Implications of HVCC
May 27, 2009
It will be interesting to see how the HVCC (Home Valuation Code of Conduct) works as a practical matter. This new law, enacted May 1, 2009, effectively places control of the entire appraisal ordering process in the hands of national appraisal management companies (AMC’s), many of which are partly owned or subsidized by the mega-banks themselves.
This new law was enacted to prevent appraisers from being coerced by brokers, agents, and others into writing appraisals for more than they believed properties were worth. While no doubt some of this “steering” took place, it is ultimately the bank funding the loan that is responsible for applying adequate appraisal review procedures on behalf of their investors. From this myopic respect, it sounds like HVCC might be a good idea, but let’s examine further.
When clients decide they want to purchase or refinance a property, they come to mortgage professionals, who then perform necessary due diligence to reasonably ascertain if a borrower would qualify for a loan based upon credit, debt-to-income calculations, and liquid assets. Only then do they rely upon the assistance of a competent local appraiser to reasonably ascertain that the necessary value range needed to successfully fund a loan is substantiated by current comps. Thus, the mortgage person and the appraiser would both do their necessary due diligence and let the client know the likelihood of obtaining a loan, before a client ever spent a penny.
Now with HVCC, appraisers and the AMC’s cannot legally give any preliminary indication of value, as this would supposedly constitute “steering.” Instead, borrowers must pay an average $500 upfront fee for an appraisal without having any indication if the appraised value will come close to meeting what is necessary to accomplish the financing. I am quite sure there are going to be a lot of unhappy prospective borrowers who are going to receive appraisal reports they can do nothing with and wonder why they even wasted their money. It also seems ludicrous that these AMC’s should be paid upfront without having to do any due diligence (I can’t think of any service industry where you get paid before doing any work)!
This is only the start. How do AMC’s determine who will ultimately do the appraisal field work? They will farm it out on a rotating basis to subcontracted appraisers in a given area, whom assumably they did some sort of pre-screening process in regards to their competency. These appraisers, who mind you are currently under extreme pressure from investors to adhere to very conservative guidelines or face monetary and/or legal repercussions, will undoubtedly often “lowball” appraisals. If you were in their shoes, wouldn’t you? It is important to remember that appraising real estate is not an exact science and there is some subjective element. This is especially true today when the volume of sales is way down from what it once was and there are often much fewer comps available. Despite this, appraisers are now asked to supply substantially more comps and backup data than they ever have before. Since it is now these AMC’s that are effectively hiring and paying these independent appraisers, why would an appraiser not always hedge on the side of conservatism in lieu of the possible repercussions that he/she could face if the loan goes bad. Taken in isolation, my guess is that this law by itself will cause values to drop another 5-10% on an aggregate basis.
Let’s go back to the question of a borrower, who has paid good money upfront for an appraisal, assuring he is going to get a professional and timely appraisal completed. I will give you an example of the appraiser whom I have used for the past 15 years (until now) and his recent experiences with an AMC. I asked what kind of due diligence the AMC did to allow him to be one of their subcontractors. He said he had to fill out an application and produce his license (no reference checks, no sample reports of his work). Voila, he was approved. My guess is that some incompetent appraisers may slip through the cracks. He is then paid $205 on reports that the AMC charges $400 to the client to produce; for almost every report he does, the AMC asks him for material additional follow-up work, which they expect him to do for no additional pay. Mind you, the person that “manages” this process at the AMC and dictates what needs to be done is located in Kansas City, KS & the appraisals are in southern California. My guess is the “manager” has far less competency than the actual appraiser. Chalk another one up for big business at the expense of the hard working appraiser actually doing the work. I feel terrible for these competent appraisers, who have in many instances built a business for decades around producing good quality work. Now, all of the sudden they have their clients pulled from underneath them and are forced to take orders from some incompetent “manager” at an AMC.
How about the question of choices for borrowers? Prior to HVCC, once a mortgage professional had an appraisal report completed, they can take that appraisal to any bank, as long as the appraiser is approved at the bank. Now with HVCC, almost every bank has a different AMC that must be used to submit loans to them. If during the process, the client is not happy with that bank’s rates, underwriting, customer service, etc. and wants to go to a different bank, they will now have to order and pay for a completely new appraisal with the new bank’s specific AMC. They are then stuck at that bank, unless they want to again pay for another appraisal report. This will severely limit borrowers’ choices.
Almost everyone in America is going to be hurt by this knee-jerk law. I have summarized below the negative consequences that will result & encourage each and every one of you to sign the STOP HVCC petition at http://www.no-hvcc.info/.
1) Borrowers forced to pay upfront for appraisal reports without having any preliminary indications of value and whether it will suffice for their financing needs.
2) HVCC in isolation will cause real estate values to drop by 5-10%, as appraisers have an incentive to be overly-conservative. This also has the spiraling effect of causing many purchase transactions to fall though, further pressuring values.
3) Borrowers will often be stuck with a randomly-chosen appraiser who is not competent to do that appraisal, both because of their general merits and the fact they may not be that familiar with a local area.
4) Borrowers’ financing choices are going to be severely limited because they will be forced to stick with one bank during the process, unless they pay for an entirely new appraisal.
5) Destruction of the entire business model for small appraisers, mortgage brokers, and real estate agents. Once again, while there were undoubtedly unsavory individuals, a vast majority of these professionals operated with integrity and do not deserve to lose their livelihood.
Wednesday, May 27, 2009
Tuesday, March 31, 2009
Examining Mortgage Origination
Examining the Bank- Mortgage Brokerage Business Model
It seems evident that banking regulators and banks themselves are questioning the continued viability of the wholesale mortgage brokerage business model. Up until the past few years, mortgage brokers consistently gained market share for the past couple decades in terms of residential mortgage loan originations. This was a profitable channel of business for the banks, as they had a sales force of mortgage brokers selling their products to the actual homeowners, while not being on the hook for the fixed costs of having an internal sales force and/or a retail branch network. With the current combination of a “commoditization” of loan products (Fannie/Freddie 30-year fixed world), many national banks establishing an extensive nationwide branch network, and a distrust of mortgage broker origination business, I believe many are wondering if mortgage brokers still serve a purpose.
While there are a great deal of mortgage brokers who should never have been in the business, the current housing crisis goes much deeper than simply blaming it on the mortgage broker. Generalizing, I think it is fair to say that the overwhelming factor in this housing crisis was America as a whole’s attitude of believing the good times would last forever and the resultant careless issuance and use of debt. Regarding the latter, no doubt our government and banking leaders greatly contributed to this abuse of debt. With the passage of the Community Reinvestment Act and the constant push on HUD by Congress to lend to more and more people (even up to 2005), the mechanisms were put in place to really open the lending spigots. Wall Street and the banks, flush with money, came out with crazier and crazier loan products, which culminated in the 100% no income/ no asset loan program. Then, if all that wasn’t enough, the credit agencies were paid by the sellers of these packages of mortgages (MBS’s) to rate them and through supposed financial wizardry, they rated them much higher than was worthy. I believe a great majority of the problem stems form borrowers who knew they were taking a risk on the housing market. However, looking back, it is hard to blame working class people who bought beyond their means when our whole system of capitalism essentially failed them (“surely, banks wouldn’t lend if I wasn’t a good credit risk”).
Well, obviously what went wrong is we based everything on the worst assumption imaginable, namely that the real estate market would just keep going up and that a house could be used like a piggy bank. We are all paying the price for it now. From a mortgage perspective, the industry is increasingly becoming “commoditized” with Fannie/Freddie (and the Federal government’s purchase and implicit guarantee) being the only real buyer of mortgages. Largely gone is jumbo lending, 2nd mortgages, and loan product choices. It has become a 30-year fixed, par-priced conforming world. Along with this lack of choices is often a lack of intelligible advice and communication to prospective borrowers. Whether a borrower goes directly to the bank or through a broker, it has becoming very hard to communicate on the simplest of issues (changing loan size by a couple thousand dollars to cover closing costs, deciding whether it makes sense to pay 1 or 2 points, can we payoff some credit card debt, etc.).
With that said, I want to examine the bank-broker relationship and offer a suggestion on how to greatly improve this channel.
KNOW THE ORIGINATOR PARTNER
Where underwriting individual borrower files is critical, I believe knowing who is originating the loan has a great correlation to loan performance. Identify those originators that over an extended period of time have given you performing loans and reward them with better pricing and service.
A professional mortgage brokerage business involves a high degree of personal communication with the client. This begins by listening to the borrower’s wants and needs, then analyzing a borrower’s loan application to see what loan choices may best fit each specific borrower’s wants and needs. It includes educating the borrower on the details of the loan process, the crucial importance of locking in a rate and what exactly “locking” means. In the case of a purchase, it all also includes educating a borrower on the details of the entire sales process, going over prospective home purchases and the underlying numbers, and issuing pre-qualification letters.
Once a client commits to moving forward and we submit a loan application to a bank, it is our job to give daily attention to this file and communicate on a consistent basis with the client. Often, a client may want to make some minor changes to loan sizing, loan program, borrower profile (say a pay increase), etc. In a more efficient lending environment, this should be a simple call to discuss details with a decision maker at the bank, but here is where it has become increasingly difficult to communicate with a rep from the bank that can actually make decisions. I understand the rational of many bank employees who don’t want to be held accountable and risk their job for a potentially poor decision, but the result is often inaction and inefficiency. Of course, making sure every deal funds on time and loan lock is met is of utmost importance. A good mortgage broker will also go over post-closing details with borrowers and regularly stay in touch with them in the future to ascertain they are in the best possible loan situation.
Going back to those originators that have displayed a history of performing loan production, ethical conduct, and high client satisfaction, why not give them superior resources to close more performing deals and give the bank opportunities to cross-sell products because of the great service they provided? This brings me back to the whole quality vs. quantity issue. For many years prior to the housing downturn, it seemed whomever did the most loans was rewarded. I know of brokers who would churn the same loans over and over again to make maximum rebates and some banks not only allowed this behavior, but actually encouraged it as it improved their volume numbers. After all, they didn’t own that paper and hence, prepayment risk was someone else’s problem. Once again, reputable mortgage brokers and borrowers are now are paying the price with the material restriction of rebate pricing and hence, borrower choices.
The new HVCC regulations (Home Valuation Code of Conduct) are very ill-conceived. I think it is a great stretch to place a major blame on mortgage brokers coercing appraisers for this housing debacle. Once again, it is ultimately the borrower who will be paying higher costs. In looking at a purchase or refinance opportunity, appraisers always performed a vital function in “comping” a property to find a likely range of value, even if it was very broad. Now, a borrower is supposed to pay one of these big, non-personal appraisal management companies upfront for an appraisal, even though they have no idea if the value will even be close to what is needed for a deal to make sense. In addition, borrowers are frequently being charged for two or more appraisals, as many banks now have mandatory review appraisals, often performed by one of their subsidiary companies, even at LTV’s below 50%! Maybe the pending legislation will change some of these new rules, but again it seems like we are losing a grasp on capitalism as an idealogy. The way events have been unfolding, I fear that we are going to have an industry dominated by a few major institutions (maybe just the Federal government) and borrowers will be forced to accept whatever fees and loans are thrust upon them. We all need to save ourselves from this Orwellian outcome!
It seems evident that banking regulators and banks themselves are questioning the continued viability of the wholesale mortgage brokerage business model. Up until the past few years, mortgage brokers consistently gained market share for the past couple decades in terms of residential mortgage loan originations. This was a profitable channel of business for the banks, as they had a sales force of mortgage brokers selling their products to the actual homeowners, while not being on the hook for the fixed costs of having an internal sales force and/or a retail branch network. With the current combination of a “commoditization” of loan products (Fannie/Freddie 30-year fixed world), many national banks establishing an extensive nationwide branch network, and a distrust of mortgage broker origination business, I believe many are wondering if mortgage brokers still serve a purpose.
While there are a great deal of mortgage brokers who should never have been in the business, the current housing crisis goes much deeper than simply blaming it on the mortgage broker. Generalizing, I think it is fair to say that the overwhelming factor in this housing crisis was America as a whole’s attitude of believing the good times would last forever and the resultant careless issuance and use of debt. Regarding the latter, no doubt our government and banking leaders greatly contributed to this abuse of debt. With the passage of the Community Reinvestment Act and the constant push on HUD by Congress to lend to more and more people (even up to 2005), the mechanisms were put in place to really open the lending spigots. Wall Street and the banks, flush with money, came out with crazier and crazier loan products, which culminated in the 100% no income/ no asset loan program. Then, if all that wasn’t enough, the credit agencies were paid by the sellers of these packages of mortgages (MBS’s) to rate them and through supposed financial wizardry, they rated them much higher than was worthy. I believe a great majority of the problem stems form borrowers who knew they were taking a risk on the housing market. However, looking back, it is hard to blame working class people who bought beyond their means when our whole system of capitalism essentially failed them (“surely, banks wouldn’t lend if I wasn’t a good credit risk”).
Well, obviously what went wrong is we based everything on the worst assumption imaginable, namely that the real estate market would just keep going up and that a house could be used like a piggy bank. We are all paying the price for it now. From a mortgage perspective, the industry is increasingly becoming “commoditized” with Fannie/Freddie (and the Federal government’s purchase and implicit guarantee) being the only real buyer of mortgages. Largely gone is jumbo lending, 2nd mortgages, and loan product choices. It has become a 30-year fixed, par-priced conforming world. Along with this lack of choices is often a lack of intelligible advice and communication to prospective borrowers. Whether a borrower goes directly to the bank or through a broker, it has becoming very hard to communicate on the simplest of issues (changing loan size by a couple thousand dollars to cover closing costs, deciding whether it makes sense to pay 1 or 2 points, can we payoff some credit card debt, etc.).
With that said, I want to examine the bank-broker relationship and offer a suggestion on how to greatly improve this channel.
KNOW THE ORIGINATOR PARTNER
Where underwriting individual borrower files is critical, I believe knowing who is originating the loan has a great correlation to loan performance. Identify those originators that over an extended period of time have given you performing loans and reward them with better pricing and service.
A professional mortgage brokerage business involves a high degree of personal communication with the client. This begins by listening to the borrower’s wants and needs, then analyzing a borrower’s loan application to see what loan choices may best fit each specific borrower’s wants and needs. It includes educating the borrower on the details of the loan process, the crucial importance of locking in a rate and what exactly “locking” means. In the case of a purchase, it all also includes educating a borrower on the details of the entire sales process, going over prospective home purchases and the underlying numbers, and issuing pre-qualification letters.
Once a client commits to moving forward and we submit a loan application to a bank, it is our job to give daily attention to this file and communicate on a consistent basis with the client. Often, a client may want to make some minor changes to loan sizing, loan program, borrower profile (say a pay increase), etc. In a more efficient lending environment, this should be a simple call to discuss details with a decision maker at the bank, but here is where it has become increasingly difficult to communicate with a rep from the bank that can actually make decisions. I understand the rational of many bank employees who don’t want to be held accountable and risk their job for a potentially poor decision, but the result is often inaction and inefficiency. Of course, making sure every deal funds on time and loan lock is met is of utmost importance. A good mortgage broker will also go over post-closing details with borrowers and regularly stay in touch with them in the future to ascertain they are in the best possible loan situation.
Going back to those originators that have displayed a history of performing loan production, ethical conduct, and high client satisfaction, why not give them superior resources to close more performing deals and give the bank opportunities to cross-sell products because of the great service they provided? This brings me back to the whole quality vs. quantity issue. For many years prior to the housing downturn, it seemed whomever did the most loans was rewarded. I know of brokers who would churn the same loans over and over again to make maximum rebates and some banks not only allowed this behavior, but actually encouraged it as it improved their volume numbers. After all, they didn’t own that paper and hence, prepayment risk was someone else’s problem. Once again, reputable mortgage brokers and borrowers are now are paying the price with the material restriction of rebate pricing and hence, borrower choices.
The new HVCC regulations (Home Valuation Code of Conduct) are very ill-conceived. I think it is a great stretch to place a major blame on mortgage brokers coercing appraisers for this housing debacle. Once again, it is ultimately the borrower who will be paying higher costs. In looking at a purchase or refinance opportunity, appraisers always performed a vital function in “comping” a property to find a likely range of value, even if it was very broad. Now, a borrower is supposed to pay one of these big, non-personal appraisal management companies upfront for an appraisal, even though they have no idea if the value will even be close to what is needed for a deal to make sense. In addition, borrowers are frequently being charged for two or more appraisals, as many banks now have mandatory review appraisals, often performed by one of their subsidiary companies, even at LTV’s below 50%! Maybe the pending legislation will change some of these new rules, but again it seems like we are losing a grasp on capitalism as an idealogy. The way events have been unfolding, I fear that we are going to have an industry dominated by a few major institutions (maybe just the Federal government) and borrowers will be forced to accept whatever fees and loans are thrust upon them. We all need to save ourselves from this Orwellian outcome!
Friday, March 20, 2009
March 20 Mortgage Update
March 20 Mortgage Update
Mortgage rates had a nice downward bounce this week after the Federal Reserve announced they would buy up to $300 billion in Treasury bonds over the next six months. In addition, the Fed also announced they would now purchase up to 1.25 trillion in mortgage-backed securities, raising their appetite from the $500 billion that was previously announced. It is interesting to note it is the Federal Reserve, utilizing their mandate from Congress, that is taking action. The current balancing act between the Fed setting monetary policy & the Treasury Department’s fiscal policy initiatives, is a tall order and one that has caused much debate on both sides.
I think the important item to note is that this big announcement did not have the huge impact on rates that the media would have you to believe. Conforming rates prior to the announcement were already under 5%. When the announcement was made, investors’ rates on average improved by only 0.25% & by the end of the day Thursday, many investors were already having price changes for the worse. The bottom line: throwing another trillion or so at our growing liquidity problem had only a limited immediate effect on mortgages rates; however, it should keep rates in this low realm for the immediate future. What is going to be the outcome of this unprecedented government spending plan, most recently estimated at $10 trillion over the next five years? While inflation should remain in check for the next 12-18 months due to the large amount of economic slack present in our economy, expect inflation and a much higher interest rate environment a couple years down the road. This provides quite an attractive home buying proposition right now.
Mortgage rates had a nice downward bounce this week after the Federal Reserve announced they would buy up to $300 billion in Treasury bonds over the next six months. In addition, the Fed also announced they would now purchase up to 1.25 trillion in mortgage-backed securities, raising their appetite from the $500 billion that was previously announced. It is interesting to note it is the Federal Reserve, utilizing their mandate from Congress, that is taking action. The current balancing act between the Fed setting monetary policy & the Treasury Department’s fiscal policy initiatives, is a tall order and one that has caused much debate on both sides.
I think the important item to note is that this big announcement did not have the huge impact on rates that the media would have you to believe. Conforming rates prior to the announcement were already under 5%. When the announcement was made, investors’ rates on average improved by only 0.25% & by the end of the day Thursday, many investors were already having price changes for the worse. The bottom line: throwing another trillion or so at our growing liquidity problem had only a limited immediate effect on mortgages rates; however, it should keep rates in this low realm for the immediate future. What is going to be the outcome of this unprecedented government spending plan, most recently estimated at $10 trillion over the next five years? While inflation should remain in check for the next 12-18 months due to the large amount of economic slack present in our economy, expect inflation and a much higher interest rate environment a couple years down the road. This provides quite an attractive home buying proposition right now.
Thursday, March 5, 2009
Housing Crisis Plan
SPECIAL HOUSING REPORT
March 4, 2009
Evaluating the Details of Obama’s Plan
The details of the foreclosure prevention program were announced today, but largely just elaborated on what was previously reported. The plan, dubbed the Homeowner Affordability & Stability Plan, is supposed to help up to 9 million Americans. Unfortunately, this relief is concentrated strictly in the conforming loan market.
Two major components of the plan:
1) Help homeowners who have been current on their mortgages but thus far have been unable to refinance because of a LTV issue (estimated to potentially help 5 million people).
This is restricted to loan amounts under $729,750, primary residences only, LTV cannot exceed 105% (unless loan is currently owned by Fannie/Freddie), and housing ratio no more than 38%.
2) Help homeowners who are already in default or “at risk” with standardized modification procedures (estimated to potentially help 4 million people).
Again, $729,750 maximum loan sizes, primary residences only, 38% max housing ratio (which needs to be subsidized down to 31% by government), and there needs to be compelling reason for the modification request (i.e. financial hardship, interest rate hike, etc.).
My view of the plan- it will help far less people than their estimates and still does very little for large swaths of the country, like southern California. Here in coastal California, we need to rejuvenate the jumbo market, which has been severely hampered by the virtual shutdown of the securitization market. In addressing this, the Fed did announce a major expansion of the TALF program (Term Asset-Backed Securities Loan Facility), whereby they would lend up to $1 trillion to revive securities markets. Under this program, the government will allow very cheap borrowing (LIBOR + 1.0 margin) with a government guarantee if the underlying loans they make go bad. This is a major positive step in restoring jumbo loan options.
March 4, 2009
Evaluating the Details of Obama’s Plan
The details of the foreclosure prevention program were announced today, but largely just elaborated on what was previously reported. The plan, dubbed the Homeowner Affordability & Stability Plan, is supposed to help up to 9 million Americans. Unfortunately, this relief is concentrated strictly in the conforming loan market.
Two major components of the plan:
1) Help homeowners who have been current on their mortgages but thus far have been unable to refinance because of a LTV issue (estimated to potentially help 5 million people).
This is restricted to loan amounts under $729,750, primary residences only, LTV cannot exceed 105% (unless loan is currently owned by Fannie/Freddie), and housing ratio no more than 38%.
2) Help homeowners who are already in default or “at risk” with standardized modification procedures (estimated to potentially help 4 million people).
Again, $729,750 maximum loan sizes, primary residences only, 38% max housing ratio (which needs to be subsidized down to 31% by government), and there needs to be compelling reason for the modification request (i.e. financial hardship, interest rate hike, etc.).
My view of the plan- it will help far less people than their estimates and still does very little for large swaths of the country, like southern California. Here in coastal California, we need to rejuvenate the jumbo market, which has been severely hampered by the virtual shutdown of the securitization market. In addressing this, the Fed did announce a major expansion of the TALF program (Term Asset-Backed Securities Loan Facility), whereby they would lend up to $1 trillion to revive securities markets. Under this program, the government will allow very cheap borrowing (LIBOR + 1.0 margin) with a government guarantee if the underlying loans they make go bad. This is a major positive step in restoring jumbo loan options.
March 5 Mortgage Update
March 5 Mortgage Update
Mortgage rates have moved up slightly from last week. The much-anticipated details of the foreclosure prevention plan that were announced yesterday had little material effect on markets.
In years past, we detailed a lot more loan programs and loan cost options, but with the current banking crisis, the current mortgage world has become “commoditized” in this respect. Since most banks either to not have the liquidity or the risk tolerance to offer loans that are not purchased or guaranteed by the Federal government, all they offer is Fannie/Freddie or FHA conforming product, with the 30-year fixed being the benchmark program. Another huge change in mortgage pricing over the last 60 days that will probably continue well into the future is “price compression.” In years past, investors offered fairly consistent rebate pricing, which enabled us to offer 0 point and 0 pt//0 closing costs options. However, because of prepayment risk, investors have severely restricted rebate pricing. This prepayment risk arises when long term loans are paid off early when rates drop and also, unfortunately to some degree caused by banks and brokers churning loans in the past. At present, this has resulted in borrowers almost always paying their own closing costs and usually some % of points.
A note about JUMBO mortgages, they are still available, however expect a 30% down payment for the best-priced loans.
Where eventually loan programs and choices will come back, timing and execution are the critical elements now in providing superior service to clients. With timing, we have seen conforming rates trade between 4.75- 5.25% at par for much of the past 90 days. A great majority of the time, they have been at the higher end. However, by watching the market diligently during the course of each business day, we have been able to time most of our locks at or near the 4.75% mark. Execution is critical, as underwriting and communication has never been so constrained with all the investors. A client should know that her/his file is receiving daily attention to make sure close and lock deadlines are being met.
Mortgage rates have moved up slightly from last week. The much-anticipated details of the foreclosure prevention plan that were announced yesterday had little material effect on markets.
In years past, we detailed a lot more loan programs and loan cost options, but with the current banking crisis, the current mortgage world has become “commoditized” in this respect. Since most banks either to not have the liquidity or the risk tolerance to offer loans that are not purchased or guaranteed by the Federal government, all they offer is Fannie/Freddie or FHA conforming product, with the 30-year fixed being the benchmark program. Another huge change in mortgage pricing over the last 60 days that will probably continue well into the future is “price compression.” In years past, investors offered fairly consistent rebate pricing, which enabled us to offer 0 point and 0 pt//0 closing costs options. However, because of prepayment risk, investors have severely restricted rebate pricing. This prepayment risk arises when long term loans are paid off early when rates drop and also, unfortunately to some degree caused by banks and brokers churning loans in the past. At present, this has resulted in borrowers almost always paying their own closing costs and usually some % of points.
A note about JUMBO mortgages, they are still available, however expect a 30% down payment for the best-priced loans.
Where eventually loan programs and choices will come back, timing and execution are the critical elements now in providing superior service to clients. With timing, we have seen conforming rates trade between 4.75- 5.25% at par for much of the past 90 days. A great majority of the time, they have been at the higher end. However, by watching the market diligently during the course of each business day, we have been able to time most of our locks at or near the 4.75% mark. Execution is critical, as underwriting and communication has never been so constrained with all the investors. A client should know that her/his file is receiving daily attention to make sure close and lock deadlines are being met.
Wednesday, February 25, 2009
FEB 09 Fed Stimulus Plan
SPECIAL REPORT
The Stimulus Plan & Real Estate
What does the latest $787 billion stimulus package that will be signed into law by President Obama mean for the real estate market?
Where many of the details of the plan as it pertains to the real estate market are still being hashed out and will be unveiled on March 4th, here is what we know:
Obama has announced $75 billion of the stimulus plan will go directly towards stabilizing real estate markets. Congress has called for a temporary halt on foreclosures until this March 4th deadline, which most banks have announced they will comply with. It is expected they will try to come out with uniform rules for loan modifications, such as house payments can be no more than 31% of a borrower’s income. They will also try to make refinancing available to homeowners who are current on their payments, but have been shut out of the refinance market because of a lack of equity in their homes. However, they will only allow refinancing up to a 105% LTV limit. They are also planning on allowing bankruptcy judges to reduce principal balances in some instances. Personally, I believe this can have large negative unintended consequences in the form of higher interest rates, as investors are going to demand a material principal risk premium if a judge can basically override a legally binding loan contract.
As you all know, two areas of the real estate market need immediate help. The government hasn’t yet released specifics on the following, but has acknowledged the following areas need attention.
1) Mid to high priced homes: The latest NAR numbers show homes that sold for $400,000 and under are only down 3% from last year. Comparatively, home sales $750,000 and up are down 47% from last year’s figures. This is shocking, especially considering in areas like southern California, $750,000 is a relatively mid-priced home.
2) Investment properties: Since the government is trying to spark home new home sales, a vital component of these new buyers should be investors (not speculators!). However, with the current amount of added fees that are being imposed on investors, many have shied away. We need to entice them back into the market with more affordable financing.
The government will no longer require homebuyers to repay the $8000 1st time homebuyer tax credit for those that purchase from January 1- December 1, 2009. If the much lower sales prices from the 2005-06 peak, the tremendous tax benefits of homeownership (vs. renting), and the sub-5% current rates are not enough of an incentive, this $8000 gift should make any potential new homebuyer giddy with excitement.
The Stimulus Plan & Real Estate
What does the latest $787 billion stimulus package that will be signed into law by President Obama mean for the real estate market?
Where many of the details of the plan as it pertains to the real estate market are still being hashed out and will be unveiled on March 4th, here is what we know:
Obama has announced $75 billion of the stimulus plan will go directly towards stabilizing real estate markets. Congress has called for a temporary halt on foreclosures until this March 4th deadline, which most banks have announced they will comply with. It is expected they will try to come out with uniform rules for loan modifications, such as house payments can be no more than 31% of a borrower’s income. They will also try to make refinancing available to homeowners who are current on their payments, but have been shut out of the refinance market because of a lack of equity in their homes. However, they will only allow refinancing up to a 105% LTV limit. They are also planning on allowing bankruptcy judges to reduce principal balances in some instances. Personally, I believe this can have large negative unintended consequences in the form of higher interest rates, as investors are going to demand a material principal risk premium if a judge can basically override a legally binding loan contract.
As you all know, two areas of the real estate market need immediate help. The government hasn’t yet released specifics on the following, but has acknowledged the following areas need attention.
1) Mid to high priced homes: The latest NAR numbers show homes that sold for $400,000 and under are only down 3% from last year. Comparatively, home sales $750,000 and up are down 47% from last year’s figures. This is shocking, especially considering in areas like southern California, $750,000 is a relatively mid-priced home.
2) Investment properties: Since the government is trying to spark home new home sales, a vital component of these new buyers should be investors (not speculators!). However, with the current amount of added fees that are being imposed on investors, many have shied away. We need to entice them back into the market with more affordable financing.
The government will no longer require homebuyers to repay the $8000 1st time homebuyer tax credit for those that purchase from January 1- December 1, 2009. If the much lower sales prices from the 2005-06 peak, the tremendous tax benefits of homeownership (vs. renting), and the sub-5% current rates are not enough of an incentive, this $8000 gift should make any potential new homebuyer giddy with excitement.
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