Jeffrey Beckham, a spokesman for the state’s Office of Policy and Management, which is controlled by the governor, said in a telephone interview yesterday.

Connecticut, in addition to being the wealthiest state, is also the most in hock, with $4,490 in net tax-supported debt per capita as of the end of last year, according to Moody’s. It sold bonds to finance deficits in 2002 and 2003, and was downgraded around that time one step to Aa3 as a result of its finances, said Nicole Johnson, a Moody’s analyst in New York.

Spend more than you earn year after year and the final conclusion is obvious.  At some point, a debt crisis develops as  creditors stop lending.   The debt crisis leads to modest spending cuts and large tax increases which further reduces private economic growth that taxes are ultimately based on.

California Situation Ignored

This should all sound very familiar to citizens of the State of California who are a bit further along the path of economic suicide than Connecticut.    Connecticut has not officially raised the income and sales tax rates but  has imposed a large variety of  fee increases (taxes) on every transaction possible.  Thousands of fee increases  on everything from motor vehicle registrations to business licenses have reduced Connecticut taxpayers’ disposable income.

The State has sought to squeeze money out of their citizens in the most obnoxious ways possible.    Draconian enforcement of traffic laws yield fines in excess of an average person’s weekly paycheck for relatively minor transgressions.   Leave your money in a brokerage or bank account for a couple of years without making a transaction and the State will grab the funds under the pretext of protecting the depositor yet will make little effort to track down the owner of the account.  The list goes on.  Taxpayers being squeezed dry may understandably ask why State spending cannot be cut and exactly who benefits from the huge spending  increases?

Connecticut is leaving no stone unturned in its efforts to increase the effective tax rate on its citizens.  The latest outrage  in the State’s desperate attempt to expropriate every dollar possible is a reduction in the time allowed for lottery winners to claim their winnings.  Any lottery ticket buyers in Connecticut should not take long vacations.  The time limit for claiming prizes has now been reduced to only six months instead of 1 year, effective August 2, 2009.   The change in claim time limitation is expected to cheat Connecticut lottery players out of $6.1 million yearly.  As things currently stand, Connecticut is collecting $13 million of unclaimed winnings each year from winners who do not collect within the one year limitation.

The larger question here is how can individual taxpayers deal with a Government that is out of control, irresponsible and oblivious to the economic destruction they are causing?   The answer may be one that nobody wants to hear.

Filed Under: Corruption, Futility of higher taxes, Government spending Tagged With: , ,

Super Clunkers – How Congress Can Double US Vehicle Sales

August 14, 2009 by 5 Comments

Clash for Clunkers Increases Car Sales

The much maligned Cash For Clunkers program has three remarkable features that differentiate it from the other wide assortment of endless government stimulus/bailout programs.

1. The Cash For Clunkers program, at an initial $1 billion cost, is relatively “small” compared to the trillions of dollars that have been deployed for other stimulus and bailout measures.  The concept of the Cash For Clunkers program did not originate in Congress but rather was the brainchild of Jack Hidary, an entrepreneur who noticed the success of similar programs in Texas and Turkey.  Mr Hidary’s lobbying efforts ultimately resulted in the Clunkers program approval by Congress.

2. The Clunkers program is the only stimulus/bailout program enacted that allows participation without regard to income or financial need status.  A Clunkers applicant does not need to be unemployed, facing foreclosure, financially inept or destitute.

After seeing trillions of taxpayer dollars spent to bail out banks and homeowners for making stupid financial decisions, it is almost refreshing to see a program that helps those who probably don’t really need any help.  A purchaser of a new $30,000 car who can obtain financing or pay for the car in cash is probably still employed and doing quite well.

It would be interesting to see the income and credit stats on new car buyers under the Clunkers program but my guess is that many of the new car buyers are frugal, financially responsible individuals who had driven the same car for many years and would have purchased another vehicle soon anyways.  The Clunkers handout merely pulled forward future car sales – but that was the intention of the program.

3.  Without debating the merits of the Clunkers program, from a strict Keynesian economic theory standpoint, the program was a resounding success based on the multiplier effect.

Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.

In the Clunkers case, assuming increased unit sales of 250,000 at a cost of $30,000 each,  sales revenue of $7.5 billion was generated based on a $1 billion government cost.  Compared to other government stimulus, the Clunker program can only be viewed as a resounding success.

Clunkers Encore

Under the theory that government programs never die but only get larger I would expect that the government will expand the Clunkers program to the point of absurdity.   The original program has already been extended and doubled to $2 billion.

Lobbyists for the car industry should have an easy time convincing Congress to expand the program based on its “success” in generating sales.  Let’s not forget, of course, that the government and the UAW now own General Motors.

How Congress Can Double Car Sales

If  Congress really wants to get creative about stimulating car sales and lending, they may start by looking at the average age of US vehicles currently on the road.

According to USA Today, the automotive consultants R.L.Polk calculate the median age of cars in the US in 2007 at 9.2 years and the median age for trucks and SUV’s was 7.1 years.  Over 41% of all cars in 2007 were over 11 years old.  There are 235 million passenger vehicles in the US, including 135 million autos and 100 million SUV’s and trucks.

For the sake of saving the environment from old polluting cars and stimulating the economy, Congress, by legislative fiat, could prohibit the possession or use of any vehicle over 10 years old.   The mandatory new vehicle replacements could be phased in gradually over 5 years,  and would effectively force the purchase of at least an additional 60 to 70 million vehicles.   Vehicle sales for the next five years would easily double from the 2009 estimate of 11.5 million units.

The government’s investment in GM would be worth a fortune, and the States’ budget problems would disappear with the flood of sales and property tax levies on all those new vehicles.  Government guaranteed easy financing would be provided to all, regardless of income or credit.  Cash rebates on traded in vehicles would be increased to offset the new vehicle’s cost.

Result for the US economy –  large GDP increases as $2.5  trillion dollars in new car sales jolts the economy back to life.   Unemployment drops to low single digits as the multiplier effect of  booming car sales ripple across the economy.  How does the Government finance the cost of this “Super Clunkers” program?  Not a problem – the Treasury Secretary is already requesting a large increase in the national debt limit.

What politician would not vote for this plan?

Disclosures: No Positions

Filed Under: Bailout, Cash For Clunkers Phase II, Congress, GM, Government spending, Stimulus Plan Tagged With: , ,

Does Tim Geithner Need A Stress Test?

August 5, 2009 by 2 Comments

Geithner Goes Over The Edge

Is the stress of running running the Treasury and trying to figure out how to borrow almost $2 trillion dollars starting to take a toll on the Treasury Secretary?

On Friday, Treasury Secretary Geithner lashed out at top federal regulators in an expletive filled tirade.  Mr Geithner’s rage seemed to be based on his perception that the FDIC, the Federal Reserve, the SEC and other government agencies had not blindly endorsed the Obama administration’s demands regarding financial regulatory reform.

WASHINGTON — Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting.

The proposed regulatory revamp is one of President Barack Obama’s top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf.

Mr. Geithner told the regulators Friday that “enough is enough,” said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.

Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Friday’s roughly hourlong meeting was described as unusual, not only because of Mr. Geithner’s repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

In addition to Mr. Bernanke, Ms. Bair and Ms. Schapiro, other attendees at Friday’s meeting were: Fed Governor Daniel Tarullo, Comptroller of the Currency John Dugan, Commodity Futures Trading Commission Chairman Gary Gensler and Office of Thrift Supervision Acting Director John Bowman.

Achtung! Mr. Geithner, exactly what country do you think you are working for?  Does our government no longer believer in the principles of  “checks and balances”, compromises and democratic free debate?   Shocked high level government officials who attended the meeting had no comments for the press on their meeting with Mr. Geithner.

Two days later, Mr Geithner gave another remarkable performance when he broke the holiest rule of politics and told the truth about the need for a broad based tax hike on the middle class.

Treasury Secretary Timothy Geithner said Sunday that signs are emerging that the economy is starting to turn around, but he cited private economists’ predictions that unemployment rates wouldn’t start to fall until the second half of next year. He also suggested that the current budget deficit was unsustainable, and both he and Lawrence Summers, the White House’s top economic adviser, declined to rule out future tax increases.

Asked whether President Barack Obama could keep his campaign pledge to hold down taxes for those earning less than $250,000 a year, Mr. Geithner didn’t respond directly.

“We can’t make those judgments yet about what exactly it’s going to take” to reduce the deficit, he said on ABC News’s “This Week.” “People have to understand that we have to bring those deficits down.”

The Congressional Budget Office has projected that the federal budget deficit would hit $1.8 trillion for the current fiscal year ending Sept. 30.

One can only wonder about how severe a thrashing Mr Geithner must have taken from the President for publicly admitting that the campaign promise to tax only the rich was soon to become just another broken promise.   Or was the Geithner performance done at the behest of his boss to lay the necessary groundwork for the inevitable tax increase coming for the middle class?  Either way, based on the Treasury Secretary’s behavior over the past week, the logical question is “should Geithner be stress tested”?

Filed Under: Geithner, Regulatory Reform, Stimulus Plan Tagged With: ,

New Government Regs Will Add Weeks To Mortgage Transactions

July 29, 2009 by Leave a Comment

Deluge Of Government Regs For Mortgages

The new rules on home appraisals courtesy of the Home Valuation Code of Conduct (HVCC) can sometimes add weeks of delay to a mortgage transaction.    With the mortgage industry still digesting the new regulations of the HVCC, new government laws regarding Regulation Z disclosure requirements promise to potentially add additional weeks of delay to a mortgage transaction.

Effective July 30, 2009 lenders must comply with new rules under the   Truth in Lending Act (TILA) as required under the Mortgage Disclosure Improvement Act (MDIA) which was part of  The Housing and Economic Recovery Act of 2008.

Reg Z Rules Could Add Weeks To Mortgage Process

The new Regulation Z requirements add complex issues to the timing and delivery of disclosure documents to the borrower.  Failure to  adhere to the proper waiting periods for certain disclosure items resets the waiting period requirements.   Many lenders may add their own time restrictions as a safety precaution against violating the new waiting periods and thereby cause additional delay to the mortgage process.

Shown below is a chart summary of triggering events for various waiting periods triggered by different lender actions during the processing of a mortgage transaction.

Waiting Periods and Triggering Events

Triggering Event

 Waiting Period Description Timeframe in Business Days
(Business Day is defined as any day except Sunday and Federal Holidays)

Initial Under writing Submission

Initial Truth in Lending Disclosure

Waiting Period — 8 Days

Including the Day of the Initial UW submission, borrowers may close/sign documents on the 9th day.

(1 Day to process, 7 Days for borrower delivery/review enabling closing/signing the next Day.)

Initial Submission

Upfront Fee Collection

Waiting Period  5 Days

Including the Day of the Initial submission, Clients may collect upfront fees on the 6th Day.

(1 Day to process, 1 Day to print and mail and 3 complete Days for borrower delivery/review enabling collection
on the next Day.

Entry and submission of appraisal data

Borrower Appraisal Review

Waiting Period  4 Days

Including the Day appraisal data is submitted, borrowers may close/sign documents on the 5th Day.

1 Day for appraisal day entry 3 Days for borrower delivery/review
enabling closing/signing to occur
on the next Day

Final Loan Submission

QC Hold

Waiting Period 2 Days
(if no risk detected)

requires a 2 Day QC waiting period on all loans.

If the DATA is changed at a later date, then another 2 Day waiting period will be applied.

Request Docs Submission

Final Truth in Lending Disclosure

Waiting Period  7 Days

Including the Day of the Request Docs submission, borrowers may close/sign documents on the 8th Day.

1 Day to process, 3 Days for borrower delivery and 3 Days for borrower review enabling closing/signing to occur on the next Day

If changes at a later date, then another 7 day waiting period will be applied.

The new regulations are meant to allow mortgage customers an easier method to compare rates with different lenders, as well as insure that the customer is properly informed of rates and fees.

The downside of the new regulations are:

  1. Higher compliance costs for lenders which must be passed on to the borrower.
  2. Potentially long delays before a mortgage can be approved and closed which may cause major problems for purchasers with short commitment dates.
  3. Potentially higher rates for consumers who in all probability will need to rate lock for 60 days rather than 30.  The longer rate lock usually results in additional lender fees or higher rates.
  4. One look at the above chart showing waiting period and triggering event time lines indicates the complexity of the new rules, which are certain to cause confusion and frustration for both the lender and the borrower.

For anyone purchasing a home or refinancing, expect the mortgage process to become a potentially grueling two month endeavor.

Filed Under: HVCC, MDIA, Reg Z changes Tagged With: ,

“Liar Loans” – RIP – October 1, 2009

July 29, 2009 by 6 Comments

Liar Loans To Be Prohibited

No income verification and stated income mortgage loans have been available to borrowers for many years.   As originally conceived, a no income verification loan was a sound product, offering highly qualified borrowers the ability to purchase or refinance a home quickly with minimal documentation.  Stated income mortgages are still being offered today to highly qualified borrowers by lenders such as Emigrant Mortgage.

What was once a legitimate mortgage product, however, morphed into the worst type of irresponsible lending during the national housing/mortgage frenzy of the past decade.  “Liar loans” became a product of destruction that allowed millions of totally unqualified people to borrow money who had little or no ability to service the loan.

Due to the mortgage industry’s excesses and irresponsible behavior, the “liar loans” are scheduled for legislative extinction on October 1, 2009.  The new regulations will apply to a newly defined category “of higher-priced mortgages” and the following restrictions will apply:

Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.

Require creditors to verify the income and assets they rely upon to determine repayment ability.

The rule’s definition of “higher-priced mortgage loans” will capture virtually all loans in the subprime market, but generally exclude loans in the prime market.  To provide an index, the Federal Reserve Board will publish the “average prime offer rate,” based on a survey currently published by Freddie Mac.  A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index…

The new rules take effect on October 1, 2009

No Income Loans To Become Niche Product

The new rules  severely limit the interest rate that can be charged on a stated income prime loan to only 1.5% above the average rate on a prime mortgage.  Given the higher lending risk involved in approving a mortgage without income verification, I would expect that after October 1st, stated income loans will become a niche product, offered by only a few lenders to highly qualified borrowers.

The new rules will make it much more difficult to borrow for those who cannot verify income.   Considering the financial havoc that can result from liar loans, the mortgage industry should welcome the new restrictions which impose proper responsibilities on both lender and borrower.

Filed Under: Federal Reserve, Interest Rates, Liar Loans, Mortgages, refinance Tagged With: , ,

Mortgage Refinances Drop 11% As Rates Remain Low

July 29, 2009 by Leave a Comment

Refinances Decline as Rates Stabilize

The latest weekly survey from the Mortgage Bankers Association showed a decrease of 6.3% in mortgage loan applications.   Application volume compared to the previous year increased by 16%.

The interesting aspect of the latest weekly numbers is the decline of 10.9%  in the number of mortgage refinances.  The percentage of refinances to total mortgage applications declined by 2.9% to 53% of total mortgage applications.  With rates hovering at close to all time lows, reduced refinance activity seems to indicate that most borrowers have already taken advantage of the current low mortgage rates.

Have Mortgage Rates Bottomed?

The perfect mortgage borrower can still obtain a rate of around 5% on a thirty year fixed rate mortgage.  In addition, borrowers have had numerous opportunities over the past four years to refinance in the high 4’s or low 5% range.  Unless a borrower is applying for a cash out refinance, there would be little benefit to refinance a mortgage today with a rate of 5.5% or less.

If mortgage rates remain in the low 5% range, expect to see continued declines in the refinance sector of the mortgage market.  In January of this year, the amount of refinances hit a peak of 85% of total mortgage applications as borrowers rushed to take advantage of low rates .

Since it is usually not worth the time and cost of refinancing unless the mortgage rate can be lowered by at least a point, I would not expect to see another mortgage refinance boom unless mortgage rates decline to the low 4% range.  Considering the recent Federal Reserve report which indicates a slower pace of economic decline and an unchanged Fed monetary policy, mortgage rates may have bottomed at this point.

Filed Under: Federal Reserve, Interest Rates, Mortgages, refinance Tagged With: , ,