Wednesday, May 27, 2009

A Very Bad Day to be Betting on Low Mortgage Rates

Another bubble may have burst, this time with low mortgage rates.

DETROIT, MI – It’s an unsettling feeling watching a market in free-fall. You watch it drop, drop and drop some more, wondering and hoping that it’ll level off. When it doesn’t, panic and paranoia creep in and your stomach starts to tighten.

I’m sure a lot of bond traders on Wall Street were going through this as one of the WORST days for Mortgaged Backed Securities played out. Take a look at the chart below:

(NOTE: this chart reflects MBS prices which are the inverse of interest rates.)

As if to set the market up like a pool hustler, the day started with a bit of improvement after a bad day yesterday. Then the market kept dropping and dropping and dropping, etc.

What’s this mean for interest rates?

Well, you’re looking at rates being ½% worse than they were at the start of last week, maybe even higher.

What caused the sell off?

It was an accumulation of factors plus mob hysteria thrown in for good measure. The government’s auctioning off a slew of Treasuries this week, consumer confidence shot up last month and was reported yesterday, housing sales are up and the market was just nervous that all this will lead to inflation.

The question is, is this a reset of the markets or will the next round of bad news drive rates back down? We also have the Fed to watch and see how team Bernanke will react to this. The Fed pledged 1.25 trillion dollars to buy MBS and keep mortgage rates around 5%. They’ve only used up about half of this amount. Will they go “all in” and blow the rest on a gamble to call Wall Street’s bluff?

Stay tuned.

Sunday, May 17, 2009

The Misconduct of the Home Valuation Code of Conduct (HVCC) - Detroit

HVCC, as currently written, will be kicking a housing market that’s already on its knees.

DETROIT, MI – Despite the efforts of the real estate and lending industries, the Home Valuation Code of Conduct went into effect May 1, 2009, bringing a dramatic change to the home financing process.

HVCC is the result of a 2007 lawsuit brought against an appraisal division of First American Corp. by the New York Attorney General, Andrew Cuomo, for allegedly inflating appraisal values on an estimated 260,000 WAMU mortgages.

So now, in typical government fashion, we go from one extreme to the other – unmonitored appraisal inflation replaced with bureaucratic appraisal deflation.

The intent of HVCC is to prevent loan originators from having undue influence over appraisers on the valuation of homes and prevent inflated appraisals.

Appraisals for mortgages on 1-4 family homes to be sold to FNMA or FHLMC, will no longer allowed to be directly ordered by loan originators. They must be ordered through Appraisal Management Companies (AMC) that act as middlemen between appraisers and loan originators. (Currently HUD’s FHA loans are not subject to HVCC. Loan originators can still order their own appraisals from trusted appraisers for FHA loans.)

Sounds great in theory, but the reality is far from perfect.

I had lunch with several of my mortgage competitors this past week. The main topic ended up being the HVCC and what it’ll mean to the process of financing a home. The consensus was that there are going to be a lot of unhappy people – homeowners, homebuyers, sellers, real estate agents, loan originators and more.

Was there a problem with inflated appraisals?

Yes, but HVCC in its current version, creates more problems than it solves. Underwriting departments at most lenders were already using advanced computer programs to address the problem of inflated appraisals. Appraisers found to be providing questionable values and work, were banned by that lender.

Why is the industry so up in arms over HVCC? Well, let’s look at how the system is supposed to work:

  • Loan originator orders appraisal from AMC (usually via internet)

  • Payment must be made when the order is placed to avoid appraisers being forced to bring in a specific value in order to get paid.

  • AMC randomly assigns the appraisal order to one of the appraisers on its list of approved appraisers

  • Appraiser is typically required to complete & deliver the appraisal within an acceptable amount of time.

Sound easy doesn’t it! So what’s the problem?

  • There are no requirements concerning the proximity of an appraiser to a property or their knowledge of an area. On a recent transaction, an appraiser came from 145 miles away to appraise a home. Not surprisingly, the value came in significantly under what local real estate agents estimated it to be.
  • The cost of appraisals has gone up. Our appraisers typically charged $300-$350, now the AMC’s charge $450 or more. Instead of an appraiser getting their full $300, AMC’s only pay them $175-$250 of the $450 charged. So, appraisers will have to do more appraisals to earn the same amount they have in the past. This will lead to shoddy work.

  • The AMC doesn’t care if data for the appraisal is difficult to find and would normally take longer to provide an accurate value. They want them ALL back in 48 hours, failure to do so could exclude the appraiser from their list. Again, this will lead to shoddy work. Many high end homes sold in the past recorded the sales price as $1 in the MLS. Also, many builders sold houses outside the MLS. Normally, an appraiser would go to county records to research these sales and prices if needed. The 48 hour turn time requirement will now lead to appraisers just ignoring these sales, which could negatively impact appraisal accuracy and value.
  • There is very little anyone can do to challenge a low valuation at this time. Oh sure, there are forms you can fill out to do so, but the real chances of an override occurring are slim. The only option then is changing lenders and paying for another appraisal, while still hoping for a better value. This will all have to be paid by borrowers and mean longer application timelines.

  • Each lender has their own approved AMC. There is nothing in HVCC requiring lenders to honor each other’s appraisals, so switching lenders could mean paying for another appraisal.

  • I haven’t seen anything in writing about how AMC’s will monitor and rate appraisers for the quality of their work. Will it be any surprise that appraisers will just use the first three comparables that pop up on their computer searches? What incentive do they have to put more time into making sure an appraisal reflects the best and most accurate value possible?
  • HVCC has no ethics, screening or performance requirements for AMC’s or their owners. Several AMC’s have been started by retreads from the subprime debacle.
    These are not the type of challenges you want to hear when real estate values are dropping, especially for those trying to refinance.

    Should we blame the appraisers when their valuations start affecting transactions? I don’t think we should. None of the appraisers I know have anything good to say about HVCC. Many of them have spent years building their businesses by establishing relationships through providing great service. Now those relationships are all being taken away from them. They’re also not happy about the time constraints the AMC’s are placing on them. HVCC and the AMC’s treat appraisers like they’re a commodity and 100% the same. It’ll create a race to the bottom and reward appraisers who work the cheapest & fastest at the expense of accuracy & quality.

    I’m going on record here advising real estate agents to pull their own comparables and hand them to the appraiser when you meet them at a property. Maybe even go one step further and do a mini Broker Price Opinion! Otherwise you’re leaving the fate of your transaction in the hands of an appraiser who really may not care if your deal closes or not. Real estate agents, by the way, are the only industry professionals involved in the transaction that are allowed to speak with appraisers under HVCC.

    If you’re a homeowner looking to refinance, you may want to get back in contact with the real estate agent that sold you your home and have them do what I suggested for a purchase transaction in the paragraph above.

    By the way, anyone thinking that going to a bank or a certain lender will avoid the problem, is seriously mistaken. Everyone in the industry will be facing the same problems. Homeowners trying to refinance won’t be able to threaten to go to their banks to avoid the problem. Real estate agents won’t be able to blame loan originators if a sales price is not met. It’s a new reality we’ll all have to learn to deal with.

    Obviously, there was a problem with inflated appraisals. HVCC is a step in the right direction to address the problem, but several logical modifications can be made to improve it.

  • Create a nationwide, central database where all appraisers have to register, so “bad eggs” can be identified by all. The federal government required it for loan originators due to fraud issues, so why not appraisers? The same mechanism can also be used.

  • Require any and all owners of AMC’s to pass a background check. Currently, an appraiser, lender or real estate agent could have their license revoked, but still open an AMC.

  • Create a national system to randomly review the work of appraisers and address complaints. HVCC as it is, leaves this to the AMC’s themselves. Self-regulation really worked in the banking industry, didn’t it?

  • Require all lenders to use independent AMC’s. Banks are currently allowed to use their own appraisal staffs and own AMC’s, which makes absolutely no sense - unless you’re a politician getting bribed/lobbied by the banking industry. The original version of HVCC required 100% independency, but I think the fact that most of the top U.S. banks already owned an AMC might have had a little to do with this rule miraculously changing. Now, does anyone seriously believe that an invisible wall between a bank’s appraisers and all other employees will really be honored?

  • Standardize the AMC’s appraiser approval process and require that they all accept each other’s appraisals.

  • Create penalties for AMC’s that pressure appraisers to work on unrealistic deadlines to stay on their approved lists. The 48 hours that most AMC’s require is foolhardy. A week is more realistic. Pressuring appraisers to rush their work is really no different than pressuring them to inflate values.

  • There should be geographic proximity requirements for assigning appraisals. Is it reasonable to expect an appraiser desperate for work to turn down an order in an area they don’t know?

  • Create a standardized system of review, so shoddy appraisal reports can be properly addressed. Since any review system takes time, which could cause a transaction to fall apart, the review system should provide a borrower the option of ordering and paying for a 2nd appraisal, but then require a full refund of the 1st appraisal if it’s found to be suspect.

The improvements suggested above won’t create a perfect solution as that’s impossible in the real world. They could dramatically improve a seriously flawed HVCC though.

Please keep in mind that we’re all in this together, both borrowers and industry professionals. We have a government that’s giving out hundreds of billions in bailout relief to those at the top that caused the housing crisis – while seeming to make everything harder for the average person on the street. We all have to stick together to find our way through this new challenge.

If you’d like to protest against HVCC in its current form, please check out this electronic petition:

For additional facts about HVCC watch this short video:

Sunday, May 3, 2009

Saving the American Dream?

A step-by-step, logical outline for a homeowner on the options to save their home.

DETROIT, MI – Homeowners everywhere are struggling to save their piece of the American Dream, their castle, their home.

Every week of news seems to promise a ray of hope, that’s quickly followed by more bad news for the economy, which means more bad news for them. More layoffs, pay cuts, benefit cuts, business bankruptcies, bailouts, rising expenses, the list goes on and on.

When they go looking for options to help them keep their homes, they run into a confusing array of claims, programs, advice, rumors and gossip.

There’s no shortage of bold headlines regarding the subject, but the media really offers very little in the way of a step-by-step analysis that makes sense of what’s real, what’s fraud and what’s realistic.

Caution is the key for homeowners when considering their options.

Take loan modification services, for example. A Google search for “Loan Modification” returns 320,000 matches for just the last month. How can anyone possibly make sense of that much information?

Making matters worse, a similar Google search for “Loan Modification Fraud” returns 33,000 matches. The problem has gotten so big that the FBI formed a special unit to investigate foreclosure rescue scams in December of 2008, supervised by Travis Yarbrough. He was quoted in a Bloomberg article on the topic when asked who is running the scams, “A number of them previously worked in subprime mortgage companies. Some of these perpetrators have gotten very creative at separating homeowners from their money.”

So what’s a homeowner supposed to do?

Be very careful of who you take advice from. Don’t blindly trust the media, family, friends, neighbors or even “experts” as they often don’t have 100% of the facts. Nor do they have to live with the repercussions of their advice – only you will.

So, do your own research and question everything. Understand that there’s no “magic” that will solve all your problems, despite how desperate you may be for a solution. Yes, there are always several actual outrageous success stories, but the chances of it happening for you are similar to your chances of winning the lottery. Most actual solutions involve a LOT OF WORK.

Lastly, remember that hope is not a plan, nor a strategy. You MUST take action or someone will do so for you and their solution will be what’s best for them, not you.

Now let’s try to bring some clarity to the chaos.

STEP #1: Build a Budget!

If you’re struggling with your finances, the only logical way to fix the problem is to complete a very comprehensive monthly budget. Issues to keep in mind:

- For your income remember there are 52 weeks in a year, not 4 weeks in a month.
- Don’t forget items you may pay only quarterly, semi-annually or once a year.
- Be careful about being unrealistically aggressive when budgeting.

STEP #2: Can You AFFORD to Stay in your Home?

This is one of the hardest questions to honestly answer as it involves a lot of emotion. You may want to seek the assistance of someone you trust outside of your household to review your budget and be blunt with you on its viability.

If you wait too long to take proactive action, you’re options will be fewer, if any.

USING SAVINGS TO LIVE OFF OR SUPPLEMENT INCOME – if you plan to ride out the storm by living off savings or a buyout, then you need to know how long you can do so. The challenge here is being realistic and knowing when to throw the towel in and look at the other options.

STEP #3: You Want to Stay, but Can’t Afford the Current Payment

If you’ve reduced your spending on everything you can, but your expenses are still greater than your income, then you need to consider other options to reduce expenses.

REDUCING YOUR MORTGAGE PAYMENT – Obama’s “Making Home Affordable Program

The Obama administration initiated a plan on March 4, 2009 to help an estimated 7 to 9 million homeowners keep their homes by lowering their mortgage payments through one of two ways:

Home Affordable Refinance
Even if you owe slightly more than your home is worth, you may be able to refinance to a lower rate if:

- Your mortgage payments are current (no more than 30 days late in the last 12 months)
- The property is your primary residence
- Your loan is owned or guaranteed by FNMA or FHLMC
- You owe no more than 105% of your home’s value
- Your stable & continuing income will support the new monthly payment
- You apply before June 10, 2010

Challenges on this program:
- No cash out or debt consolidation is allowed
- 2nd mortgages may not be paid off.
- 2nd mortgages must subordinate for this program, but they don’t always agree to do so!

Home Affordable Modification
If you owe more than 105% of your home’s value or you’re behind on your mortgage payments, this option may help you if:

- Your primary residence is a 1-4 family property
- Your mortgage was originated prior to January 1, 2009
- Your mortgage payment + taxes + insurance exceeds 31% of your gross monthly income
- The Servicer of your mortgage voluntarily participates in the program
- A modification plan must be in place prior to December 31, 2012

Participating (voluntary) lenders are instructed by the plan to modify mortgages to 31% of a homeowner’s income, using the following steps in order:
- Lower the interest rate in 1/8% increments to a floor of 2%
- Extend term of a loan in 12 month increments to a maximum of 40 years from mod date
- Forebear a part of the loan, with no interest, which will have a balloon payment.
- Voluntarily only – agree to reduce the principal of the loan.

Many credit companies will negotiate payments and interest rates to help consumers avoid defaulting on their accounts. Some things to keep in mind:

- The credit account will usually be closed so it can no longer be accessed.
- It may also result in late payments being reported to credit bureaus. This is done to make it difficult for a consumer to open up new credit accounts until the negotiated account has been paid. Often, an agreement in writing can be made that upon full payment, the reported late payments will be removed.
- Get all agreements in writing!
- HUD Certified Consumer Debt Counselors are available 888-995-HOPE, website

STEP #4: No Options to Afford to Stay or Don’t Want to Stay

If you’ve explored all your options, but still can’t afford your home OR you wish to more on for other reasons, then you can explore a short sale, deed-in-lieu of foreclosure or wait for the inevitable foreclosure.

It’s most likely that whatever rental income you can get won’t cover your payment. If it does great, just be careful to go over this with a rental professional as there are all sorts of hidden costs associated with being a landlord.

If the projected market rent doesn’t cover your payment, it may cover enough for you to be able to comfortably make up the difference. Again though, check with a professional so you’re aware of the hidden costs involved.

NOTE: Be VERY careful when considering this strategy! Once you rent out your home you lose many tax benefits and legal protections.

A short sale is where you get your mortgage lender to accept less than you owe them in order to sell your home. Keep in mind:

- The average short sale takes 2-3 months to complete AFTER a buyer is found
- Your lender may not stop their foreclosure actions even if you find a buyer
- 2nd lien lenders will make short sale negotiations much more difficult
- TAX ISSUES – most lenders will send a 1099-C and leave it to you to address tax issues. At the end of 2007, the Mortgage Debt Forgiveness Act was enacted. If you receive a 1099-C, it may not be taxable under this act. Read IRS Publication 4681 for details. NOTE: cash out from your home used for anything but home improvement will usually be taxable!
- DEFICIENCY JUDGMENTS: most 1st lenders will agree not to pursue. Many 2nd lenders will want to preserve their rights to pursue a judgment at some later time.
- NEW MORTGAGE: FNMA currently requires a 2 year waiting period after a short sale.

This is where a lender agrees to take your home back via a Quit Claim Deed, instead of pursuing foreclosure. Due to excessive foreclosure inventory, many lenders are not currently agreeing to this strategy.

- If you have a 2nd lien, this strategy is usually NOT an option unless both liens held by same lender.
- Tax & Deficiency issues from above apply
- NEW MORTGAGE: FHA allows the shortest waiting period of 3 years.

In Michigan, the foreclosure process can take up to 9 months or more to complete. During this time, you can live in your home without making payments.

- Michigan gives lenders two options for foreclosure: judicial and by advertisement (most common)
- A homeowner has no legal obligation to move out of their home immediately after Sheriff’s Sale
- Most residential homeowners in Michigan are allowed a 6 month Redemption Period
- You have no Tenant rights in Michigan after expiration of Redemption Period
- DEFICIENCY JUDGMENTS: If 1st lender bids amount they are owed, it’s unlikely they will pursue a deficiency judgment. If they bid less than they are owed (becoming more common) they can pursue a deficiency judgment for the difference between what they are owed and what they bid (must be at least fair market value). 2nd lenders can pursue deficiency judgments unless they agree to forego for a reduced settlement.
- NEW MORTGAGE: FHA currently requires a 3 year waiting period after a foreclosure, an exception is possible if extenuating circumstances.

The possibility of deficiency judgments may force many homeowners to also consider filing bankruptcy after a short sale, deed-in-lieu or foreclosure.

A homeowner may also consider bankruptcy if they feel strongly about staying in their home and choose to let all their unsecured debt go and focus all income on saving their home.

Closing Thoughts

Many people reading this document may be desperate enough to believe almost anything that appears to offer some sort of assistance out of their dilemma. Do not make this mistake.

There are many websites advertising how they can help you ‘walk-away” from your home, many of them represent you can do so with no financial repercussions. As mentioned above, this is not the case.

Be proactive and seek out the assistance of experienced and reputable professionals. Question everything! If someone cannot or will not explain your options to your satisfaction – run, don’t just walk away from them. This is a sign they either don’t know themselves, don’t think you’re worth the time or don’t want you to know. None of which you should accept.

WARNING: This post is not intended to offer any legal advice so, it’s highly recommended that competent legal & professional advice be obtained.