There's A New Predatory Lender in Town

Last week I started a series on the ways in which UN Agenda 21 is being implemented through Smart Growth and Smart Code initiatives to radically transform the American way of life. (And I will be getting back to it in the coming weeks.)  I  have been in loan origination for nearly 14 years now, and I have watched the federal and local governments declare full scale war on housing in the last few years.  But normally, when I tell people that home ownership is under attack in America from virtually every sector, their eyes glaze over and they answer back some version of the following:  "That can't be true.  After all, Obama is encouraging everyone to refinance and working to help people stay in their homes."

I spent the greater part of today doing something I have not done in a long time--calculating mortgage loan quotes for customers.  Since the Consumer Financial Protection Bureau headed by Richard Cordray has announced that they will have the qualified residential mortgages ready to implement this summer, which will basically apply a tourniquet to what flow of mortgage money is left in the U.S., I thought this might be a good time to see if any of my previous borrowers wants to take advantage of truly historically low interest rates while they still have a chance at getting approved for the loan.

Having been a loan originator since 1998, I have seen both boom and bust in this industry.  And I remember when borrowers either qualified for a loan or they didn't.  Up until a couple of years ago, a borrower who qualified for a conventional Fannie Mae loan was eligible for whatever the best rate available that day was.  Whether he actually received the best rate was an entirely different matter and depended in part on his shopping skills and who his originator was, but all in all Fannie and Freddie interest rates were offered on a pretty democratic basis.  Then in September of 2008, the federal government took Fannie and Freddie into conservatorship.  Suddenly these entities were no longer mainly privately held--they were now owned completely by the government.  Very soon, interest rate pricing was no so democratic--interest rates were now tied to the borrower's credit scores in 20 point increments.  The borrower with a 680 credit score got a better interest rate than the borrower with a 679 score; the borrower with a 740 credit score got a much better rate than the borrower with a 700 score. The new system favored the financially stronger borrower over the financially weaker one. 

But as the economy worsened dramatically and families lost the equity in their homes, the federal government attempted to rush to the rescue with HARP and HAMP to help borrowers refinance their homes.  Borrowers could, in theory, refinance a home at 105% and later 125% of its appraised value, provided that they could satisfy a long set of conditions and caveats.  And though their interest rate and costs were not the same as the ones offered to the person with the 740 score, they still got a lower rate than their previous mortgage.  Borrowers who could afford to refinance into a 15 year or a 10 year note did not have any credit score based interest rate adjustments, so those loans remained pretty democratic.

Now it is 2012, and the president has circumvented Congress once again to introduce a new wave of help to struggling homeowners.  With so many Americans underwater in their homes and unable to refinance, the government is rolling out HARP 2.  In this new and improved version, the borrower' s ability to qualify for a mortgage loan will not be based on the appraised value of the house.  We have been promised that the borrowers will have limited obligation to prove income.  We have also been promised that many of the conditions and caveats which prevented homeowners from refinancing in the past have been removed.  HARP 2 will help struggling homeowners to refinance out of those pesky adjustable rate mortgages and balloon notes that they have not been able to escape and transition into the world of the fixed rate mortgage.  So finally, after much trial and error the federal government has finally gotten it right.  Right?

Not exactly.  We all tend to forget that nothing is free.  Fannie and Freddie are owned by the government, and they have lost hundreds of billions of dollars over the last 3 and a half years.  So any help to drowning homeowners should naturally help Fannie and Freddie too.  Rather than conduits for packaging and selling mortgage-backed securities, Fannie and Freddie are being transformed in sources of revenue for the federal government at the expense of American homeowners.

We saw the first example of this when in December Congress passed the two month payroll tax extension. To do so, they raised fees on loans offered by Fannie Mae and Freddie Mac for the next ten years.  Ten years of fee increases to pay for a two month payroll tax extension?  Really?

And that was just the beginning.  The HARP loans were originally priced almost the same as regular refinances--they just allowed qualified homeowners to refinance a little more easily.  But not anymore.  I first learned of the changes three weeks ago, when I received a telephone call from a pharmaceutical sales rep who wanted to refinance her home at a lower rate.  The woman (who has great income and credit scores in the 700s) was concerned that her home had lost too much value since her last refinance in 2009 and that she would not have 20% equity.  She wanted me to quote her on a HARP loan.  I entered the figures into the loan calculator on the website of a major lender whom I use freqently and received a real shock. This woman qualified for a 3.99% rate with no discount points using a regular rate and term refi, but using HARP her 3.99% rate had a 4% discount.  That means that to refinance her $336,000 loan she would have to pay an additional $13,440.00 in fees (discount points) just to close.  Presumably, these costs would roll into her loan.  (Fortunately, we were able to refinance her on a conventional loan as it turned out that she did have sufficient equity to qualify.)

Today, I priced several refinance loans using HARP guidelines with the same lender.  A borrower with a 675 mid credit score wanting to refinance a $400,000 mortgage loan with less than 20% equity to a new 30 year fixed rate mortgage can expect to pay up to 12% in discount points to Fannie and Freddie for the privilege of doing so. That is more than $48,000 in fees.  And unlike the last incarnation of HARP, the new fees apply to both 15 and 30 year loans.

I checked with another lender and their pricing is about a 1% discount on these loans.  On a $400,000 loan, that would be about $4000.00 in additional fees, which is still a lot but substantially less than lender A is quoting,  so I am wondering whether Lender A--who normally has cheaper pricing than anyone else I work with--has put additional overlays on their HARP loans because they don't want to take on these loans.  Will this additional pricing be carried over to HARP II?  How many lenders will follow suit by raising the pricing so that they will not be stuck with upside down mortgages without charging a high premium for the privilege of making the loan.

There is so much wrong with this new pricing model on so many levels, but as far as I am concerned, what is most wrong with it is that HARP loans are aimed at people who are unable to refinance their existing mortgages because of lost equity.  These are people in adjustable rate mortgages where the initial term has expired or people in mortgages with high interest rates.  When HARP 2 guidelines were announced in November, the government said that it would make these loans available only to borrowers with less than 20% equity in their homes because they were for borrowers who "really needed them."  In the old days of subprime loans, loan originators and lenders who ladled on fees which stripped the equity out of borrowers' homes were considered predatory.  But the price adjustments we are seeing today would make the old subprime lenders blush.  The discount points for these loans will be added to the loan balance of an already underwater mortgage, further damaging an already debt-strapped homeowner.  And while they will undoubtedly generate millions in revenue for Fannie and Freddie, that revenue is being generated under the guise of helping struggling Americans when in fact nothing could be further from the truth.  Although the stated goal of HARP 2 is to encourage Americans to refinance into 10 and 15 year mortgage loans which they will pay off quickly, thus regaining the equity in their homes, the whole idea of implementing massive fee increases on American homeowners is outrageous.  And in a climate such as the one we are in today, where many advocate "strategic default" and walking away from homes to allow them to go into foreclosure, the fee structure of the new mortgage loans may be the final push that some homeowners need to throw their hands up in the air and say "I'm Done."

Anyone seeking a HARP refinance needs to be aware that there can be wide differences in the pricing on the loans and they need to shop accordingly.  Otherwise, they may end up with a refinance that is much higher cost than the loan they are trying to escape.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen. For more information, visit her website at http://www.frontier2000.net/.

New Appraisal Rules Begin November 1

Yesterday I spoke to a long-time friend of mine who owns an appraisal company.  It seemed strange to think that up until a little over a year ago, I used to call his company frequently to order appraisals, and check the status of pending orders.  Since the Home Valuation Code of Conduct was implemented in May of 2009 as a result of a settlement between Andrew Cuomo and Fannie Mae and Freddie Mac, none of us loan originators have been able to order appraisals for loans that were going to be sold to Fannie Mae and Freddie Mac.  So for almost a year and a half, I have been getting my appraisals through whatever company the lender chooses and seeing them after the underwriter does.

When the Home Valuation Code of Conduct was first introduced, the mortgage broker industry cried foul since it took the mortgage loan originator (and specifically the small, independent mortgage broker) completely out of the appraisal ordering process.  After 11 years in business, rather than calling an appraiser I knew and could rely on, I placed an order through the lender's website and they randomly selected an appraiser from their list.  Some of those appraisals were so far off the mark that I was shocked--I still remember the Las Cruces appraiser who appraised a home selling for $360,000 for only $270,000.  He compared the property to a foreclosure next door.   Other appraisals were surprisingly good.  I discovered that appraisers who worked hard and took pride in their work continued to do so even though they were being hired by AMCs while appraisers who had always produced substandard work continued to do so as well.

Supposedly, the Home Valuation Code of Conduct was necessary to keep corrupt mortgage brokers and loan originators from attempting to influence the value of a property by improperly influencing the appraisers.  And from the stories that I have heard, there were apparently enough incidences of originators pressuring appraisers to make this a real issue.

However, HVCC decimated the small business owners and made them all subject to being hired by an appraisal management company who dictated what they could be paid.  So the rule which was supposed to protect the independence of the appraiser actually harmed the independent small business owner.

As part of the Dodd Frank bill, HVCC has supposedly been eliminated and new appraiser independence rules have been put into place. But the new rules sound an awful lot like the Home Valuation Code of Conduct they replace.  For example,  no employee or or agent or independent contractor (mortgage broker) shall attempt to influence any appraiser through coercion, bribery or threats to bring in a certain value on a property.  In addition, the new rules ban "requesting an appraiser to provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser's completion of an appraisal report."  Further, "the Seller will not accept any appraisal report completed by an appraiser selected, retained or compensated in any manner by any other third party (including Mortgage Brokers and real estate agents)."  So for those who have been waiting for HVCC to end so that they can go back to the old relationships between originators and appraisers, there is going to be a long wait.

What I find truly interesting about both HVCC and the new appraiser independence rules is while both claim to protect the independence of the appraiser, neither one makes it illegal for a bank holding company to own an appraisal management company or to use an in house appraiser.  As long as the loan officer involved in the transaction does not have direct personal contact with the appraiser, this is not considered a conflict of interest.  But in reality, if the bank holding company pays the appraiser's salary--either directly or through an appraisal management company--and the bank sends the appraiser a purchase contract for a property, the appraiser is going to probably feel some obligation to appraise that property for the sales price.  And appraisers who do not feel any such obligation may find themselves unemployed.

I have noticed what appears to me to be a real shift in the appraisals that I have received over the last nearly 18 months since HVCC was implemented.  At first, very few properties appraised for the expected value.  That it turn led to a lot of deals falling through.  I talked to a title officer last year who said that she had a stack of files in her office that had fallen through because the appraisals were too low that "looked like the leaning Tower of Pisa."  When we challenged the valuations of appraisals through the AMCs, we got back notes like the one that I received when I challenged the Las Cruces appraiser.  That appraiser emailed back a nasty comment saying that he did not have to please loan originators any more since we could not hire him. 

However, lost deals cost money.  Lost deals with interest rate loan locks cost the banks a lot of money.  So it was probably inevitable that the trend of properties not appraising for value would be reversed. Nowadays, most of the appraisals do come in for value.  That may be due to the market stabilizing some, but it seems to me to also be due to a general understanding that appraisals on purchases "must" come in.  Earlier this month I completed a purchase transaction through a major wholesaler.  I really feared that the property would not appraise since it was a large home on the eastside of El Paso where it can be hard to find comparables for more expensive properties.  I placed the appraisal order through the lender who placed it through their appraisal management company.  When I got the appraisal back, I was shocked to see that the appraisal had actually come in $17,000 higher than the sales price. When I looked to see who had completed the report, I saw that it was an individual I would never have hired to appraise any property--much less a difficult, complex property such as this one.  To me it appeared that she had pushed to match the contract price--actually to exceed the price--rather than to really accurately assess the value of the property.  Since I am not allowed to have any direct contact with the appraiser, I was very interested to see how the underwriter would feel about the report.  To my surprise, all she asked for was a letter explaining why some of the comparables used were so far away from the subject.  The appraiser put notes of explanation in the file, sent the report back, and the underwriter accepted it.

Don't misunderstand--my loan closed and I was happy.  But I firmly believe that if I had hired an appraiser who had produced a report of that quality and sent it to the underwriter, at the very minimum she would have required a review and she might have conditioned for a new second appraisal.  It appears to me that now that the originator is no longer a factor in the appraisal process, the overall quality of the work does not seem to matter at all.  The only thing that matters is that the originator did not have a conversation with the appraiser.

One problem that is supposed to be addressed through the new rules is the matter of appraiser compensation.  The new rules are supposed to require that appraisers be licensed in the states in which they work and that they be paid a fair wage for their work.  Fair market wages would tend to improve the quality of the workmanship.  But there should be some other system besides a rotation to insure that qualified, capable people are rewarded over those who really do not know what they are doing.

The great irony of the entire appraisal mess is that just before the real estate market imploded, Fannie Mae loan approvals were coming back with conditions for limited appraisals, exterior only appraisals, and sometimes no appraisals at all.  If the automated system agreed with the stated value of the property, then the borrower could get away without getting the house appraised.  Now, three years into the market meltdown, this phenomenon has returned in a big way.  A majority of the loans that I do now do not require an appraisal with a value--they allow for exterior photos only (what is called a form 2075).  And in some cases, the findings do not require any appraisal or inspection of the property. So the irony of the new real estate market is that neither the appraiser nor the originator is really determining the value of real estate properties--that information is being pre-determined by pre-programmed information in the computers at Fannie Mae.
                                                                            
                                                                       

Why Halting Foreclosures is a Bad Idea-- Part I

Just when we thought that the housing market could not get into a bigger mess, the major banks started announcing that they are putting a hold on pending foreclosures.  To many commentators this appears to be a good idea--over the weekend commentators on Fox News remarked that this would give troubled homeowners more opportunity to straighten out their problems and keep their homes.  But does it really?

Apparently the foreclosure process has created about as many villains as the origination process.  Many people outside of the industry are blaming the MERS system which allows lenders to sell home notes without re-recording the deed of trust.  I read the comments' section today of a website called 4closurefraud.org which urges distressed homeowners who are about to be foreclosed on to find an attorney to argue that they do not have a legal obligation to pay anyone but their original lender.  If the note has been sold to a new lender, and the original lender has been paid off, they do not have any obligation to make payments under the note. 

This argument is nothing short of insanity.  I wonder if the people who advocate using technical loopholes like MERS and the presence of a new lender to avoid foreclosure realize that the secondary market (which allows lenders to buy and sell home loans and therefore creates more capital for originating new mortgages) is the very reason that they were able to buy a home in the first place.  If you dismantle the secondary market by claiming that the current note holder does not have a legal right to foreclose on the property, you effectively destroy the very system that has allowed the U.S. to become a nation of homeowners.

Then there are complaints about "foreclosure mills."  A letter signed by Barney Frank, Alan Grayson and Corrine Brown dated September 24,  2010, addressed to Michael Williams, CEO of Fannie Mae, complains that Fannie Mae servicers in Florida are employing law firms that specialize in speeding up the foreclosure process, "without regard to process, substance, or legal propriety.  According to the New York Times, four of these mills are both among the busiest of the firms and are under investigation by the Attorney General of Florida for fraud...Several of the busiest of these mills show up as members of Fannie Mae's Retained Attorney Network."  The letter complains that pressure to foreclose upon properties is leading Fannie Mae and its servicers to rely on attorneys who "specialize in kicking people out of their homes" noting that this same network of attorneys is retained to do pre-filing mediation between troubled homeowners and banks.

I do not know whether Williams responded to the letter or in what fashion he did so, but I do know this week, one wholesale lender suspended its operations in Florida.  If foreclosures are going to be under the scrutiny of Congress, why lend there at all?

In the meantime, Bank of America, Ally and Chase are putting a hold on foreclosures in 23 states requiring court ordered foreclosures.  According to an October 1, article in the Washington Post, Bank of America executive Renee Hertzler admitted in a deposition that she signed up to 8,000 foreclosure documents a month without reviewing them.  The attorney general of California has ordered that Ally Financial stop foreclosures in the state--California does not have judicial foreclosure--and Connecticut attorney general Richard Blumenthal has announced a 60 day moratorium on all foreclosures by all lenders in the state.

So where is all of this headed?  The elephant in the room in this situation is, that legal maneuvering aside, the homeowners being foreclosed on cannot afford the houses.  The reason that the HAMP program--Making Home Affordable--has been such an ongoing failure is that even if the loans are modified into more affordable terms, the homeowners still cannot afford them.  We currently have homeowners living in their homes over 400 days after foreclosure while they wait for the bank to sell the house.  Is a person who has been living in his or her home without making a payment for 400 days going to want to start making payments on that home again if the loan can be modified?  I don't think so.  After not making a house payment for over a year, those homeowners are not going to be happy with anything less than have the lien invalidated so that they can own the house free and clear--a move which would cause a financial crash that would make the one two years ago look like a minor hiccup.

And then there is the issue of the title companies who insured title on the sale of foreclosed properties.  If the foreclosures themselves are ruled illegal, they will face claims on the title they insured.  In the worst case scenario, the new buyers could potentially forfeit the property as it is returned to its original owners.  If the title company is responsible, will they have to reimburse all of the costs to the individual who purchased one of these homes in good faith and is now going to be homeless himself?  Apparently, the title companies are getting nervous, as Old Republic Title has stopped issuing title insurance on foreclosed properties owned by Ally.

Frustrated homeowners who feel embattled by the banks may be cheering these moratoriums on, but they do not understand the full consequences of what is happening right now.  And while the individual homeowners may not understand this reality, I believe that the major players in the housing industry such as Barney Frank certainly do understand it.

Is this all just political appeasement ahead of an important midterm election?  Maybe partially, but I think this issue of stalling foreclosures on technicalities is a much more important issue than merely scoring brownie points with angry voters.  A court ruling that a note holder who purchased a home note on the secondary market does not have a legal claim to foreclose on that property could fundamentally and radically change housing finance in the United States.  If a judge were actually to rule that the lien holder does not have legitimate claim to the property the secondary market would effectively end, which would mean that banks and lenders would be able to make significantly fewer home loans at significantly shorter terms knowing that they were not going to be able to sell the notes.  This new halting of foreclosures is much more than just a political move for voters, or a stall tactic for unhappy homeowners--it is a power play to restructure homeownership in this country as the government moves us from a society of homeowners to a society of renters.

Some of you may remember a few years ago, before the market crash and the murderous drug war in Mexico--when there was a lot of interest in providing housing finance in Mexico.  Stewart Title even opened a title office in Mexico City.  At that time, the idea was that so many Americans wanted to retire to Mexico that if the proper mechanisms were in place, they could buy houses with mortgage loans and title insurance similar to what they enjoyed in the U.S.

Efforts to duplicate the mortgage system were unsuccessful though.   Living here on the U.S.-Mexico border, I used to get phone calls from people wanting to buy both commercial and residential properties in Mexico and wanting to get them financed.  Financing was almost impossible to obtain, and after a few years I asked one lender why that was true.  They answered that Mexican law made it almost impossible to foreclose on a property owner, and for that reason, lending was very scarce.

As we work through the process of foreclosures, we need to remember as a society that what makes mortgage debt an attractive financial instrument is that unlike credit card debt or auto loans, mortgage debt is secured against an immovable piece of collateral which under normal circumstances usually appreciates in value.  A homeowner in trouble cannot run away with his house.  So the debt is a good risk because the collateral is the lender's security.  But when we make foreclosures impossible, we take away the collateral, and without the collateral, the entire system crashes.

Tomorrow:  Whose fault is the foreclosure mess anyway?


                                                                        

The Top Three Reasons Why It Is Hard to Get a Residential Loan

As we officially move into fall, underwriting is backed up as much as thirty days with homeowners who want to refinance and one or two who want to take advantage of historically low interest rates and the most affordable housing market the U.S. has seen in years.  But even for the "perfect" borrower, closing a loan still feels like running through mud. So, on hump day, I thought I would devote this post to three reasons why it is so hard to get those loans closed.

1.  Buybacks.  When a loan is sold to Fannie Mae or Freddie Mac, the lender's contracts obligate the lender to buy back the loan if the loan does not perform either due to fraud in the file or poor underwriting which does not meet the guidelines of Fannie and Freddie.  Both entities have been in conservatorship for the last two years and according to a report last week from Edward DeMarco, acting director of the Federal Housing Finance Agency, both enterprises have lost over $226 billion since 2007.  Of that amount, about $148 billion in losses has been borne by taxpayers and the balance was borne by shareholders of Fannie Mae and Freddie Mac prior to the government takeover of both entities in 2008.  To stem the tide of losses, Fannie and Freddie appear to be concentrating their primary efforts in two areas--forcing the lenders to buyback non-performing loans and requiring lenders to modify existing homeowners.  According to DeMarco, during 2009 lenders had to buy back $8.7 billion of single family mortgages and for the second quarter of 2010 lenders owe $11 billion to Fannie Mae and Freddie Mac in loans that need to be repurchased.  According to DeMarco one third of these repurchase requests are 90 days old, and "many of lenders with aged, outstanding repurchase requests are among the largest financial institutions in the United States...If these discussions do not yield reasonable outcomes soon, FHFA may look to its supervisory and conservatorship authorities provided under the statute to resolve the situation."

Fear of buybacks is a major reason that lenders refuse to sign off on good files.  Some very honest underwriters will admit that--they simply cannot afford to repurchase these loans. If they know that the government is going to be taking legal action against them to make them repurchase $11 billion in loans in a few months, they are going to look long and hard at the loan on their desk today to see if they think they will have to buy it back in the future.  That is also a key reason that an exception to underwriting guidelines is almost as difficult to come by as a presidential pardon.

2. No new products.  Demarco makes the point in his testimony on September 15 that Fannie and Freddie are focused on limiting risk exposure.  "Rather than developing and offering new products [Fannie Mae and Freddie Mac] must maintain their focus on mitigating credit losses and remediating internal operational weaknesses while employing prudent underwriting standards and guaranteeing proven mortgage products."  In other words, Fannie Mae and Freddie Mac will not be introducing any new products with more lax underwriting standards.  DeMarco states that  since the end of 2008 Fannie and Freddie have stopped buying Alt-A and interest only loans which he calls "two of the poorest performing mortgage products in the market."  DeMarco goes on to say that interest only loans purchased by Fannie and Freddie prior to 2008 have a delinquency rate higher than 18% and Alt-A, which were the stated income and reduced income documentation loans, have a delinquency rate of 12%.  .  With a track record that bad, we cannot expect to see these loan products return any time in the foreseeable future.

3. They only drink cream.  Years ago, a local mortgage banker said of his mortgage business here in El Paso, "I only drink cream."  I think those words could become the new motto for the government owned versions of Fannie and Freddie.  Consider these facts:  In 2006, credit scores below 620 made up 6% of Fannie Mae's portfolio--in 2010 loans with a credit score under 620 comprise less than 1%.  The average loan to value for a loan with Fannie Mae today is 69% and the average credit score is 758.  A credit score above 750 no longer makes a borrower special--that is the credit profile that the Fannie and Freddie expect to see, along with a low debt to income ratio and a steady source of consistent provable income.  And according to DeMarco, the insistence on purchasing higher quality loans is making a difference in the bottom line: "Due to the focus on improved purchase quality and underwriting standards, the loans that [Fannie and Freddie] purchased in 2009 and 2010 have had much lower rates of delinquency in their initial months of repayment than did mortgages originated between 2006 and 2008."  Unfortunately, if you are a borrower with a few dings on your credit or income problems, a conventional loan is not going to be the right product.  And that creates a real challenge, because while Fannie Mae and Freddie Mac are focused solely on avoiding risk and defaults, the housing market as a whole is suffering because buyers who don't fit into the narrow guidelines which these two mortgage giants have created are struggling to get financing.  And while FHA can make up some of the shortfall, it cannot make up for all of it.  In El Paso, Texas, the Fannie Mae conforming loan limit is $417,000.  The FHA loan limiting is $275, 000.  For borrowers who do not fit into Fannie Mae or Freddie Mac guidelines, they cannot borrow more than $275,000 for a home loan unless they can take advantage of VA or USDA.

The new plan to restructure housing finance and replace or restructure Fannie and Freddie will be released by the Treasury in January of 2011.  Until that time, we just have to be patient and hope that one day soon we will private market competition to provide options and solutions for frustrated home buyers.


                                                                     
 

The End of Life as We Know it?

A scary article on AOL today details the reasons that writer Rob Hahn believes thirty year fixed rate mortgages (and 10 and 15 and 20) could be about to become as extinct as the dinosaur.  Hahn's basis for his argument is the Treasury summit on finance conducted last month and some of the findings coming out of it.  If his premise is correct, it will radically reshape the society in terms of home ownership and expectations.

Of course the point of the summit was to look for new solutions to the continuing problem of Fannie Mae and Freddie Mac.  Both agencies are now functioning like lenders who are going out of business.  In my twelve years as a mortgage broker, I have learned to identify the warning signs that a lender who appears to be fine is about to close their doors without warning--they start turning down good loans.  Private lenders do that months before they announce their closure to clear their portfolios, but it appears to me that this is what Fannie and Freddie are now doing to reduce their own portfolios.  That growing restriction of credit is what is currently killing the housing industry.

But  according to Hahn, the problem will only get worse.  He predicts that Fannie and Freddie will both be nationalized.  Of course, Barney Frank has said publicly that a private/public hybrid does not work, but he also advocated for a new agency which would have new guidelines and no private ownership.  Hahn seems to believe that the agencies will survive, but no longer as profitable entities.  As wholly owned government agencies, they will simply seek to further the goals of the administration rather than to make money.  And one of those goals appears clearly to be to transform the US from a nation where home ownership is the American dream to a nation where we are content as renters.  All of the initiatives that we have seen have been towards postponing foreclosures through all kinds of artificial means--something akin to keeping a comatose person alive on life supports.  But at the same time we see a real move to make purchases increasingly more difficult, and we also see a media push to encourage renting as a prudent alternative to buying a home.

Hahn believes that the new and improved government-owned Fannie and Freddie will concentrate on loans for apartments and multifamily units rather than single family homes.  According to an article in Housing Wire published August 18, the day after the Treasury Finance Summit,  the summit extolled the virtues of a society in which Fannie and Freddie would invest heavily in rental space.  According to the article, one of the participants in the summit was Alan Boyce, CEO of Absalon, which is a venture of George Soros, who touted the virtues of Danish society, where many renters are assisted by the government and the taxes are extremely high.   As Fannie and Freddie invest more in multi family, apartment housing, they can offer better rates and terms than private companies, and they can, as a result, acquire much of the apartment industry as collateral.   We can also look for more focus on renting as a preferred lifestyle through media outlets and through government information programs.

So how does this impact on the thirty year fixed rate mortgage?  Hahn believes that as Fannie and Freddie assume their new roles in apartment finance, they will ease out of the single family mortgage market.  This will result in banks and private investment firms having to decide whether they want to make loans on houses and at what terms.  Bill Gross of Pimco, who was also at the housing finance summit, made the statement that if his firm were going to loan on single family mortgages, he would want to see 30% down and an adjustable rate mortgage for a 10 or 15 year term.  So all mortgage financing will become very much like hard money lending today.

Interestingly, Fannie Mae was started during the Great Depression, along with FHA, to make it possible for Americans to own homes without depending on the local banks for a source of capital.  Because the banks could sell the loans, they did not have to loan just the amount of money that they had on reserve at any one time.  This system, which is unlike any other system in the world, has made possible the highest rate of home ownership in the world.  Why we would now want to model ourselves after Denmark and transform from a nation of homeowners to a nation of renters is incomprehensible to me.

When my parents bought their first home in the late 1960's, they used my father's VA loan to get the house.  At that time, borrowers who did not have VA had to put 20% on the house.  My mother describes that many Americans saved money until their late thirties to buy their first home.  The difference between then and now--my parents' first home, which they purchased brand new from a builder with a great floor plan and a nice neighborhood, cost $16,000.  The average price of a home today is $204,000.   A $61,200 down payment is beyond the capacity of many Americans to save, so renting will become the only option.  Home ownership will go from being the American dream to being an unattainable fantasy for many working families.  That doesn't sound like progress to me.

The Importance of Avoiding Disputes

Remember when our parents used to drill into us that we should make every effort to live at peace with everyone and stay out of conflict whenever we could?  Some parents, like mine, followed that basic message with a second message: if somebody attacked us first we needed to defend ourselves. But that second admonition was only to be used if all of our efforts to avoid conflict had failed.  For most of us the basic message was clear--stay out of trouble if you possibly can.

Today, Fannie Mae has taken on the role once held by our parents of reminding us that disputes are bad.  No, I am not talking about the fight with the school yard bully at recess, or the on-going conflict with the neighbor who refuses to clean up the weeds and trash in his yard.  I am talking about disputed items on a credit report, which due to Fannie Mae's new guidelines have turned into a real problem for borrowers looking for conventional financing.

A few years ago, disputing items on credit reports was all the rage.  I have had borrowers with mobile phone accounts that they insist they never opened, utility bills they claim they never signed for, apartment leases that their ex-boyfriend/girlfriend was supposed to pay, etc.  Most people with collections on their credit report are fairly insistent that those accounts do not belong to them.  And in some cases, that is true.  We live in an age where identity theft is a huge business--from online hackers with spyware looking to steal account numbers and passwords to waitresses and waiters who are able to make copies of credit cards at restaurants, this society is filled with people who are benefiting financially from destroying another person's credit.  In some cases, the problem does not stem from something as sophisticated as formal identity theft but the account being billed does deserve to be disputed because it was double billed or previously paid, or the service or product being billed for was never supplied. 

Filing a dispute has been a fairly easy process since the three major credit bureaus became more accessible through their websites.  A consumer disputing a tradeline needs only to go to the website of the credit agency in question, order a copy of his own credit report, and then click the dispute tab to have the bureau investigate it.

While the dispute process has many legitimate uses, we also recognize that, as with many good things in this world, the process has been exploited and abused by credit repair companies who dispute all of the derogatory items on the credit report so that the creditors will have to respond to the credit reporting agencies' request for information.  The creditor is supposed to respond within 30 days, and if he fails to respond the agency is supposed to remove the item in question.  Of course, this is a very short-term fix because when the creditor does respond, the offending item goes right back on the credit report, but it has been used to artificially elevate credit scores very briefly so that borrowers who really do have very bad scores can temporarily raise their scores enough to get a loan.

Scams like these must have been what prompted Fannie Mae to make its new rule about disputed items.  A borrower with a disputed item on a Fannie Mae credit report must now have the dispute removed before the loan can close or else the credit score cannot be considered in underwriting. 

I had read about this a couple of months ago, but I was confronted with it this week as I was getting files ready to refinance.  One borrower in particular has basically good scores, extremely high income, low debt in relation to his amazingly high income, and a lot of assets.  He also has a few collection accounts which he refuses to pay.  I wanted to make sure that he would not be required to pay these accounts at closing (I have done quite a bit of work for his family and I know that he would rather not refinance than pay collection accounts, so I wanted to find this out first), so I started by running his file through the automated underwriting system to make sure that he could leave the collections unpaid.  And then, as I stared in amazement at my findings, I remembered what I had read about the disputed accounts a couple of months ago.  My borrower does not have to pay his collections because they total less than $5000.00, but in spite of his wealth, basically good scores, and low debt, he cannot get approved for this refinance because he disputed two of the accounts, which combined total less than $500.00 unless he removes the dispute from each credit reporting agency.  Removing a dispute could take months, and he is only refinancing to take advantage of the low interest rates right now.

The item he is disputing is a charge from an insurance company that he insists he does not owe.  The account is a couple of years old and is insignificant when compared to the rest of his credit history.  But here is the most amazing part--even if my borrower decided that the new refinance was more important to him than this measly collection and paid the collection account in full, Fannie Mae still would not give him the loan!  Even if the bill has been paid, if the account is on the credit report showing that it is in dispute, the credit scores cannot be utilized.  And since accounts stay on a person's credit report for seven years from the date of last activity, this account will be there a long time.

Yesterday I talked about how strict new underwriting guidelines are making it nearly impossible for even good borrowers to qualify for mortgage loans, and this new underwriting rule about disputes is another example.  I have no doubt that this rule was implemented to weed out weak borrowers who artificially inflate their credit scores by disputing items on their reports.  But, in an effort to sift out these borrowers, Fannie Mae is also punishing borrowers with long credit histories and scores that are reflective of how they have managed their credit over time but who have had a legitimate disagreement with a creditor.  The result is that borrowers like mine who are a good credit risk, have the income and assets to pay, and have a long, mostly clean credit history, get their loans denied.

In checking around, I learned that Freddie Mac does not have this same rule, so the file can be sent through their automated engine instead.  For my borrower, that means losing his interest rate lock since the lender I was going to use does not allow his specific loan product on Freddie Mac.  Fortunately, the rates are still low and we can salvage this deal.  But in a market with volatile rates, this would have cost him the opportunity to refinance and take his 15 year mortgage loan down to a 10 year while knocking nearly a point off his rate.

The morale of the story:  1.  Read the credit report carefully before you submit the file to see if there are any disputed accounts--even closed ones.  2. Remember Mom and Dad's words of wisdom and where ever possible, avoid disputes.

Welcome to the Recovery?

Now that financial reform has been signed into law, Treasury Secretary Tim Geithner is on the road taking his message to the banks, and to Wall Street yesterday, and to regular folks like us in the Op Ed piece that he wrote for the New York Times. The title of today's post is taken from Geithner's Op Ed piece published yesterday in the New York Times entitled, "Welcome to the Recovery." I have decided to personalize Geithner's title with a question mark, although frankly, I think a better title for both Geithner's Op Ed piece and this post could come from heavy metal artist Alice Cooper's 1975 album, "Welcome to my Nightmare."

Geithner's article in the New York Times stresses that while millions of Americans are still out of work and suffering, there are tangible signs that the economy is improving, which include booming exports, the return of private job growth, and "businesses have repaired their balance sheets and are now in a strong financial position to reinvest and grow." "The devastation wrought by the great recession is still all too real for millions of Americans who lost their jobs, businesses and homes...The uncertainity is understandable, but a review of recent data on the American economy shows that we are on a path back to growth."

In his speech at NYU, however, Geithner was a little less sunny and upbeat, although he encouraged the financial industry to fall in line behind the new financial reform bill and start implementing reforms themselves, rather than just waiting around for the regulations to be written. According to the Washington Post, "At NYU Geithner said other tough reforms lie in the months ahead, namely an overhaul of government backed mortgage giants Fannie Mae and Freddie Mac..."

And the overhaul of Fannie and Freddie is going to have a huge impact on housing and real estate. Remember that the Dodd Frank bill left Fannie and Freddie intact, and no plan to sunset either of these entities was included in the final bill. However, the bill does call for a study of Fannie and Freddie to be completed by January, 2011. This study is supposed to be presented by Tim Geithner to Congress, and now, with just 5 months remaining before the study is due, the government is reportedly trying to come up with some ideas of how to handle the Fannie/Freddie situation.

Toward that end, the Obama Administration is hosting a Conference on the future of Housing Finance at the Treasury Department on August 17. The conference was announced and posted on the Treasury Department's website on July 27, 2010. According to the Treasury Department's website, "This event will bring together leading academic experts, consumer and community organizations, industry groups, market participants, and other stakeholders for an open discussion about housing finance reform." The website goes on to quote HUD Secretary Shaun Donovan, "The Obama Administration is committed to engaging stakeholders and the public as we consider proposals for reforming the housing finance system. The need for reform is clear and we want to listen to a wide range of views as we chart a course to a more robust and stable housing market that works for the benefit of the American people."

Certainly, everyone agrees that something has to be done about Fannie Mae and Freddie Mac. In a great irony, Fannie Mae, which actually was chartered during the 1930's as a response to first Great Depression, is now about to fall victim to the Great Recession. Taxpayers could and probably will spend an estimated $400 billion bailing out Fannie and Freddie--together they will probably comprise the biggest of all bailouts. But the question is, what sort of system will be put into place to replace them. Barney Frank has said candidly that a public/private hybrid model (which Fannie and Freddie were before they were taken over by government in the fall of 2008) does not work. Conservatives have stated openly that they agree and that the government should be out and private enterprise should take care of the flow of money necessary to back mortgages. But since the financial reform bill did not address this issue at all, and the all-private concept has been around for a while, we can be fairly certain that the government has something else in mind entirely.

My own personal opinion is that the conference on August 17 is nothing more than a dog and pony show to make members of the housing industry and consumer advocates perceive that they have been involved and engaged in the reform process. It is inconceivable to me that the authors of a 2300 page comprehensive financial reform bill which creates multiple new agencies and enormous new bureaucracy seriously don't have any idea how they want to deal with the issue of Fannie and Freddie. And if they are rejecting the concept of a completely privatized model, then that only leaves the option of a totally public one--a new government agency which will provide mortgage capital. And that, I believe, is exactly where this is headed. Sometime next year, I believe that we will see a new blueprint rolled out for a new government agency, and a plan to sunset Fannie and Freddie.

However, we are also getting some clues to the fact that this new entity, whatever it may be, will be less generous with its money than the ones it is replacing. Consider a Newsweek article published July 23, 2010, entitled, "Wall Street Whispers: Will Obama Slay the Fannie and Freddie Beast?" Look at this paragraph from the article, "The Obama administration appears to be suggesting--very subtly--that homeownership isn't a God given right. That the American dream has morphed into an American entitlement. That millions of people who should not have been homeowners in the first pace ended up paralyzed by unsustainable debt as a result...'This crisis reaffirmed the need to achieve a better balance between ownership and rental housing,' Hud secretary Shaun Donovan told lawmakers this spring.'" The Newsweek article goes on to quote Raphael Bostic, a senior HUD official and a "leading scholar on home finance and key policy adviser", whom the Washington Post quotes as recently stating, "In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go. You're not going to hear us say that." And Newsweek goes on to say, "The most sensible and politically palpable option may be something in between--explicit guarantees with more strings attached, fewer incentives for Americans to buy homes, and more incentives for them to rent if they can't pay down hundreds of thousands of dollars over a 30 year time frame."

I agree that homeownership is not an entitlement. During the Bush years, we saw an initiative to put 5 million new Americans into homes in the hopes that Americans who purchased homes would become more responsible members of the community. That did not work because it was based on the government determining that Americans needed to buy houses. But now we see apparently a new initiative--much less well publicized--that Americans need to not buy houses.

What I want to know is why the decision to buy or to rent is a decision that the government should be involved in at all. Newsweek talks about incentives to purchase versus incentives to rent as if adult Americans are not capable of looking at their own situations and determining that they need a roof over their heads and then taking appropriate steps to secure one.

Over the course of 12 years in housing finance I have met a lot of people who dreamed of buying a home. But the people who were serious about buying one made it happen. If they had to wait while they paid off debt, they did so. If they had to save money for a down payment, they did that. The most effective incentive to purchase that the most motivated buyers had was their basic belief that owning was preferable to renting. And I have worked with other borrowers who had really good income and very good credit, but they never purchased a home. Some of these borrowers would open a contract every year on a property which they dreamed about owning but when the time came to purchase, they walked away. It was not that they could not afford the property--it was just that for them as individuals, renting seemed safer than buying. That is a decision that no one else can make for a person--the individual must make it for themselves.

And this is what I find troubling about this whole idea that the government should decide whether we as Americans rent or buy. That is like deciding for another person whether they should marry or remain single--it is a highly personal choice which really should be made by the person affected and no one else. We don't all get to marry the person we want to marry, and we don't all get to buy the house of our dreams. But that does not mean that we may not choose to marry someone else, or buy a different house that meets our needs just fine. And it should be our choice--not that of some bureaucrat doling out mortgage money as they see fit.

The Declaration of Independence says that we have right to life, liberty and the pursuit of happiness, which really just means an opportunity to pursue those things that we hope will bring happiness. Happiness is not a guarantee; neither is the attainment of anything else we pursue. But we should have the opportunity to try. Homeownership is the American Dream because in this country, through hard work and diligence, people have always been able to purchase their own homes. No administration should be able to say whether or not any given person deserves to have a chance at attaining that dream for themselves.