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/.

Suze Orman is Wrong--Don't Walk Away

On Sunday our pastor decided to preach about the dismal state of the economy and how we should react to it.  During the sermon, he mentioned that his brother's house is worth fifty percent of what it was purchased for and that his brother has no choice but to walk away from his home.  Now, our pastor's brother is self-employed, and I don't know his specific set of circumstances; if he can no longer make the house payments on his house due to loss of income he may, in fact, have no choice but to walk away from a home he can't sell.  But more and more, we are hearing that if our houses have lost value we should just "walk away" from what has turned out to be a bad investment.

One vocal proponent of "walking away" is financial guru Suze Orman who has been quoted in numerous articles stating that those who are "underwater" in their mortgages should walk off and let the houses get foreclosed on.  This past Monday, Ms. Orman appeared on "The View" with what has become her new rallying cry, "If you are upside down in your mortgage and the bank will not work with you, walk away from the house."

In Orman's book The Money Class, she advises borrowers, "Do the calculations everybody. How much is it costing you to actually stay in that house? How many years will it take for you to pay more for that house than it is worth? If it's 3 years, 4 years, 5 years, are you kidding me? That's a house you really need to say bye bye.  It's not worth the money."   Orman advises people who are upside down in their home mortgages to try to get the bank to modify the loan.  Failing that, she says that homeowners should seek out a short sale or a deed in lieu of foreclosure. "If they won't do that, then walk away. It's just how it is."

The fact that a respected money expert is telling American borrowers that they can and should default on their loan obligations when they have the ability to repay is really a sign of just how far we have fallen as a nation.  It is deplorable to think that we have come to a place as a society where defaulting on our obligations is considered some kind of a moral high road.

CBS Sacramento carried a story on April 28, 2011 of borrowers who did just as Orman suggests and let their homes go into foreclosure because they no longer have the equity they once did.  Mary Beth and Bob Stucky were underwater $200,000 and the bank refused to reduce the principal, so they walked away and became renters.  They are now renting a larger house for a smaller payment, and although they may not be able to buy a home again for many years, they say they feel "peaceful" because they realize that their home was a "bad investment."  CBS Sacramento also interviewed Rob Sorenson who walked away from his home and allowed it to go into foreclosure.  All of his credit had previously been good, but his decision to allow his home to be foreclosed on resulted in his having all of his credit cards cancelled so that when his dog got sick and had to go to the vet he had actually had to borrow $2000.00 from a family member since he does not have any access to credit.  So he has not only defaulted on a major obligation, but he has actually become a burden to family members who are having to loan him money that he used to be able to borrow on his own.

Other than the nuisance factor, what is really wrong with walking away from a home that is underwater?  Plenty.  For one thing, it doesn't make any sense.  If you have a fixed rate, fully amortized mortgage for thirty years, or fifteen years, or twenty years, you know at the time that you sign the mortgage documents how much your monthly payment will be and also how much you will be paying for that home.  The truth in lending document included in every mortgage package contains the exact dollar amount you can expect to pay for that loan over the life of your mortgage, and it is normally two to three times higher than the amount you borrowed due to interest and finance charges.  So in that sense, every mortgage holder is upside down on his or her mortgage when they sign the papers.  But if you have not suffered a job loss, a health crisis, or a financial tragedy, you have no reason not to make those payments.  Why?  Because the appreciation or depreciation on the house is just a number that changes arbitrarily.  When properties were appreciating at a skyrocketing pace, no homeowner ever went back to their mortgage company and said, "I know I bought this house for $200,000 and I financed $150,000 but now it is worth $500,000.00 so I think I owe you some additional money."  So why, in the reverse situation, should the bank lower your principal simply because the value has dropped?  You didn't owe them more when the values were rising, and you don't owe them less now.

If we had no moral obligation to pay for things that depreciated, no one would ever make a car payment again.  Virtually everyone understands that the moment they drive their car off the lot, it has less value than it did twenty minutes before when it was sitting on the lot.  If we applied the same logic to all items as we do to homes, we could not have any credit system at all since the moment that something became old or worn we would no longer need to make the payments.  The problem with housing is that we no longer look at our homes as a place to live.  We have decided as a society that our houses are supposed to contain enough equity to pay for our summer vacations and to give us a credit card  to spend on whatever we wish during the  year.  If the house can no longer be a source of free fun money, it has failed us and we should not have to pay for it.

Second, the boom was artificial, and so is the bust.  When real estate values were booming, we all seemed to forget the basic principles of gravity "What goes up must come down."  Right now we are in a double dip, and values are dropping this summer and will continue to drop for a while as underwriting guidelines continue to tighten.  But, after that, we can look for values to rise again as properties become more expensive.  That house that today is worth $200,000 less than it was 4 years ago may have regained its losses in 5 to 10 years.  In any event, when you walk away from a home you are making the payments on, you are throwing away all of the money you have already put into that home, which is ridiculous. 

Third, although some people are forced into foreclosure by financial circumstances, many have other options.  Most borrowers who are practicing strategic defaults have high credit scores and have not suffered a job loss.  They simply do not see the value in making their payments.  If you want to move into a cheaper house fine--how about renting your current home to someone else?  As more and more people are forced to become renters, the demand for rental housing is going to grow.  For a little effort, you can save your property and your credit.

Fourth, odds are very good that the house you are walking away from today may well be your last.  As underwriting guidelines continue to tighten, many homeowners who have abandoned their homes for no reason are going to be shut out of homeownership in the future, either by much higher interest rates and financing costs, or by credit guidelines that do not give them a second chance.  And Orman actually knows this.  She says that the new American dream may not include ever owning a home again.  "And if you do rent for the rest of your life, it's not a big deal. Who cares? Just invest that money you would've put in your home somewhere else....The new American dream really is a dream that allows you to sleep at night where you feel secure, and you know what is yours cannot be taken away again, because of the actions of others."

That's just nonsense.  Orman acts as if strategic defaulters go off to a happy paradise with no more problems.  Renters make the payments on properties that other people own and put wealth in the pockets of property owners--period.  And while "what is yours cannot be taken away again" what is not yours certainly can be.  Your landlord can lose the house you are renting to foreclosure if he does not make the payments regardless of whether you are making your payments to him or not.  Or you can find yourself in the same situation as a woman who recently called me to tell me that her landlord is not renewing her lease because the landlord has decided to give her house to her own son and evict the tenant.  Life does not come with guarantees, whether you rent or own.

Finally, homeownership provides security for people in their senior years.  While young couples in their thirties and forties may not feel the pinch of renting, older Americans have typically relied on having their homes paid off as part of their retirement.  A home that is paid off is good security towards any financial crisis, and many communities now protect seniors against out of control property taxes.  Reverse mortgages provide seniors with the option of using the equity in their homes to offset living costs or to get rid of a mortgage payment that is too high.  A home that is owned free and clear provides a senior with many options that a renter simply will never experience.

Orman is pushing all of those unhappy homeowners out there to hurry up and default sooner rather than later since the federal tax break for foreclosures and short sales will expire at the end of 2012.  That would mean that if you default on $100,000 debt in 2013, you owe federal income taxes on $100,000.  So in addition to ruining your credit and your future homeownership chances, you will owe a massive tax penalty to the IRS.

If you have lost your job, experienced a divorce resulting in loss of income, or gone through some other life changing experience beyond your control that has cost you your home, don't beat yourself up.  Life happens.  But if you are considering strategic default because your home is not worth what it used to be, don't be fooled by this concept that you are going to be better off "letting the house go." In the end, you will be better off if you act responsibly and meet your obligations--either by continuing to make the payments or finding a tenant who can make them for you.  A few years down the road, when values have recovered and houses are very difficult to purchase, you will be glad you held on to your property.

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 http://www.frontier2000.net.