November 21, 2024

Mortgage Rates at 5% Could be the Low for 2022

March 30, 2022 by Leave a Comment

A few short months ago at the end of 2021, 30-year mortgage rates hit their lowest level in history in the low 3.25% range.  Since that time rates have skyrocketed by 50% to a shade below 5%.  Increased rates have occurred as the Federal Reserve was forced to raise rates due to a rapidly increasing rate of inflation resulting in double digit price increases for many products and services.

Any one expecting rates to decline from here is likely to be disappointed.  Both wage and price inflation have become embedded in the economy as shortages of workers and products relentlessly drive prices higher.  Trying to tame inflation while at the same time keeping the economy running at full speed is the biggest challenge the Fed has faced in the past thirty years when short term rates approached 20%. 

None of this has been on the boom/bust mortgage industry as thousands of workers have been laid off as mortgage refinances plunge and purchases slow down. 

According to the Mortgage Bankers Association, refinance volume has plunged 60% below levels one year ago.

… The Refinance Index decreased 15 percent from the previous week and was 60 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 1 percent compared with the previous week and was 10 percent lower than the same week one year ago.

“Mortgage rates jumped to their highest level in more than three years last week, as investors continue to price in the impact of a more restrictive monetary policy from the Federal Reserve. Not surprisingly, refinance application volume declined further, as fewer borrowers have an incentive to apply at rates that are significantly higher than a year ago. Refinance application volume is now 60 percent below last year’s levels, in line with MBA’s forecast for 2022,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist…

The average interest rate for a conforming 30-year fixed rate conforming loan with a 20% down payment in now at about 4.8%. Although the mania in the purchase market continues, it’s only a matter of time until activity declines due to higher rates and dramatically increased home prices.  Potential purchasers are being squeezed as wages lag far behind the increases in the cost of living and housing.   

If the Fed engages in multiple half point rate hikes as they are suggesting, expect mortgage rates to steadily increase.

Filed Under: Federal Reserve, Housing, mortgage rates, Mortgages, refinance Tagged With:

FHA Mortgages and Student Loans Are a Risky Combination

November 12, 2015 by Leave a Comment

First time home buyers have traditionally faced a variety of obstacles including the high cost of housing, stagnant wages, and the difficulty involved in saving for a down payment.

 

If that wasn’t bad enough, recent changes by the Federal Housing Administration (FHA) now raise another potential barrier to home ownership due to the manner in which student loan debt must be evaluated.

 

For a variety of reasons many potential home buyers with a large load of student debt are able to obtain payment deferments of various durations.   Since there was no formal payment due under the payment deferments, some of which can last for years, the FHA had for the most part simply ignored the looming certainty of future monthly payments.  By not factoring in an estimated loan payment for deferred student loans, borrowers were able to lower their debt ratios for purposes of loan eligibility.

With the new FHA requirement to account for future payments on deferred student loans, many applicants may wind up with a back end debt ratio in excess of the 43 per cent currently allowed under FHA regulations.  Potential home buyers who were close to the maximum for monthly debt payments may now find themselves ineligible for any type of mortgage loan.

Are the new FHA regulations fair to first time home buyers?

One could make the argument that the new rules make sense since at some point the borrower is going to be required to start making payments on the student loan debt and if the payment is large enough it could cause enough financial stress to put the borrower at risk of defaulting on the mortgage.   According to a HUD spokesman,  “Will that borrower actually be able to afford their loan and the student loan payment? It’s a legitimate issue to consider.  Deferred student debt is debt all the same and really must be considered when determining a borrower’s ability to sustain both student debt payments and a mortgage long term.  Our primary interest is to make certain that a first-time home buyer is put on a path of sustainable home ownership rather than being placed into a financial situation they can no longer tolerate once their student debt deferment expires.”

It’s difficult to dispute the logic of HUD’s position but it seems to fail to take into account the prospect of a borrower’s future income increasing enough to compensate for the additional student debt payment.

The problem with considering future income, however, is that incomes have been increasing at a very slow pace in the post financial crisis period.  The prospects of higher incomes for the average worker remains speculative while the certainty of having to make payments on a student loan at some point are not.  Nonetheless, the increase in the amount of student loans being handed out have been increasing at a staggering rate as students furiously borrow on the dubious prospect of obtaining a job after college that pays enough to buy a house and car, raise a family, and payoff student loans.

Those expecting an increase in the rate of home ownership are likely to be disappointed as more and more young people remain at home with their parents unable to take on the financial responsibilities of home ownership.

The excessively easy lending of a decade ago temporarily raised the rate of home ownership as totally unqualified borrowers bought houses on the theory that home values could only continue to skyrocket.  The subsequent default of these weak and unqualified borrowers resulted in millions of foreclosures which burst the housing and mortgage lending bubble which resulted in the rate of home ownership falling right back to the long term historical average of about 65 per cent.

Filed Under: Banking Industry, FHA, Mortgages Tagged With: , , , , ,

The Zero Sum Game Of Lower Interest Rates And Why Mortgage Rates Will Rise

July 28, 2012 by 1 Comment

The Federal Reserve has forced long term interest rates to historic lows in a desperate attempt to “stimulate” both the housing market and the economy in general.  The results have been mixed but the benefits of lower rates to borrowers are undeniable.  Lower rates reduce the cost of large debt burdens carried by many Americans and increases the spending power of those able to refinance.

Exactly how much lower the Fed intends to repress mortgage rates is anyone’s guess but as interest continue to decline, the overall benefits diminish.  Here’s three reasons why the Fed may wind up discovering that the economic benefits of further rate cuts will be muted at best, self defeating at worst.

1.  Lower rates are becoming a zero sum game for the economy as lower rates for borrowers translates into lower income for savers.  Every loan is also an asset of someone else and lower interest rates have merely been a mechanism for transferring wealth from savers to debtors.  Every retiree who prudently saved with the expectation of receiving interest income on their savings have been brutalized by the Fed’s financial repression. Even more infuriating to some savers is the fact that many debtors who took on irresponsible amounts of debt are now actually profiting from various government programs (see Foreclosure Settlement Q&A – A Victory For The Irresponsible).

A significant number of retirees that I know have been forced to drastically curtail their spending in order to make ends meet while others have been forced to draw down their savings.  The increased spending power of borrowers has been negated by the reduced spending power of savers.  This fact seems to elude Professor Bernanke who hasn’t been able to figure out why lower rates have not ignited the economy.

2.  Many consumer who would like to incur more debt are often turned down by the banks since their debt levels are already too high.  Those who can borrow often times chose to deleverage instead, considering the fragile state of the economy.  Anyone saving for a future financial goal (college tuition, home down payment, retirement, etc) is forced to reduce consumption and increase savings due to  near zero interest rates.  The Federal Reserve has destroyed Americans most powerful wealth building technique – the power of compound interest.  A 5% yield on savings will double your money in about 14.4 years while a 1% yield will double your money in 72 years – and that’s before taxes and inflation.

3.  As mortgage rates decline into uncharted territory, the mathematical benefit of lower rates diminishes.  As can be seen in the chart below the absolute dollar amount of monthly savings as well as the percentage decrease in the monthly payment diminish as rates race to zero.

Benefits of a refinance on a $200,000 mortgage diminish as rates decline

% Rate Mo Payment Mo Savings % Reduction Yearly Savings
6.00% $1,199.00
3.00%    $843.00 $356.00 29.70% $4,272.00
1.50%    $690.00 $153.00 18.10% $1,836.00
0.75%    $621.00  $69.00 10.00%    $828.00

Closing costs at lower rates also become problematic, making it impossible to recapture fees within a reasonable period of time.  With closing costs of $8,000 on a $200,000 mortgage refinance, it would take a decade to recoup closing costs.

Many astute analysts have made elaborate and compelling arguments that interest rates can only go lower.  From a contrary point of view, I believe that a future rise in interest rates is a high probability event.  This is the opposite of my prediction in March 2009 when I surmised that mortgage rates would decline to 3.5% – see 30 Year Fixed Rate of 3.5% Likely.

The Chart of the Day has a long term chart of the 10 year treasury and notes that the recent sharp decline in interest rates “has brought the 10-year Treasury bond yield right up against resistance of its 26-year downtrend channel.”

 

Filed Under: 3.5% Fixed Rate 30 Year Mortgage, Bernanke, Deleveraging, Federal Reserve, Housing, Interest Rates, Mortgages, Saving Money Tagged With: , , , , , , , , ,

Bank of America Refinance Offer Raises Questions On Wealth Accumulation

May 24, 2011 by 1 Comment

A client of mine recently received a mortgage refinance offer by mail from Bank of America (BAC).  The offer showed that a savings of $2,225 per year was possible by refinancing to a new 30 year fixed rate mortgage.

My client called me to discuss whether or not a refinance made sense since her rate was only dropping by .375% to 4.75%.  Conventional analysis of a mortgage refinance usually assumes that a refinance only makes sense if the rate is dropping by at least 1 or 2 percentage points.  Other factors used in evaluating a refinance involve the period of time required to recoup closing costs, how many years the borrower intends to remain in the home and a review of the forecasts for future interest rate changes.

In my customer’s case, not only was the rate decrease small, there was also $5,706 in closing costs which included 2 points.  In addition, the savings that Bank of America projected were based on a 30 year fixed rate mortgage.  Since my customer only had 22 years left on her current 30 year fixed rate mortgage, this meant 8 years of additional payments.

The monthly savings of $185.42 ($2,225 yearly) for a refinance came at the cost of adding 8 more years to the mortgage term.  Despite the monthly savings, the total additional payments over 30 years for the new lower rate mortgage amounted to $48,048, including the financed closing costs.

Was Bank of America trying to fatten their bottom line with a refinance that made no sense?  Depends on your perspective and financial status.  For some households on very tight budgets, reducing the mortgage payment by $185 per month can make life a lot easier.

For other households, the $185 monthly savings can help increase long term wealth using a concept that most consumers have either never heard of or don’t understand.  It’s called compound interest, allegedly described by Albert Einstein as “the most powerful force in the universe”.

In the case cited above, if the homeowner saved the $185 per month from a refinance and achieved a 4.75% return over 30 years, the result would be a nest egg of $141,634.  The power of compounded gains over 30 years far exceeds the additional payments of $48,048 at 4.75% interest paid on the declining balance of a 30 year mortgage.  The homeowner winds up with a net gain of $93,586

A 6% return on the $185 per month savings over 30 years would yield $175,904 and a gain of 8% would yield $252,055.

A refinance that did not look compellingly attractive could actually increase long term wealth for those with the discipline to save.  After considering the options, my client decided to refinance and increased her 401k savings by $185 per month.

Disclosure: No position in Bank of America stock

Filed Under: Banking Industry, Mortgage Basics, Mortgages, refinance, Saving Money Tagged With: , , , ,

FHA Introduces New Minimum 580 Credit Score Requirement

September 6, 2010 by 54 Comments

The FHA is introducing new guidelines on loan to value ratios and the minimum credit score required for FHA borrowers.  As detailed in a Mortgagee Letter from the Department of Housing and Urban Development (HUD), the following credit requirements will apply for FHA borrowers, effective October 4, 2010.

  • To be eligible for maximum financing, borrowers will need a minimum credit score of 580 or higher.
  • Borrowers with a credit score between 500 and 579 will be limited to a loan to value of 90%.  A sub 580 FICO credit score borrower will henceforth need to make a 10% minimum down payment on a purchase transaction.
  • All  borrowers with a credit score below 500 will not be eligible for FHA-insured mortgage financing.

HUD’s newly introduced minimum credit score and loan to value requirements will apply  to all single family loan programs, except for Reverse Mortgages (Home Equity Conversion Mortgages) and Hope for Homeowners.

The new credit requirements are not expected to dramatically change the number of FHA mortgage approvals.  Most  lenders had already imposed a minimum credit score requirement of 640 or higher for FHA borrowers.  In limited cases, borrowers with scores between 620 and 639 could still obtain mortgage approval.

Many potential FHA borrowers with scores below 640 who cannot obtain mortgage approval may be left wondering why this is the case if the FHA has established a minimum score of only 580.  The explanation for this is that the FHA does not make mortgage loans but rather insures FHA loans made by lenders.  Despite the FHA insurance, banks do not have an iron clad protection from loss.

To protect themselves from loss exposure, FHA lenders impose various requirements that may include establishing higher minimum credit scores.   Some of the factors that influence banks in their assessment of risk on FHA loans are discussed below.

More and more banks are increasing the minimum credit score on FHA loans to attract a better overall execution (sales price) on their securities which improves profitability.  Nonetheless, the increase in the minimum credit score isn’t always about protecting the bank on a potential future loss.  In a lot of cases a bank feels more comfortable with a profit model that positions itself as a mortgage seller with a higher weighted average credit score on their pool for many other factors.

A credit score is an 18 month predictive measure of future performance but is not as reliable when a state or region is hit by some unpredictable negative economic factor.  An increase in the minimum credit score can be used as an override to protect against losses resulting from a sudden downturn in the economy.

Each bank executes a contract of sale with defined representations and warranties on their future liability.  The penalty (or loan buyback provision) is legally defined in the contract between seller and buyer of the loan.  However, not all contracts are the same with regard to liability issues.  When a loan default occurs, a post closing quality control review takes place.  If the loan originator was negligent with respect to due diligence, the bank is subject to full recourse provisions and required to repurchase  the loan which usually results in large losses to the bank.  An example of this occurred recently when Bank of America announced that Fannie Fae and Freddie Mac were demanding $10 billion of loan repurchases.

Given the complexities and potential losses to banks on the origination and sale of FHA loans, it is unlikely that banks will be decreasing their minimum credit score requirements any time soon.

More On This Topic

Sub 620 FICO Score FHA Lenders

What Are My Odds Of FHA Loan Approval With A FICO Score Below 620?

Basic Requirements To Be Eligible For FHA Financing

Filed Under: Banking Industry, FHA, FHA Minimum Credit Score, Mortgages, Sub 620 FHA borrowers Tagged With: , , , ,

Can The Unemployed Afford A Mortgage Payment?

September 15, 2009 by 10 Comments

Government Determined To Keep Unwilling Homeowners In Homes

The FDIC announced a new initiative to reduce foreclosures on home mortgage loans held by failed banks that were acquired by another institution.   This new FDIC program goes far beyond previous government mortgage assistance programs such as the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).

Whereas the HARP and HAMP programs require income verification and attempt to lower a monthly mortgage payment to a level that is reasonable in relationship to a homeowner’s income, the new FDIC forbearance plan will attempt to help homeowners who are currently unemployed.

FDIC Encourages Forbearance To Unemployed

As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed. This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure.

“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job, and the acquiring institution, which continues to receive payments on the loan. Ultimately, by reducing losses under our loss-share agreements, this approach helps reduce losses to the FDIC as well.”

The recommendation to loss-share partners applies where unemployment, or underemployment, is the primary cause for default on a home mortgage. In such cases, the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months. The monthly payment during this period should be established based on an affordable payment – given the borrower’s circumstances – and it should allow for reasonable living expenses after payment of mortgage-related expenses.

FDIC Plan Likely To Help Few Homeowners

The objectives of the FDIC’s forbearance plan are well intentioned.  Allowing an out of work homeowner time to find a new job may prevent an unnecessary foreclosure and eliminate the need for a costly foreclosure by the bank.  From a practical standpoint, the FDIC plan may ultimately benefit very few homeowners for the following reasons:

  • The program is only available to those homeowners who have mortgages with failed banks that were acquired by another institution under a loss-share agreement with the FDIC.
  • Under the forbearance agreement, the bank will accept only a portion of the regular mortgage payment.  The FDIC is asking for only a 6 month forbearance.  Given the prospects of a “jobless economic recovery” and the difficulty in finding new employment, the FDIC appears wildly optimistic about a quick change in fortune for an unemployed homeowner.   Banks do not want to foreclose, but very few banks now offer a forbearance plan to the unemployed since they do not expect them to quickly find a new job.
  • The mortgage foreclosure prevention plans currently in effect have had dismal success rates and these programs are limited to candidates who have income.  The HARP program, expected to help millions of homeowners had at the end of July approved only 60,000 refinances.   The government loan modification program (for those not qualified under HARP) has been plagued by very high re default rates ranging from 17% to 45%.
  • The FDIC recommends that the lender establish an “affordable payment” for six months, allowing for reasonable living expenses.  Many homeowners with jobs are struggling to make their mortgage payments.  Many states pay only a fraction of previous earnings in unemployment benefits.   Unless the homeowner has put aside some savings, unemployment compensation will usually cover only basic needs, leaving nothing for a mortgage payment.  It is likely that any payment (other than zero) will be too high for unemployed homeowners.
  • Recent statistics on the “cure rate” for delinquent mortgages show a stunning decline.  The cure rate is the percentage of borrowers who are able to catch up and bring a delinquent mortgage current again.  As of July, the cure rate for prime mortgage loans plummeted to 6.6% from an average of 45% during  2000 to 2006.  Some of the delinquent borrowers had lost their jobs but many were still employed.  This is a sea change in attitudes towards home ownership.   Many of those financially able to catch up apparently saw no benefit in doing so; either the burden of home ownership outweighed the benefits or there was no perceived benefit in continuing to make payments on a home with large negative equity.   Many homeowners may view foreclosure as the best “program” for getting back on their feet since they could potentially enjoy years of “rent free” housing before the bank ultimately forecloses.

Trapped Homeowners Want Out

Heavy Load

Heavy Load

Courtesy: laprogressive

Many Americans are apparently rethinking the “dream” of home ownership and acting accordingly by relieving themselves of the costly burden of mortgage payments, taxes and maintenance on what has become a depreciating asset.

While the government says “yes we can”, impoverished homeowners are saying “no we can’t”.  Perhaps this is why the massive government initiatives to prevent foreclosures are failing.   Trapped homeowners are doing what’s best for them and walking away, while the government vainly attempts to impose home ownership on those who now reject it.

Filed Under: FDIC, Housing, Layoffs, loan modification, Mortgage Defaults, Mortgages, Uncategorized Tagged With: , ,

Artificial Mortgage Rates Drop To 4.75%

September 10, 2009 by Leave a Comment

Fed Manipulation Of Mortgage Rates Continues

Mortgage rates continue their downward trend with the perfect borrower now able to obtain a rate of 4.75% with a two point buy-down on a 30 year fixed rate mortgage.  As expected, with mortgage rates now back in the 4% range, mortgage applications have increased.   The latest stats from the The Mortgage Bankers Association show large increases in mortgage activity, with refinances accounting for almost 60% of total mortgage applications.

The Market Composite Index, a measure of mortgage loan application volume, increased 17.0 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 15.8 percent compared with the previous week and 64.5 percent compared with the same week one year earlier.

While fluctuations in mortgage rates are historically based on many factors, the biggest factor affecting mortgage rates today are the manipulations by the Federal Reserve.   With the mortgage market dominated by the government, it is difficult to determine where rates would be in a free market but indications are that rates would be much higher.  For example, non agency lenders who do not sell mortgage loans to the government agencies but portfolio them instead, are currently quoting 30 year fixed rates at around 6 to 6.5% depending on credit and loan to value (obviously, the non agency lenders are not doing much conforming loan business).

Fed Price Fixing Efforts With Mortgages Will Fail

So what’s the problem with having low mortgage rates?  The  government manipulations in the mortgage market allow homeowners to refinance and buy at low rates.   If mortgage rates drop low enough, perhaps the government will succeed in its objective of re-inflating housing prices.  There just might be a few problems with the government’s manic quest to keep mortgage rates low.

  • How long will investors continue to buy securities backed by mortgages on which payments are guaranteed by the government?  Perhaps forever, but perceptions of the value of a “government guarantee” may diminish as the financial condition of the US Government continues to erode.  At some point, rational buyers will give little credence to the guarantee of a government that needs to borrow 40% of its year outlays while running multi trillion dollar yearly deficits.
  • How long can the Federal Reserve continue to purchase mortgage backed securities and treasury debt with printed money?  It may not seem to be causing a problem in this country (yet) but some of the USA’s largest foreign creditors are getting very nervous – See China Alarmed By US Money Printing.

Banks Load Up On Mortgages

Theoretically, the Federal Reserve can buy every mortgage backed security in existence but at what point does the bond market react with higher rates based on the risk that the Fed is going to monetize debt on a colossal scale?  Fed purchases of mortgage backed securities are fast approaching the announced goal of $1.25 trillion.

Courtesy wsj

Courtesy wsj

As it turns out, the Fed has a willing and able partner in the purchase of mortgage backed securities.  With the banking industry facing massive losses on defaulting mortgages, how is this for irony? – Banks Load Up On Mortgages.

As of June 30, the roughly 8,500 federally insured banks and thrifts were holding $113.5 billion of Ginnie securities, compared with just $41 billion a year earlier, according to a Wall Street Journal analysis of bank financial disclosures. It is the largest amount that banks have reported holding since at least 1994.

Banks, sometimes with the blessing of federal regulators, have been loading up on Ginnie securities for one main reason: They make their balance sheets look healthier. Since the securities are guaranteed by the government, federal banking regulators have deemed them risk-free, meaning that adding them to a bank’s investment portfolio, or replacing assets deemed riskier, lowers the overall risk of the portfolio in the eyes of regulators.

Some banks have used government cash infusions under the Troubled Asset Relief Program to buy Ginnie Mae bonds.

Holding Ginnie bonds help banks look better because federal bank-capital guidelines give the Ginnie securities a “risk weighting” of 0%. That means banks don’t have to hold any cash in reserve to protect against losses.

At the same time that the banks are choking on defaulted mortgages and reluctant to lend, they are purchasing vast quantities of government guaranteed mortgages to shore up their capital ratios, sometimes using TARP funds.

The Great Unwind

The Fed fostered the bubble in the housing market with easy money, leaving us with collapsed housing prices and oceans of defaulted mortgage debt.  The Fed is now inviting a similar disaster in the mortgage market, again with super easy monetary policies.

The massive purchases by the Fed and the banks of mortgage backed securities is artificially inflating the prices of mortgage backed securities, consequently curtailing purchases by private investors.  This leaves the Fed and the banks as the only (irrational) buyers.

At some point mortgage rates will rise regardless of the Fed’s manipulations.  The taxpayers will be stuck with massive losses on the Fed’s mortgage backed securities as yields climb and prices plunge.  Banks, as always, will be heavily invested in the wrong asset at the wrong time.  Due to the magic of FASB accounting rules, the banks won’t have to take losses if they do not sell their mortgage backed securities; but neither will they be able to increase lending with capital frozen in underwater mortgages.

The government’s obsession with housing has resulted in the misallocation of untold trillions of dollars.   Meanwhile, urgent human and infrastructure needs of the country are left unfunded.   With the mortgage markets now completely dominated by the government, we can look forward to a continuation of the same failed policies.

Filed Under: Federal Reserve, Housing, Interest Rates, Mortgages, printing money Tagged With: , ,

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: , ,

“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: , ,