Making the World a Safer Place for Mortgages

Appearing on the Fox Business Channel January 19, 2011, the FDIC chairwoman Sheila Bair, was asked about the new class of residential mortgages, "qualified residential mortgages".  Qualified residential mortgages are a class of mortgages created under the Dodd Frank rule which exempts certain types of mortgages from the law's 5% risk retention rule.  QRM's may be sold without the lender having to retain any part of the loan in their portfolio, but they must conform to strict new guidelines.

How strict?  When asked this question on FBC, Bair responded that qualified residential mortgages which can be sold on the secondary market will have "more pristine standards" and "additional requirements to qualify." 

Since the standards are actually being written right now by federal regulators, it is too early to know yet exactly what will be included in the final definition of a qualified residential mortgage.  One fact that does appear to be emerging pretty clearly is that these mortgages will require no less than 20% down payment.  Wells Fargo had issued a proposal for 30% down, but Bair rejects that as excessive, saying that the 20% downpayment worked well for many years to create safe and secure residential mortgages.

In a lending environment as tough as this one, it is hard to imagine underwriting standards becoming even more strict than they are now. But that is exactly what is about to happen.  Freddie Mac issued a statement late last year that their average credit score for a mortgage loan is over 750.  Debt ratios cannot exceed 50% except on special refinance transactions for loans that Fannie Mae and Freddie Mac already own.  All documentation in the file is checked and rechecked.

So how could underwriting standards become more pristine? Actually, they could tighten in several ways. Some regulators have been calling for appraisal reviews for files being sold on the secondary market. We might see QRMs require a mandatory full appraisal and an appraisal review for each loan.  That would raise borrower costs substantially, but it would give the lender and the servicer an added layer of protection.  And we probably can expect to see debt ratio guidelines tighten--perhaps to 40% total debt to income or perhaps even lower--to the old ratio cap of 33%.  That would mean that the total borrower monthly debt including the housing payment, could not exceed 33% of the gross monthly income.

This will certainly make mortgages safer.  Unfortunately, it will also make them much less available, and it will make homeownership more expensive and less attainable. Consider Ms. Bair's statement that the 20% downpayment served us well for many years. The 20% standard was developed at a time when housing prices were much lower than they are today.  My parents bought their first home in 1967 for $16,000. At 1650 square feet, the home was purchased brand new from the builder at less than $10.00 per square foot!  I have since seen the home; it was a well designed, well-built three bedroom home with a master suite and built-in kitchen appliances, sitting on a large lot in a new subdivision.  (Incidentally, my parents used my father's VA to purchase the home so they did not make a 20% downpayment even then.  It cost my parents $100.00 to close on their first home, and they had an escrowed monthly payment of $102.00.)  Today, that same home is on the city tax rolls for $110,000.00

In an era where credit cards were basically non existent, and home prices were low, young couples could save their money and make a down payment on a home.  How times have changed.  Most cars today cost more than my parents' first home  The average price of a home nationwide is more than $170,000.  With credit cards and car payments, child support payments, etc. most potential borrowers cannot meet the tough new standards for underwriting under qualified residential mortgages.

And this is the conclusion of Washington D.C. policy think tank MF Global, which was quoted in Housing Wire on January 24, 2011, saying that we are creating a situation "where less-than-perfect-borrowers have no ability to get mortgages, which could make an already tight mortgage market even tighter."  Most industry experts believe that banks will come up with a set of portfolioed mortgages which allow less than 20% down payments and have less stringent underwriting standards.  However, in practice, how many lenders are going to want to relax standards on mortgages in which they must retain at least 5% ownership?

All of this equals a tighter housing market in 2011.  As the pool of qualified homeowners gets increasingly smaller, and mortgage loans become increasingly difficult and expensive to obtain, more and more Americans are going to find that the American Dream of homeownership is just too far out of reach.

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GLC 2011 conference and seminar programme

Full details of Govan Law Centre's new seminar and conference programme will be announced shortly.  The first event is a national conference in Glasgow on 9 February 2011 entitled 'Disability Discrimination Claims in the Additional Support Needs Tribunals'.

From 18 March 2011, certain disability discrimination claims will be heard by the Additional Support Needs Tribunals, rather than the Sheriff Court. Govan Law Centre’s Education Law Unit are hosting a conference in Glasgow on this topic, with a line-up of prestigious speakers, including our keynote speaker, the Minister for Children and Young People, Adam Ingram MSP.

Other events include a seminar on 10 June 2011 on the operation of the Private Rented Housing Panel, with Ms Aileen Devanny, President of the PRHP in Scotland, an event on the Property Factors (Scotland) Bill, and many more to be announced - for further details please click here.

Faulty goods? Visit the OFT's new Sale of Goods Act 'hub'

The Office of Fair Trading has developed an comprehensive 'online hub', which brings together up-to-date practical guides and information on UK consumer rights in relation to the purchase of faulty goods.   Although aimed at UK retailers and their staff, the 'hub' provides provides helpful customer guides, and useful materials.  So if you've purchased faulty goods and want to know if you can get a replacement or your money back, this is the site for you.

Scottish Parliament Committee hear evidence of employers who “take advantage” of migrant workers

Govanhill Law Centre’s submission to the Scottish Parliament’s Inquiry into Migration and Trafficking has been cited in the Parliament’s final report.

The Inquiry, held by the Equal Opportunities Committee last year, heard evidence from a large number of stakeholders including migrants, local authorities, the voluntary sector, police, academics, journalists, MSPs and the Crown Office. The innovative partnership working approach of the Hub in Govanhill was recognised by the Committee as an example of good practice.

The Inquiry heard evidence on the nature and extent of migration to Scotland and described the lack of migration data, public perceptions about migration and the influence of the media as “key overarching issues“.  The Committee recognised key challenges in “improving awareness among migrants about public services, and their rights and entitlements“, “employment including exploitative employment practices“, health, education, housing, policing and enforcement.

Govanhill Law Centre Solicitor Lorraine Barrie said “we are pleased that the Committee have recognised the significant barriers many migrants experience when living and working in Scotland in terms of receiving advice and information about their rights and practical barriers to reporting exploitative employers.   We are also pleased that the partnership working approach of the Hub in Govanhill, which we are part of, has been recognised as an example of good practice“.  The full story can be read on Govanhill Law Centre's website here.

New Truth In Lending Forms Starting January 30, 2011

Now that we are almost to the end of January, most of us who work on the loan origination industry have all of our attention fixed on the Federal Reserve Rule regarding our compensation which will take effect April 1, 2011.  We are getting constant emails for webinars and training on the new rule and how each of our lenders will comply with it, even as we struggle to pay today's bills with today's dollars.

That could be the reason that I am seeing no emails or reminders about another Federal Reserve Rule which becomes mandatory on January 30, 2011.  This is the rule requiring additional disclosure on truth in lending forms in response to the Dodd Frank Bill.

The most basic change is that the new truth in lending must disclose a payment summary for all mortgage loans, whether fixed or adjustable. The payment summary must include the initial interest rate of the loan, and if it is an adjustable rate mortgage, the maximum interest rate and payment that can occur for five years and the maximum interest rate and payment possible over the life of the loan. The truth in lending must also contain a statement that there is no guarantee that the consumer will be able to secure a lower rate by refinancing the loan. Even though the Mortgage Disclosure Improvement Act of 2008 calls for this statement only on adjustable rate loans, the new Federal Reserve rule requires that the statement be on all Truth in Lending forms for all loans.

The new form will require several new tables. For instance, on adjustable rate loans, at each scheduled rate adjustment, the form must display the payment corresponding to the increase and the earliest date at which the increase could occur. Loans that are escrowed for taxes and insurance must display the full payment with the taxes and insurance on the truth in lending. (Presently the truth in lending form displays only the principal and interest and the mortgage insurance if applicable.) The irony is that the full payment with the taxes and insurance used to appear on the good faith estimate form, but when HUD introduced the new revised form this year, they took the escrowed payment off the form which has created a lot of confusion. If the loan has mortgage insurance on it, the truth in lending form must display the mortgage insurance and the date of automatic termination.

Introductory and "teaser" interest rates must be clearly defined as such with a clause that says "You have a discounted introductory rate of _____% that ends after (period). In the (period), even if market rates do not change, this rate will increase to________%)."

While these changes may or may not be helpful to the borrower--what adult does not understand that there is no guarantee that he or she will qualify to refinance their home?--the primary issue for loan originators is that we have to upgrade our software prior to January 30, 2011 to stay in compliance.  And these upgrades are not cheap.  A subscription renewal to Calyx Point  is costing upwards of $420.00 for access to a single computer.  However,  if lenders' interpretation of the new Federal Reserve rule follows the track that they have taken on other recently enacted disclosures, the cost of not having the new forms with the proper verbiage could be loan denial--which is actually ironic since most lenders redisclose the truth in lending anyway to make sure that the APR is calculated accurately.

It seems to me that rather than completely reworking the truth in lending form, which costs all loan originators, the Federal Reserve could have accomplished the same goal with an additional mandatory printed disclosure.  Maybe the next round of disclosures should be an interactive on-line form with the following disclaimer. "Your residential mortgage loan is very expensive because excessive government regulation has greatly reduced competition and raised prices for surviving companies and those increased costs are now being passed on to you.  Please enter your zip code to locate your elected representative if you wish to complain."

Compliance is mandatory beginning January 30, so make sure that your software is upgraded and that your office is ready so that you can take applications next Monday.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information, visit her website at

The FDIC to the Rescue--Sheila Bair's Plan to Compensate Foreclosure Victims

Appearing on Fox Business Channel, yesterday, FDIC chairwoman Sheila Bair pitched her proposal for a BP style commission to compensate victims of poorly executed foreclosures (the infamous robo-signing scandal).  "We need to provide remedies for borrowers harmed by past practices.  A foreclosure claims commission, modeled on the BP or 9/11 claims commissions, could be set up and funded by servicers to address complaints of homeowners that have wrongly suffered foreclosure through servicer errors."  Bair wants to see a "broad settlement" for homeowners who were foreclosed on improperly, stating that, "such a settlement should prohibit foreclosure sales when a loan is in loss mitigation, except in specific situations where delay would disadvantage the investor, violate existing contracts, or reward a borrower in bad faith."

The funds for this new commission will be supplied by servicers who will pay the costs to run it.  But Bair believes that since it will save them the cost of litigating individual cases, it will save servicers money over time.  She also believes that the commission will benefit individual borrowers who would otherwise have to wait to go to court to have their cases examined.

To me, the entire concept of comparing the foreclosure problems with the BP oil spill or 9/11 is just outrageous. The victims of BP and 9/11 were minding their own business going about their daily lives when they were impacted by a major disaster that they had no power to prevent or minimize.  For the most part, the victims of the foreclosure mess are homeowners who for one reason or another did not make their payments.  Of course, we have all seen national stories of cases of mistaken foreclosures where the banks sent foreclosure notices to properties that were actually paid in full and terrorized the homeowners.  And certainly, in any such case, the homeowner is entitled to justice and restitution for the costs of saving his property, or renumeration for a property falsely seized.  But the majority of individuals foreclosed on were individuals who were not making the payments--some for as many as 400 days.  So to set up a commission to review the cases of individuals who may be protesting a foreclosure on a technicality, but who are nevertheless in default of their notes, is ridiculous.

Fox Business Channel asked Ms. Bair whether the commission is likely to impact on the costs of mortgage loans since the servicers would be required to fund the commission.  Did Ms. Bair believe that those servicers from the major banks would pass those costs on to the consumer?  She answered that there are a number of ways to cover extra expenses, including cutting bonuses and dividends, but that at the end of the day, this would be an additional cost of doing business.  Now what are the chances that Wells Fargo, Bank of America and Citimortgage are actually going to cut executive compensation and bonuses rather than passing the additional costs of this new mandate onto the consumer?  Not good.  And that means that we will see more of what we have been seeing over the past few years--the responsible homeowner with good credit who makes his payment on time paying for the problem homeowner who for one reason or another went into foreclosure and is now being compensated for his poor life choices.

Of course, the commission does not exist yet, but Sheila Bair believes that she can get the support to create it.  And she has some heavy hitters in her camp--reportedly David Stevens of HUD and Congresswoman Maxine Waters (D-CA) are on board with the plan.  So the commission may become reality sooner rather than later.  But at the end of the day, this is just another example of rewarding bad behavior.

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No New Taxes for Texans? We Sure Hope Not.

With the 82nd legislative session in high gear now in the state of Texas, all of us who live or work in the state are keeping a close eye on Austin.  Last November, the Republicans took control of the Texas legislature with a promise to balance the budget with no new taxes.  In fact, that was the specific campaign promise that El Paso's new state rep, Dee Margo, made to get elected.  So now that the legislature is in session and lawmakers are trying to correct a $15 billion dollar shortfall (some estimates say $27 billion) can they keep their promise?

Well, time will tell.  Lawmakers have already announced that there are no sacred cows--even education can take some deep cuts.  But cutting education is politically unpopular--almost as unpopular as raising taxes after promising not to.  So if our lawmakers decided that raising taxes was unavoidable where might they go for the money?  The Texas Association of Realtors (TAR) has several items on their radar screen for this legislative session which would affect a lot of Texans if passed:

1.  Transfer taxes on the sale of property.  Texas is a state that currently does not have transfer tax on the sale of real estate, but such a tax has been proposed before and the concept is apparently floating around again.  A proposal, which was defeated in the last legislative session in 2009, would have allowed various counties to set their own tax rates on the sale of real estate.  The tax would have to paid before recording any documents relating to the real estate transaction.

This is a bad idea on so many levels.  First of all, in a time of declining home values and loss of home equity, to continue to chip away at the equity of sellers discourages sales and encourages more frustrated sellers to allow their homes to go into foreclosure.  A seller who is selling his home for the value of the note because he can't afford the payments is not going to have several thousand dollars to bring in to pay the taxes, and likewise the buyer is not going to want to see his out of pocket costs expand by thousands of dollars. On a $200,000 home, a 1.5% tax would add $3000 in costs to the transaction.  That can push a homeowner who has virtually no equity and was just "breaking even" on the sale into a position of losing money.  Remember that the health care law includes a tax on the sale of real estate for homeowner's earning over $250,000, so even a relatively small tax layered on top of that tax is going to cost homebuyers and sellers a lot of money.

Additionally, from a loan officer's standpoint, this poses a problem because the 2010 GFE requires that loan officers put the exact dollar amount of transfer taxes on the initial good faith estimate.  This is a "no tolerance" category, so if the tax rate were set by the county, the loan officer would need access to the transfer tax rate in each county before completing the estimate or he or she will end up paying the taxes!  Let's hope this proposal gets voted down.

2.  Taxes on virtually all goods and services.  This idea has been floating around Texas for years, but fortunately it has never actually gained any traction.  Potentially, we could pay taxes on virtually all of the services we use, including the real estate agent's commission, the loan originator's commission, the pest inspection fee, the home inspection fee, etc.  This also adds up to a lot of additional costs.  If we want business to continue to prosper in this state, we have to resist the desire to tax business to death.  A tax on most goods and services will make all costs go up, and will ultimately harm the small business owners, which adds to unemployment, and in the end costs the state more money in unemployment compensation and lost revenues.

3.  Mandatory sales price disclosure.  To me this is a very interesting and subtle way of increasing taxes which might actually pass.  Texas is a non-disclosure state for real estate transactions.  The assessor's office sends out notices to property owners asking what they paid for the properties, but the property owners are not required to disclose the amount paid for a property.  This can also create an interesting dilemma for appraisers as they struggle to find out the "real" sales price of a piece of property.  Granted, counties have become more aggressive in their estimations of the value of property than in past years, but mandatory disclosure of sales price would take the guess work out of property valuation for the county.  It would also make it much harder for the property owner to go back and fight the valuation on the grounds that it was over valued.  However, since this is not really a new tax, but just a new disclosure requirement, this one might actually go through.

Governor Perry reiterated his own commitment to no new taxes.  I hope that he stands firm on that and requires that the legislature find the money in other places to balance the state budget.  Otherwise, the recession may hit Texas much harder in the next few years.

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Bachmann vs. Dodd Frank

One day into her third term in the House of Representatives serving the state of Minnesota, Michele Bachmann introduced her first bill for the 112th Congress--a repeal of the Dodd Frank bill in its entirety. Unlike the voluminous bills we have grown used to seeing over the past two years, Bachmann's bill is short and to the point.  Section 1 entitled "Repeal" states simply, "The Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203)  is repealed and the provisions of law amended by such Act are revived and restored as if such Act had not been enacted."    Wow--one paragraph in simple English!  I'm impressed!

On January 6, Bachmann released the following statement about HR 87, "I'm pleased to offer a full repeal of the job-killing Dodd-Frank financial regulatory bill.  Dodd-Frank grossly expanded the federal government beyond its jurisdictional boundaries. It gave Washington bureaucrats the power to interpret and enforce the legislation with little oversight.  Dodd Frank also failed to address the taxpayer-funded liabilities of Fannie Mae and Freddie Mac.  Real financial regulatory reform must deal with these lenders who were a leading cause of our economic recession.  True reform must also end the bailout mindset that was perpetuated by the last Congress. I am proud to work towards repeal of Dodd Frank because Congress must protect the taxpayers instead of handing out favors to Wall Street." 

Co-sponsors for Bachmann's bill include California Congressman Darrell Issa, Todd Akin (R-MO) Tom McClintock (R-CA) and Bill Posey (R-FL).

Of course, not everyone is on board with Bachmann's proposed legislation.  Barney Frank, in whose honor the bill is named (along with the retired Chris Dodd) issued his own statement in response to HR 87.  "Michele Bachmann, the Club for Growth, and others in the right-wing coalition have now made their agenda for the financial sector very clear: they yearn to return to the thrilling days of yester-year, so the loan arrangers can ride again--untrammeled by any rules restraining irresponsibility, excess, deception, and most of all infinite leverage."

I really wonder whether Frank has watched the news lately.  Housing remains in a slump and unemployment remains high partially largely because of lack of access to capital.  Whether we are talking about the young couple purchasing their new home, or the small business trying to expand, lack of access to loans is killing recovery.  The "loan arrangers" are the ones who keep capital flowing so that people can buy, spend, invest and hire.  When the lenders become the enemy, where is the money supposed to come from?

For my part, I hope that Bachmann can get her bill passed and that it can make it through the Senate.  Now if we could just get her to work on a bill repealing the Federal Reserve rule on compensation.

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Another Housing Bubble--in China?

In a world of bizarre real estate news, this story that appeared yesterday in Bloomberg news is strange even for now.  The headline reading, "China's Home Prices Rising, in Line with Incomes, Isn't a Bubble, CLSA Says" comes from a statement to the same effect made by Andy Rothman, who is the CLSA Asia-Pacific Markets' China macro strategist.

According to the CLSA website, CLSA is an acronym for Credit Lyonnais Securities Asia, which touts itself as "Asia's leading independent brokerage and investment group" providing "equity brokering, capital markets, mergers and acquisitions, and asset management services to global corporate and institutional clients."  The firm was founded in 1986 and today has more than 1500 employees in 15 Asian cities as well as London, New York, Boston, Chicago and San Francisco.

Now back to the headline.  A housing bubble projected for China?  According to the Bloomberg article, China has Tier 1 and Tier 2 cities.  The majority of China's urban population lives in Tier 2 cities where the prices are about 75% lower than in the Tier 1 cities--cities such as Beijing and Shanghai.   But prices everywhere are on the rise.  In November, housing prices rose for the 18th month in China's 70 cities.   Government efforts to curb the accelerating real estate market, which included limiting the number of house purchases and suspending mortgage financing for third homes, failed to stop the price accelerations.  In fact, housing prices in Shanghai rose 26% last year and Chongqing saw a 29% increases in prices.

Still, Rothman says that the rising prices are not indicative of a problem because nationwide the housing prices increased only 10% while household incomes rose 13%.  Says Rothman, "That's really a pretty healthy balance and people tend too much to focus on first-tier cities...When people talk about bubbles, they are not looking at details.  They are just looking at headlines."

All of this sounds so eerily familiar.  I remember 2003-2007, when property values were skyrocketing in California, Florida and Arizona.  In El Paso, we had investors from California who sold their properties there and came to our market looking for homes.  But we were more savvy than we appeared.  Several of our builders banded together and agreed to not let investors buy up their developments.  The real estate appreciation on the west coast was unsustainable--a market correction had to happen, but if we were careful, our real estate market would not get dragged down too.  I remember explaining to investors from California that Texas did not offer the type of property value appreciation they had come to expect, so their real estate purchases here would be a longer commitment in order to see a return on investment.

It seems ridiculous now that we really expected the bursting of the housing bubble to be just a regional event. We were blissfully unaware that a massive correction in California, Arizona, Nevada and Florida was going to affect the entire real estate market and ultimately the entire country.  And yet, the Chinese appear to be headed down exactly the same road.  According to Bloomberg, Jim Chanos, a hedge fund manager who predicted the collapse of Enron, stated last month that China is on a "treadmill to hell" because the country has used property development as a primary means for economic growth.   Still, Rothman insists there is nothing to worry about, "There are obviously individual segments of the market which have problems.  But in terms of systematic problems, I don't see it."  That sounds remarkably like the commentators on the investment shows four years ago who still insisted that the U.S. housing bubble was a myth. 

The Chinese government is going to impose new property taxes, and the central bank is expected to raise interest rates in 2011 to slow growth.  But these measures are largely aimed at speculators according to Rothman.  And with the economy growing at a rate of 9.5% and inflation capped at 4.5%, the rapidly rising cost of housing should not have an effect on China's overall economy.  At least, that's what they keep saying.

New Year; New Interest Rates

In better days, my family and I used to go to a local steakhouse after work on Friday nights.  The steakhouse had been recently purchased by a long-time client of mine who had spent considerable money renovating it to make the decor more modern and to add a state of the art computer system complete with monitors that allowed the servers to adjust customer tickets using touch screens on the walls.  If I happened to be seated a table very close to the wall, I could see that the screens flashed reminders to the wait staff, "Upsell the beverages; Upsell the desserts."

I always laughed when I saw the flashing signs because it was a reminder that in all businesses, the little things count.  If every customer purchased one dessert, bottom line profits probably improved a lot.

In our business, we negotiated interest rates and closing costs with borrowers so that they could finance their home.  For many borrowers, that meant "upselling" a slightly higher rate in favor of less cash up front to close.  More often than not this practice helped the borrower because he spent less money out of pocket and was financing his costs over time.   After all, a small increase to the interest rate spread over a 30 year period caused a very small increase to the monthly payment.  For us as brokers, it meant that we could look forward to a payday from even those borrowers who were not bringing much money to the table.  And for the lender who made the loan, that extra .125% of .25% of a point meant a lot of extra revenue over the life of the loan.

This upselling process was completely voluntary, however.  More affluent, cash-rich borrowers might choose to get the lowest interest rate they could receive and to pay more closing costs upfront.  Since they had the cash, they knew that they could pay upfront to save money over a long period of time.

Much has been made of the new Federal Reserve Rule which goes into effect April 1, which makes it illegal to tie compensation to the terms of the loan--particularly interest rates.  The argument in favor of the new rule is that loan originators will make better loans which are less costly for the consumer since they have no incentive to upsell higher rates.  But on the flip side of that coin, the lender now has no one to upsell their product.

If you really think about what this means in business terms, it is counterproductive to basic business principles. In the steakhouse, the servers had an incentive to comply with the owner's request to upsell the desserts and beverages since a larger tab presumably meant a larger tip.  For the server who persuaded dinner patrons to buy a nice bottle of wine or to indulge in a slice of the triple chocolate layer cake with vanilla ice cream, that sale could pay off in dollars in their pocket.  But what if the owner had programmed the computer screens to read, "Upsell the beverages, upsell the desserts.  But understand that in order to keep you from unnecessarily influencing patrons of this establishment to drink and eat sweets, any gratuity in this establishment shall be computed solely on the price of the entree."   The owner would have had mountains of moldy cake to throw away at the end of each month.

And so it now is with lenders, and ultimately with Fannie Mae and Freddie Mac, those two all-powerful government-sponsored, government-owned entities who set the price of loans.  Since the government took Fannie Mae and Freddie Mac into conservatorship in 2008, both entities have added a number of previously non-existent add ons to interest rates.  And now, in the first week of 2011, Fannie and Freddie are giving us all a little New Year's present by raising the cost of money again.

We all know that interest rates are rising in response to market conditions and have been moving steadily towards 5% for a 30 year fixed rate loan for the past six weeks.  However, the adjustment that Fannie and Freddie did this week, which for most lenders will go into effect Monday January 7, 2011, is not connected to these natural market adjustments.  Fannie and Freddie are basically raising interest rates for all borrowers including those with scores of 740 or higher who had previously been a protected class.  Borrowers with scores of over 740 will see an interest rate adjustment of  .25%  for downpayments of 25% or less.  Those with lower credit scores and smaller down payments will also see interest rate adjustments.  The adjustments are in the form of fees that the lenders have pay when they deliver the loans to Fannie or Freddie, but they are paid for through higher interest rates in the products delivered to the consumer.

This move on the part of Fannie and Freddie is really unprecedented, since the 740 and higher credit score borrower is usually rewarded for the way that they have handled their financial affairs.  By raising the interest rate for borrower making less than a 25% down payment, the agencies are saying that:  1. They no longer particularly value the more affluent borrower; they are prepared to raise money from anyone they can; 2. They recognize that these high quality borrowers don't have any choice about paying the higher rate unless they want to put 30% down.

The supreme irony is that this rate hike is coming courtesy of the same bureaucracy that gave us RESPA reform which was supposed to cut costs to the borrower; the SAFE act which was supposed to eliminate "bad players" from our industry, and the various failed loan modification programs which have been circulating for months.  With all of this focus on cutting costs for the consumer, why do Fannie and Freddie continue to raise their fees?  Very simply, because with the new rules going into effect April 1, interest rate negotiations are going to become a thing of the past.  When compensation and rate cannot be tied together, there is no reason to negotiate rate.  And if there is no possibility of negotiation, there is no incentive on the part of the loan officer to upsell, but there is also no incentive on the part of the lenders to offer lower rates or Fannie or Freddie to offer lower fees.  Competition and negotiation are gone. 

For the consumer who is stuck paying these bills, this is really a raw deal.  At least in the past, the consumer had choices and if he did not like the deal presented to him, he could go elsewhere.  But coupling the Federal Reserve rule with these new rate adjustments from Fannie Mae and Freddie Mac is like charging the dessert and the bottle of wine to the teetotaler who does not eat sweets and then telling him, "Hey, that's just the price of having a steak in this restaurant."  With rates on a steady upward rise, the new fees from Fannie and Freddie are likely to leave a bad taste in nearly everyone's mouth.


If You Live in Texas Read This

Just before Thanksgiving, I was asked by a client of mine for whom I have done a lot of work to refinance his second home in La Grange, Texas for a lower interest rate.  Although I expressed some concern to this borrower that he already had a low interest rate, and that going from a fifteen year mortgage to a thirty year one might not be to his best advantage, he explained that he really wanted a lower monthly payment.  Since I have financed this ranch style home on twenty acres twice before, I was not at all concerned about the property or about the borrower qualifying.

Fast forward about one month.  We have an approved appraisal for more than we needed.  Our income and assets have all been verified.  We are on our way to the closing department.  We have arranged a courtesy close with a title company in El Paso so that he does not have to travel back to La Grange to close.  Then, two days before we are scheduled to close, I get an email and a phone call from the lender, Suntrust, and the lender's attorney.  The second home on twenty acres in Fayette County has an agricultural exemption on it to reduce the property taxes.  This will have to be removed before the loan can close. 

I was horrified.  Because of Texas Equity laws and homestead laws, I am well aware that a property with an agricultural exemption cannot get a cash out refinance.  However, our transaction was a rate and term refinance--not a cash out.  The agricultural exemption has never been an issue on a rate and term refinance.

It turns out that Texas is now enforcing a statute that prevents title companies from issuing a particular title endorsement (T30 coverage) on properties with agricultural exemptions. The lender requires the T30 endorsement for the loan, but the title company will not issue the endorsement as long as the property has an agricultural exemption. 

I spoke to the branch manager at Suntrust, and to both the title company in La Grange and the title company doing the courtesy close in El Paso.  Apparently, this issue has become a widespread problem.  Professionals buy "gentlemen's ranches" to relax from their stressful jobs.  To reduce the property taxes, they file an agricultural exemption on the property which greatly reduces the property taxes.  But if they want to refinance those properties, they have to remove the exemption.  In El Paso county, this would have been a huge problem, because properties with agricultural exemptions are subject to three years of rollback taxes when the exemption is removed.  That means that if the property is worth $200,000, and the assessed rate without the exemption would be $5084, the owner has to pay three years of taxes, or $15240.00 as the penalty for removing the exemption.  In most cases, that is a deal breaker.

Fortunately, Fayette County does not charge rollback taxes if the property remains agricultural.  So, while my borrower had to pay the $2000.00 difference between the exempt and the non-exempt taxes, that is all he had to pay.  In El Paso, he would have had to pay three times that amount.

The title officer told me that this new rule regarding agricultural exemptions applies to purchases also.  The exemption has to be removed before the transaction can close and either the buyer or the seller has to escrow for the back taxes on the property. 

So before you get too far into your transactions in 2011, check out the exemptions on the property taxes. Knowing what exemptions are in place and how much it will cost to remove them can save you and your clients a lot of stress and headaches in the new year.
Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information, visit her website at