Media Hype Creates Mortgage Expectation Bubble

News stories are only covering half the facts on falling interest rates, creating unrealistic consumer expectations.

BLOOMFIELD, MI – Everywhere you turn today is news about how low mortgage interest rates have fallen. Whether newspapers or internet, you can find coverage on the topic. People are talking about mortgage rates on the radio, TV, at work, everywhere.

The trouble is, all is not as the media so simply portrays it.


As the chart above show, this is the fourth major drop in interest rates Americans have seen since 1982. Back in 1982 mortgages were very labor intensive with handwritten applications, documents done on typewriters and everything sent by what we now call, “snail mail”. From application to closing could easily take 8 weeks, often longer. Many homebuyers took advantage of the increased purchasing power as a result of the lower rates, but many more existing homeowners took advantage of the lower rates to lower their mortgage payments.

With each successive drop in interest rates since then, consumers have benefitted from the increased use of technology by the mortgage industry. Computers, faxes, websites and email have all sped up the mortgage process, making mortgages cheaper, dramatically easier to obtain and increasing product options – until now.

The refinance opportunity that started at the end of 2008 brings the lowest rates in over 50 years, but it also brings challenges not seen in over 30 years.

Falling home values, tightening lending criteria, fewer loan programs & options, higher down-payment requirements and more, are challenges many borrowers have never experienced.

You’d never know this though from following the media hype about the drop in interest rates. Most articles about the topic rarely mention that borrowers face a brave new world of qualifying for these low rates.

Reality Check
Traditionally, the mortgage rates lenders offered were the same for all borrowers as long as they qualified for the corresponding mortgage program. Either the borrower had the credit, income and assets to qualify or they didn’t. That all changed on March 1, 2008 when FNMA announced Loan-Level price Adjustments (LLPA) on their products to compensate for increased risk.

Effective June 1st of 2008, even though a borrower may qualify for a mortgage program, their mortgage rate now depends on their FICO score, Loan-to-Value of the property and on refinances - more for taking cash out. At the extremes, some borrowers may pay up to three discount points more than others (keep in mind a discount point is not a percentage point).

Imagine the surprise of millions of borrowers being told they’re approved for their mortgage, but not at the advertised rate they applied for.

Unfortunately, it gets worse. On December 29, 2008, FNMA announced major changes to their LLPA’s that go into effect April 1, 2009. Because of the lag time from application to close and then lender delivery to FNMA, many lenders have announced they will implement these higher costs January 12th.

Want to finance a condo? If you finance more than 80% of the value it’ll now cost you an additional 0.75 in discount points regardless of your credit score. How about taking some cash out of your home? It could cost you as much as three additional discount points. There are now also hits for manufactured homes and subordinate financing.

The timing of this FNMA announcement is very odd in light of the Feds actions in buying Mortgage-Backed Securities to lower mortgage rates. One part of the government is trying to lower rates to help the housing market, while another part is raising the cost of those same rates.

Another bit of news the media has neglected to report is that “no-cost” refinances are almost a thing of the past. FNMA and the banks are changing the pricing model of the industry to discourage these types of transactions. Why? To stop what’s called, “portfolio runoff”. The rates offered by the industry have built-in assumptions that once a loan is closed, it’ll stay on a lender’s books for at least a minimum number of months. In previous refinance “booms”, lenders got burned by borrowers refinancing every 2-3 months and lost a lot of money. So, borrowers looking to refinance will have to either roll refinance costs into the loan amount or pay them in cash.

Rates hit Record Lows!

The Fed follows through on their Mission of Buying Mortgage-Backed Securities to Drive Rates Down.

After rising the last 2 weeks, rates have plunged this week in response to the Fed's buying binge.

See the graph below:

Keep in mind this is a graph of MBS prices, which is inverse to mortgage rates. Notice the peak today (as of 4pm) exceeds all previous high marks.

We are seeing challenges though in getting these prices to translate to lower rates.

Lenders are getting slammed with refinance applications and are holding back on passing on all the pricing benefits to better rates. This is one way they control the number of loans submitted.

On top of that, lenders laid off tens of thousands of employees in 2008 and are short on manpower.

We are advising all our clients to get their applications in with us so we can start the underwriting process, while we watch the rates to lock in when it makes sense.

Gotta run and take care of clients:)

New Year’s Resolutions for the Mortgage Industry

What are the chances of repeating last year’s actions and getting better results?

January 3, 2009 -- BLOOMFIELD, MI – What a challenging ride the year 2008 was. A worsening mortgage meltdown, the nationwide decline of real estate values, lack of credit liquidity causing a banking bailout, a bailout of the domestic auto industry, rising unemployment and the beginnings of a worldwide recession. Did I miss anything important?

The real estate and mortgage industries were decimated by the deteriorating economy, not to mention almost 25% of home owners nationwide watching their biggest investment going upside down.

One of the definitions of insanity is doing the same thing over and over again, hoping for different results. What changes can be made so that the industry has better results in 2009?

1. Registration and testing of all loan originators, including those working for federally chartered institutions.

WHY: Although borrowers should ultimately be held accountable for their ignorance and greed in taking out mortgages they couldn’t afford, a percentage of mortgage professionals did some serious misleading and worse. A mortgage is no more a commodity item than a 401k, yet consumers took mortgage advice from loan officers with little or no training. Several federally chartered organizations, most notably WAMU and Countrywide, had “sweatshop” refinance operations. Both these organizations were involved in lawsuits filed against them for mortgage abuses.

2. The return of common sense underwriting. There seems to be a lot of pressure on underwriters to be perfect, causing a lot of good mortgage applications to be rejected or picked apart. FNMA/FHLMC should issue some guidance on this.

WHY: Underwriting guides were too loose in recent years, but now the pendulum seems to have swung the other way. The government’s stated goal is to unfreeze the credit markets. Hypersensitive underwriting practices work in opposition to this.

3. FNMA/FHLMC should create a streamline refinance program that does away with appraisals & income verification modeled after HUD’s FHA Streamline program. FHA Streamline allows no cash out, but only requires that mortgage payments for the last 12 months have been on time. I’ve written about this several times before and there was a news leak on December 10th that it’s finally being considered.

WHY: Homeownership really boils down to affordable payments. Most people lose their homes, or walk away from them, when they can no longer afford the payments. Allowing homeowners upside down in their homes to still refinance and lower their payments, will keep more homes out of foreclosure. Slowing foreclosures will slow the dropping of real estate values, which will improve consumer confidence that’s now at a record low.

4. FNMA/FHLMC should remove their current limits and allow real estate investors to buy up foreclosed homes and rent them out. The limit is now 4 mortgages backed by FNMA/FHLMC, but with restrictions it should be unlimited.

WHY: The pool of qualified homebuyers has dramatically shrunk with the end of zero-down programs, easy credit requirements (both extremely abused) and the increasing number of consumers with foreclosure blemishes. This is one of the reasons we have excess real estate inventory. Many of these same people though, would like to rent a home, even rent-to-own it. Qualified investors are best suited to accomplish this. They just can’t get commercial financing due to the credit freeze. To avoid abuses, investors should only be allowed to buy foreclosed properties, have deed restrictions against reselling for 12-24 months and have either significant experience or liquid reserves.

5. Even though the program was a bit ill-conceived by politicians, lenders should embrace HUD’s Hope for Homeowner’s program (H4H) to avoid foreclosures.

WHY: The H4H program allows lenders to refinance nonconforming loans through FHA at 90% of the home’s current value. These loans usually won’t qualify for FNMA/FHLMC and are in danger of foreclosure. The current lender does have to write off the difference, but this is usually less expensive than the property going through foreclosure & being resold or being sold through a short sale.

6. Creative rules should be conceived that will motivate lenders to better staff their loss mitigation departments.

WHY: Ever tried calling a lender concerning a short sale, loan modification or foreclosure? You get to speak to someone with little training, reading from a limited script, that can’t make a decision. If you mail/fax/email something to them, it has a high probability of getting “lost”. In actuality, the easiest thing for these overworked individuals to do is to claim they never got what you sent. If the government is serious about doing more to keep homeowners in their homes, creative penalties need to be instituted to motivate lenders to solve this problem.

I’m sure some of these ideas will be addressed and some may end up not being feasible. We do need to do something though, or we’ll be worse off at the end of 2009 than we were at the end of 2008. Send me any ideas you may have.

Michigan Rewards Goof-off Grasshoppers instead of Attentive Ants

The Michigan Loan Officer Registration Act (LORA) deadline of January 1st, 2009 proved unobtainable, so an extension has been granted.


December 27, 2008 -- BLOOMFIELD, MI – So much for being on the ball. Michigan just turned the Aesop Fable of The Ant & the Grasshopper upside down by announcing a LORA deadline extension on December 8th.

Aesop’s Fable told the story of a lazy grasshopper playing all summer long and making fun of an ant hard at work storing food for the winter. When winter comes, the starving grasshopper begs the ant for some food.

If you were a Michigan loan originator (Ant) that took the original LORA legislation seriously and signed up for the required testing ASAP, you just got the rug pulled out from under you. All those LO’s that procrastinated (Grasshoppers), or didn’t even know about the new legislation, get to laugh at you now for stressing out, studying and taking the test at 8am on a Sunday morning.

For those scratching their heads as to what I’m writing about, the Michigan legislature passed a bill, called the Loan Officer Registration Act (LORA), that Governor Granholm signed into law April 3, 2008. LORA requires Michigan loan originators to register with the Office of Financial Services (OFIR), requires taking a 24 hour class or having 4.5 years of experience, passing a test, annual continuing education, background check and fingerprinting.

The original deadline for all this was January 1, 2009.

A disagreement arose though, with the Michigan State Police concerning interpretation of the fingerprinting and background check requirements. This resulted in the extension announced December 8th pushing the deadline back to April 1, 2009.

The only good thing about the extension was that the legislature took the opportunity to stiffen the requirements a bit more. The FBI will also now be involved in the background check and fingerprinting.

I’ve written before that LORA is way over due. Too many crooks and incompetents got in the mortgage business for the fast cash and took advantage of unsuspecting homeowners, helping to contribute to the current housing crisis. The industry needs a housecleaning! When similar legislation was enacted in Indiana & Ohio, over 30% of the mortgage originators “disappeared”. More need to go. Just this past week, I met a guy who has his own mortgage brokerage and he didn’t even know about LORA. How scary is it, that he could be doing mortgages and not know about state requirements concerning his livelihood?

Overall, the extension is really a shame. All the bad eggs we want out of the business get more time to do more damage. Is it just a coincidence that the new deadline coincides with April Fools Day?

Show your support for higher standards in the mortgage industry by only doing business with those that have already passed the required LORA test. Don’t settle for a verbal verification of this. After taking the test, we all immediately get a printout with our picture on it that tells us if we passed or failed.

To Refinance, or not to Refinance?

Mortgage rates have dropped, but many homeowners are saying, “So, what”.

December 22, 2008 -- BLOOMFIELD, MI – the Federal Reserve dropped the overnight rate to a record low of 0.25% on Tuesday, December 16th. More importantly, they announced a plan to buy mortgage-backed securities in quantity. This sent mortgage rates to their lowest levels in 50 years.

Mortgage lenders around the country rejoiced, expecting another refinance boom just in time for Christmas. Stories spread about the millions of dollars of loans locked and there was even talk of lenders hiring again.

Homeowners though, don’t seem to care.

In addition to blast emailing everyone in my database with what I thought was great news, I personally called over 70 clients that had a rate and loan amount where it could make sense for them to refinance. Surprisingly, I seemed to be the only one excited about this opportunity. Most clients didn’t seem to be interested for various reasons – too busy getting ready for Christmas, savings not enough, too much paperwork to deal with, and the best one, “I think rates will go lower”. Several of my associates in the industry I talked to got the same feedback.

I’ve been thinking about these responses for a couple days, wondering why there hasn’t been more interest in refinancing. In years past, a drop in rates like this would’ve had my phone ringing nonstop. With the large number of lenders out of business and the corresponding dramatic drop in loan originators, one would think the “survivors” would be swamped.

Me thinks homeowners are a lot more cautious these days, which is a good thing. They’re not willing to just refinance for the sake of refinancing or to convert home equity into dollars to spend. Too many have been burned by mortgage crooks or overspent and are worried about losing their homes.

There’s also the fact that a significant percentage of homeowners with mortgages are upside in their homes.

As I’ve written about in the past, it’s estimated almost 25% of homeowners nationwide are upside down in their homes. Nevada leads the nation at almost 53%. Here in Michigan, the number is almost 47%. FHA & VA loans already offer the option of refinancing without needing an appraisal. On December 10th, word leaked out that the government was considering making the same option available for conforming mortgages.

If that comes to pass, I wonder if it would make a difference with homeowners and increase their interest in refinancing?

Then there’s also the issue of interest rates. There are an abundance of news stories from Wall Street & Washington D.C. about how low interest rates may go. One homeowner referred to me stated he wanted to wait to refinance and time the market so he could get the lowest rate. I wonder how that strategy has worked for him in the stock market?

Don’t be greedy. Besides the odds being against you in trying to time the market, there are several other possibilities that could work against you: your home value could fall below that needed to refinance or enough to require PMI, mortgage rules could change again for the negative, you could lose your job, your credit could get damaged or your neighbor’s foreclosure could drop your home’s value.

Contact me to discuss refinancing. If you’ve dealt with me in the past, you know I take pride in only refinancing when it makes financial sense. Also, please refer your family and friends to me that have financing questions or are looking to buy.

Have a great & safe Holiday Season.

The Great American Housing Challenge

What can be done to stop foreclosures and the resulting drop in housing values?


December 13, 2008 -- BLOOMFIELD, MI – Mortgage rates dipped this past week to 40 year lows and although many homeowners would like to refinance and lower their mortgage payments, a significant portion cannot due to being upside down in their homes.

Nationally, as of October, almost 25% of financed properties have less than 5% equity in them or are upside down. Nevada leads the nation at almost 53%, followed by Michigan at almost 47%. Refinancing to lower mortgage payments will be difficult for many homeowners as they would have to bring money to the closing that they probably don’t have.

The government’s efforts in creating programs to help homeowners, have so far failed to significantly slow the deluge of foreclosures.

FHA Secure, designed to help homeowners refinance out of subprime ARM’s, has reported questionable result numbers according to the New York Times. In fact, the definition of the program was changed to pump up the program’s numbers.

FHA’s Hope for Homeowners has also generated dismal results. A 47 page list of participating lenders, updated by HUD December 12th, doesn’t have any of the top ten lenders in the country on it. These lenders account of almost 70% of the mortgage market, if they’re not on the list, consider the program a failure.

On November 11th, the government announced an initiative for lenders to modify mortgages held by FNMA & FHLMC. An $800 per loan incentive was even offered. This program was so well received by lenders that there’s now talk about tying the receipt of federal bailout funds to participation in the initiative.

So, what would be a better solution to help keep people in their homes and seriously slow foreclosures? It’s all about affordable monthly payments. So, how about doing away with appraisals altogether on refinance transactions that don’t pull any cash out of a property and lower the homeowner’s mortgage payment?

Through ownership of FNMA/FHLMC/FHA/VA the government already effectively owns over half the residential mortgages in the U.S. As such, we’ve got nothing to lose by ignoring appraised values. We can only gain by lowering monthly payments to make it more affordable for homeowners to stay in their homes and avoid foreclosure.

This solution also avoids the issues of trying to force lenders into doing loan modifications and the investor lawsuits associated with those same modifications.

Anyone have a better idea?

Santa, all I want for Christmas is a 4.5% Mortgage Rate

Homeowners get excited about a Holiday rumor.
Even IF it somehow stuffs our stockings, will it just be a lump of coal?

December 6, 2008 -- BLOOMFIELD, MI – On Wednesday, December 3rd, beleaguered homeowners thought Santa really did exist and they were getting an early Christmas present. A rumor hit the media that the government was going to lower mortgage rates to 4.5% to help people stay in their homes and slow foreclosures. CNN picked up the rumor CNN Article.

On Thursday, emailed stories were flying around the internet and phones at lenders started ringing off the hook. The Wall Street Journal picked up the story WSJ Article.

By Friday, TIME Magazine had the story on their internet site TIME Article. The rumor had evolved into only applying to mortgages used to purchase a home.

The serious coverage and how fast the rumor spread, shows that a solution to the housing crisis is near the top of everyone’s Christmas Wish List this year.

How much relief would such a rate drop give a homebuyer? As the graph here show, a 1% rate drop on a $200k mortgage would save $122/month. A 2% drop would double that amount.

Experts are all over the board on how many more homes would sell if this rate was available, if the increase in sales would be enough to prop up home values and slow foreclosures.

Of more immediate concern is how likely the rumor is to become reality? To do so, the government could just set FNMA/FHLMC rates at 4.5%, something they can do now that they own the two. These would lead to issues though, of either the government owning individual mortgage or having to sell the mortgages on Wall Street at a loss. The government’s other option would be to buy all the mortgage-backed securities it can to drive market yields, and hence rates, down.

Either way, the government ends up subsidizing or owning mortgages. Can you say, “Socialism”? How about, “Communism”?

What should a homebuyer or homeowner do? Well rates dropped last week and although they’ve given some of that drop back this week, they are lower than they’ve been all year. The dip last week was short-lived, but another may be coming. Borrowers need to get a mortgage application in NOW to be ready to lock at a moment’s notice!

If Santa does stuff our stockings with a 4.5% rate, borrowers can always refinance again.