Brian's Blog

Was it really a surprise??

A couple of thoughts....

1) We knew this week was coming. We discussed it back this winter when the administration said they would begin buying MBS to put a ceiling on mortgage rates through June that the market would begin to drive up rates by May. The market always anticipates -- buy the rumor, sell the fact. In this case ridiculously low rates existing in the face of a government printing press on steroids stand no chance of holding their ground. Once you come to the end of any stimulus program, the world says "OK, what's your next magic act going to be? How you gonna keep this party going?"

So the vague promises that the government would keep being a participant in the mortgage market looked all too hollow, and the Market voted with it's feet, nary a buyer to be seen. When you see moves like that, a bottom has been found and sentiment has changed. Sure the economy is still punky and slow, with employment and GDP slow to grow for 12 more months++. But the free fall has shifted to a wait and see mode with a renewed focus of "how will we get all this liquidity back in the bottle with out causing massive inflation?" Here is a good article you can use to explain to borrowers about this abrupt change; it reminds them not to be greedy and grab the rates if they just recover a little from here.

http://www.boston.com/business/personalfinance/articles/2009/05/30/sudden_mortgage_rate_hike_shocks_many_hoping_to_refinance/

Hopefully we will get a pickup in purchase activity here in May/June (have seen some strong activity in the first time buyer areas here)that will feed us during a summer that likely will be slower than the last few months but better than average. Rates can be very choppy the next 90 days and purchases usually slow after July 4th. I am looking for a purchase run last week of August throughColumbus day though...refi's in the fall???  Could be a dip but only because they have gone higher from here and are just returning to these levels.

2) CAN I HAVE MY $8000 NOW? HUD came out and squashed the idea that they would make it any easier to get your $8000 now so that you can use it as a down payment. There was a lot of talk of sellers/builders/"non-profits" giving the $8000 upfront with a "payday" loan to get it back. Of course these interested parties are just trying to understandably move product. The only thing standing in the way is down payment. Sure looks like the DPA programs that HUD has worked so hard to eliminate. These programs did the same financial two-step to avoid down payment. 

The fundamental issue is that if you can't save money while making a lower rent payment in order to buy a home, how will you make your higher mortgage payments AND deal with higher home cost bills that you know happen. Furnaces, leaks, while-your-at-it's...coupled with lost bonus, OT, health issue or full job loss. If you have no skin in the game it is just so easy to walk away. ESPECIALLY if your value has dropped at all...in most parts of this country those drops are very likely to continue...I give credit to HUD for standing by he old belief that skin in the game is a non-negotiable. (even though it hurts volume at a crucial time, its better for us all in the long term). Here is a good WSJ article about this... 

http://online.wsj.com/article/BT-CO-20090529-712103.html

or

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=200905291517dowjonesdjonline000799&title=update-fha-policy-on-tax-credit-more-limited-than-expected

The next 30+ days will be very telling...concentrate on getting your pipe out the door so the losses don't pile up, and pursue that purchase business that others are forgetting about. Work double time now, because these may be your only summer apps...

Why Refinancing Is So Hard

Here is a consumer piece I wrote recently that I thought you would find interesting. 

Download Five Reasons Why Refis are Hard

Why is Just Getting a Lower Mortgage
Rate Such a Hard Thing To Do Today?

Written by Brian Koss

Well, believe it or not, both lenders and borrowers are asking that same question right now. Lenders are turning away as many as 50% of the applications they take and spending 2-3x more time on each application. This pain leads to higher levels of anxiety (all around), increased costs (which always trickle down), and lots of disappointment and unnecessary friction. In order to set the right expectations, I would like to give 5 of the top reasons why refinances are so difficult and what you can do to avoid the friction.

 1) Paperwork. Since the late 90’s the trend in lending was to simplify the process and avoid the paperwork. A full two years tax returns and statements of every asset and debt for 3 months along with no questions. It peaked with a good FICO score allowing you to simply buy a home with no money down and no income or assets verified. Today those same FICO readings give you zero benefit in documentation relief. Everybody – rich or poor, on-time or not – has to produce the documentation. You are presumed guilty until proven innocent, so any recent changes in employment or variableness to income is a big issue. Also any change in your recent asset history is a big issue and please no significant changes beyond paychecks going through your accounts.

 2) FICO’s. Loans to a fault were being done for individuals whose credit score was as low as 500. 580-620 was considered OK. 620-680 was considered good to very good and 680 and above was great. Today loans below 620 are borderline impossible. No stories and no explanations will help. Pricing is adjusted for loans below 720; before it was 620 or 580. This eliminates many of the refinances and purchasers in the market. But the good news is that Credit Simulators are available from the pro-active loan officers out there who can show a borrower what is exactly affecting their score and show them what actions to take to improve their score.

 3) Values- the majority of time spent waiting for a decision on a loan is spent waiting for an appraisal to actually arrive at our desk from a busy appraiser and/or waiting as the underwriter scrutinizes the math of how the appraiser got the value. Frequently the underwriter these days will ask for explanations or more examples of comparable sales, comparables closer to the home, more like the home or more examples of like homes on the market, etc A few years ago values were frequently determined  using Automated Valuation Methods. These AVMs spit out of a computer model similar to a Zillow saving hundreds of dollars for the customer and weeks in the process.

 Lastly on value is the issue of loan to value. All loans today require much greater down payment or equity. All property types are affected by this but especially jumbo, investor, second home, multi-family, condos, and any unique properties or situations. There can be as much as an extra 20% required, plus there is a greater need for cash reserves after closing.  The bottom-line is, it requires much more money to get financing today and we need to know where it all came from. Be prepared to show 3+ months statements on every asset you have that can help show your strength, reserves, and where your deposit is coming from.

 4) HVCC--Adding to this appraisal issue is the new appraisal process Home Valuation Code of Conduct or HVCC that just started 5/1/09. This regulation prohibits lenders and brokers from making contact with an appraiser during the process or being involved in the selection of an appraiser. This means to the consumer that they will have to pay for the appraiser upfront; they won’t be able to get an opinion of value upfront on a refinance to see if it’s even worth even doing and you are not guaranteed to get an appraiser who really knows their market.

 5) Subordination – A term that many consumers haven’t heard before is a major culprit in this painful finance process today. For those refinances out there that have an existing second mortgage, you need to have your second lien holder subordinate (stay in second place while we pay off your existing first mortgage and replace it with a new lower monthly payment first mortgage). Sounds like a no-brainer right but you’d be surprised. Too many times the second lien holder wants to force you to pay off and close out their second position, and therefore says no. The process of subordination involves us completing the whole file – all of your documents, our documents, and the appraisal--- which can take 4-6 weeks, then sending it to the second lien holder for their approval which can take 2-6 weeks. Most rate locks are at 45-60 days and therefore we have a problem. In the past we would just put a new equity line or second mortgage and get around this issue. But today there are virtually no qualifying seconds available so we are stuck begging, in line with everyone else.

To all of the above you add on the new HARP program allowing the first mortgage refinance to go as high as 105% LTV, which then requires the underwater second lien holder to subordinate at a pretty lofty position, adding to the subordination woes. All the modifications for all the people who don’t fit into these new terms slow down the major servicers and their response times to subordinations and payoffs etc.

 You can also add the following:

Warehouse lines that independent mortgage bankers use to fund loans are 80% less than two years ago eliminating billions of dollars in capacity.

Fraud checks, ID checks, 4506 IRS checks, value checks, are audit processes that are all now being moved to the front of the process adding time and money.

Technology has not kept up with the new flows of business and massive regulation. During the last 10 years little time was spent reinvesting in R&D, so adding the new requirements to antiquated systems is a recipe for disaster everywhere. Plus there are few solvent technology companies available to compete today.

Our industry had shrunk our processing staff significantly from 2006-8; many left the industry to find more stable work. Also many of the employees of the last 10 years did not learn business the right way and struggle with the new skill requirements.

The story is not over yet. There are many more changes planned by investors and regulators to come. The bottom of this cycle will probably look more like a W than a V bringing another wave of opportunity wrapped up in confusion. Hopefully we can get the message out to the public so we can manage the expectations irresponsibly set in the past.