A few weeks ago Home Account announced it’s long-term relationship with Jack M Guttentag, The Mortgage Professor and the appointment of The Professor to our Board of Directors.  The Professor is America’s most widely read and followed independent publisher of mortgage related content.

As a result on this exciting partnership, the Home Account Blog is no longer being actively published by Home Account staff as The Professor has become the new voice of Home Account.

Over the next few weeks, this Blog will start to appear as a post within The Professors Library.  It is there where The Professor’s weekly updates, posts, answers and articles will appear.  Complementing The Professor, Home Account members will also be able to access third party mortgage-related news, feeds from other reputable mortgage experts and occasional updates from others on Home Account’s staff on changes and opportunities we all are seeing in the mortgage marketplace.

The Home Account Team

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Is the recession over?  Well the HOUSING recession, which is what matters to us at Home-Account, definitely isn’t over.  It would be easy to argue that the general recession isn’t over, either, but who wants to be a party-pooper?

In terms of the housing market, though, we are probably a year or more from being in the clear.  What matters aren’t just rates and approvals but the rebuilding of a healthy and profitable mortgage industry and that hasn’t happened yet.  Mortgage

losses for the banking industry should continue to run at high levels for an extended period of time. Third-quarter loan losses on mortgages should be higher than in the first and second quarters. Non-performing residential mortgage loans will continue to build.

Economic data, while somewhat more encouraging lately, is far from definitively turning the corner. We are currently in the seasonally strong period for home prices and this may be helping the most recent data more than many experts would like to admit.

Housing affordability has improved markedly for all homebuyers, but real mortgage rates remain high.

Eighteen percent of mortgage defaults in 4Q2008 were from strategic defaulters, (those who could pay but were so underwater they decided not to pay). Others estimate the current number is 26 percent. This is alarming in light of estimates that 30 percent of all homeowners will be underwater within 12 months according to Zillow.com.

Foreclosures hit another record high in June — 1.5 million homes were foreclosed on. The rise in foreclosures, pre-foreclosures and real estate owned by banks presents a huge headwind for home prices.

As Yogi Berra said, “It ain’t over ‘til it’s over.”

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Mortgage rates were up a little last week, according to Freddie Mac, and house prices seem to be firming a bit according to the Case-Schiller figures for May, which is the most recent month for that housing index.  The Obama Administration is starting to cautiously talk about the recession slowing and maybe even ending later this year.  Does this recovery extend to the housing and mortgage markets. too?

No.

Fewer than half of all mortgage applications are closing.  Fewer than half of the projected four million mortgage modifications will actually happen. That means there are two million or more foreclosures yet to come — an incredible downward pressure on home prices for another 6-12 months.  Case-Schiller futures trading points to a housing low sometime in 2010, which is at least earlier than it appeared to be six months ago, but still not soon enough to validate the Obama optimism, which feels a bit like whistling in the dark.

And all the while mortgages become harder and harder to get.  New appraiser rules are pushing-down appraisal values.  This may be perfectly proper, but it will hurt loan closings.  New mortgage broker rules applied this week need clarification but will generally make loans more, not less, expensive, further driving-down closures.  Loan fees are higher, not lower.

All signs point to a need for further economic stimulus, maybe this time aimed at the people who actually need it (and have been paying for it all along) — American home owners.  We’ll see.

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Mortgage rates eased slightly higher last week after being down the previous three.  We’ll see this brownian motion in the future, too.  From a policy standpoint, both the government and industry will be grappling this week with the implications of a recent Government Accountability Office report on mortgage modifications and the blow-back from new Fed rules for mortgage brokers.

The GAO report, which came out last Thursday, says what we at Home-Account stated two months ago — that the Obama Administration has no hope of achieving even half of the five million modified mortgages it has been talking about.  The rules took too long to put in place, loan servicers have taken too long to ramp-up to do modifications, and on some level the banks don’t appear to want it at all, even though modifications are clearly in their financial interest compared to the cost of foreclosures.  The upshot that conspicuously ISN’T in the GAO report is that this means an inevitable second spike of foreclosures in the months ahead, further delaying any national housing recovery.

The new Fed rules for brokers are covered in a blog post here at Home-Account, but suffice it to say the Fed is entering new regulatory territory and is unlikely to get the positive results it is seeking.  Where they are seeking greater transparency what the Fed is likely to get are marginally higher mortgage costs for consumers and an overall lower percentage of mortgage applications actually closing.  Great.

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The Federal Reserve last week proposed new rules to go in effect this week that are intended to curb certain abuses of mortgage brokers by limiting broker compensation and increasing transparency in the entire mortgage process.  But as well meaning as the Fed may be, these changes will hurt brokers, won’t homeowners very much, if at all, and may lead to a reduction of competition and therefore higher mortgage costs.

The basic idea behind the new rules is that mortgages and the mortgage process are complex and brokers can take advantage of this to make more profit from the homeowner than originally expected.  So the new rules take two basic actions: 1) they give homeowners three days, instead of the current one day, to look over the final paperwork before closing the loan; and, 2) they require that the final closing documents list all costs within a slim percentage of the original Good Faith Estimate.  Final costs can be LOWER than expected under the new rules, but they aren’t supposed to be HIGHER, thus keeping unscrupulous brokers from shifting unaware homeowners into a different mortgage that makes more money for the broker.  No bait and switch.

While this all looks fine on the surface, it shows a naive lack of understanding of the mortgage business on the part of the Federal Reserve which, after all, hasn’t traditionally touched this sector.

The first problem with these new rules is the likely effect they will have on mortgage rate locks.  When a homeowner “locks” a rate it is typically for up to 30 days, though often less.  If the loan doesn’t close by the time the lock expires, that rate is gone.  Giving homeowners three days instead of one to read the paperwork inserts an almost automatic two day wait in the process without an accompanying two day extension of the lock.  This will increase, perhaps dramatically, the percentage of mortgages that fail to close.  Remember that at this time most mortgages DON’T close (only about 35 percent of loans actually close) and this process will make the condition even worse.

Those who are determined to buy or refinance a home may well be forced by these new rules into multiple cascading Good Faith Estimates that will just increase the complexity, overhead, and cost of their eventual mortgage.

The answer probably isn’t to make the paperwork examination process shorter, however, but to extend the lock, though the Fed is reluctant to do that because of possible financial implications for the lender — implications that would again make mortgages more, not less, expensive.

Extending the process by another two days also makes it more difficult to fairly calculate the Annual Percentage Rate for the loan — that actual cost of borrowing that takes into account all the tiny details including the cost of carrying the loan for those extra two days.  The result of this mandated uncertainty is that APR estimates will tend to go up and loans will look less attractive than they really are.

This latter effect is an artifact of the new rule that penalizes brokers for setting estimated closing costs too low but doesn’t penalize them for setting them too high.  So the result will be estimate inflation when it comes to those closing costs.  Where the broker thinks the appraisal might cost $350 they’ll put $400 just to be safe.  Where the interest payments to carry the loan until the first payment might be $700, maybe $800 or $850 will be used.  And while this seems harmless it isn’t in two respects: 1) inflated numbers tend to be self-justifying (final numbers will rise over time to meet the projected closing budgets), and; 2) all lenders aren’t equally subject to these new rules, as I explain below.  The competitive environment suggests that lenders not required to release as much information under the new rules will either gain more business as a result or — more likely — will increase their own charges to keep pace, therefore making mortgages cost slightly more overall.

None of this might matter if the new rules were broadly successful in accomplishing their true underlying task, which is showing homeowners just how much the broker is making from the loan.  True it gives a little insight into broker fees (while pushing them slightly higher in the process) but it has no such effect on banks that lend directly like a CitiBank, Wells Fargo, or Bank of America.  Nor does it have any impact on correspondent lenders — mortgage companies who fund loans through their own lines of credit then sell them on again within 24 hours generally to those same big banks.

This is because neither of these other two classes of lenders is required, for example, to disclose the size of their Service Release Premium — what they are paid to hand over the loan to a new servicer.  How much are these other lenders — who represent the major of U.S. mortgages — making on loan origination?  There is no way of knowing.

So prices go up, failed closings go up, the big get bigger, and both brokers and homeowners are squeezed.

This is progress?

cringely Blog closing costs, Federal Reserve, Good Faith Estimate, mortgage brokers, mortgages, rule changes

Mortgage rates were down marginally last week accord to Freddie Mac — the third week in a row for this trend.  What we feel with some certainty is that this week rates aren’t likely to start back up.

Meanwhile the issues of slow refinance activity and glacial mortgage modification rates that we’ve seen for the last several months are being made worse by most of the big banks recently announcing billions in profits.  Remember these are the same banks that were bailed-out with taxpayer money at the same time those taxpayers generally WEREN’T being bailed out.

This may put pressure on the Obama Administration to sweeten the pot for existing mortgage holders, so we expect new initiatives to be announced in the coming weeks.

What those initiatives will include is what we have to figure out by next week.

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Mortgage rates are continuing to trend down this week, driven both by the bad economy and simple inertia.  Its as though the mortgage industry were waiting for a shoe to drop — and so they are.

The Obama Administration has been subtly reworking its mortgage proposals.  Everything that used to be there is still there, but not to the same scale.  The Public Private Investment Partnership, for example is still in operation and the principle firms were announced this week, but the program that was supposed to buy up to $1 trillion in distressed mortgage securities now looks to be limited to around $30 billion, tops, because of specific limits on buyer leverage.  That’s a more than 97 percent decline in what was supposed to be a key program for mortgage industry recovery.

The Administration has to come up with something else — another program to benefit homeowners — but until then the market waits and waits.  How can it do anything else?  If the new answer is forced principle reductions that’s a HUGE blow the owners of mortgage securities.  Or will Obama have the nerve to even take that path?

Nobody knows.  And so we wait.

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One casualty of the mortgage crisis that we’ve covered here before is the jumbo mortgage — loans over $417,000 in some jurisdictions and over $729,000 in others.  If you are (or were) a millionaire with a big house and a big mortgage, chances are it was a jumbo.  In the mortgage bubble days jumbos generally carried a half-percent interest rate premium over conventional (non-jumbo) loans. Then all heck broke loose and jumbos disappeared entirely only to reappear recently, though after a somewhat different fashion.

Lenders are leaping into the jumbo mortgage business and offering aggressive rates — easily as aggressive as in the bubble days in terms of rate premiums.  But there’s a catch.  The catch is that jumbo mortgages today are a lot harder to qualify for than they used to be.

Want a jumbo loan?  Then be ready to make a 30-40 percent down payment on your new house.  This immediately eliminates refinancing most of the older jumbo loans in California, for example, where more than half of the mortgages were already of jumbo size.  If your jumbo mortgage is underwater don’t expect to be able to refinance — or even to apply for a mortgage modification, since the Obama plan, for example, doesn’t even cover jumbos.

The reason lenders are jumping into jumbo mortgages is because under these terms it is a great business.  Wall Street still won’t touch jumbos for securitization, but that doesn’t matter because the banks are tending to hold these loans in their own portfolios.  And for good reasons: 1) the lenders have plenty of equity down so the properties are worth more than the loans against them; 2) it costs little more to foreclose on a jumbo than on a conventional loan so for the lender the downside is the same while the upside is much larger, and; 3) under current Fed policy the banks are making these 6-percent jumbos with 0.25-percent money — a fantastic spread by historical standards.

So welcome back jumbo.  Too bad most of us can’t qualify.

cringely Blog banks, jumbo mortgages, mortgage crisis, mortgage rates, mortgages

The Office of the Controller of Currency released some interesting information last week about mortgage modifications and foreclosures.  It seems that modifications, which were supposed to be increasing in number under the Obama Administration’s Making Homes Affordable plan, have actually been dropping since February.  Fewer mortgage holders have been getting mortgage modifications each month and — if that isn’t a dreary enough fact — the overall numbers are pitiful, far less than the millions projected by President Obama.

So the federal mortgage modification program is, in a word, a failure.

Meanwhile, foreclosures continue to rise, but last week brought sobering news on that front, too: the average foreclosure loses the lender 63 percent of the money they have lent on the property.  This is a testament both to the giddy levels of debt homeowners were taken to before the mortgage bubble burst AND to the obvious fact that lenders are losing a ton of money on all those foreclosures.  And right now, according to HUD, 8.9 percent of U.S. mortgages or more than four million mortgages with a notional value of $892 billion are in foreclosure.  If the loss trend for lenders continues, and there is no reason to believe it won’t, that means they face probable losses of more than $560 billion.

This is terrible news, of course, but in a season of terrible news it actually presents an almost humorous paradox, because the Obama (and previously the Bush) Administration doesn’t seem to have met a banker it didn’t like, which suggests that there will be yet another bailout of sorts for the lenders.  But this time around that can only be accomplished, ironically, by doing something for the borrowers, too.

We expect a new Obama program shortly that will somehow reset many mortgages in foreclosure through the simple expedient of lopping some large amount off the principles of those mortgages.  This is an impossible task, of course, because it will simultaneously alienate all the mortgage holders who AREN’T in foreclosure.

Look for such a new program to appear in a few days, with an extra spin cycle thrown in for good measure.

What then?  We haven’t a clue, but it should be interesting to watch.

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“I’m from the government and I am here to help,” those are words that cause varying degrees of alarm in most Americans.  Now the Obama Administration wants banks to simplify their many credit products including mortgages and credit cards and — this time at least — they may actually be here to help.  But the lenders hate it, of course, and are working hard to oppose any changes to the current system that got us in our present mess.

In the eras of our fathers and grandfathers people bought houses, got mortgages, paid those mortgages off and sometimes had a ceremony where they burned the mortgage document, itself.  Today, however, we are in an era of continuous debt.  People buy houses, get mortgages, pay some on the mortgage, refinance with a new mortgage (often taking cash out) then the cycle starts all over again.  The only time most modern homeowners are truly out of debt is if they decide to go from being owners to renters, which usually happens late in life.  This transition from paying-off our mortgages to not paying-off our mortgages isn’t something invented by consumers but by lenders who realized keeping us in as much debt as possible for as long as possible was good for profits — very good.  But it’s not so good for homeowners.

The Obama Administration is trying to force product simplification on the banks.  This means simpler loan and credit agreements written in plain English and the elimination of many exotic loans like 100 percent financing and interest-only.  Unfortunately for the banks, these products tend to have higher profit margins, especially as consumers fall behind and are hit with penalties and punitive rates.  Eliminating junk and deceptive credit products will eliminate a lot of bank profit and the bankers don’t like that.

There’s an interesting cycle here.  Banking used to be a pretty mundane industry with relatively low profit margins and accompanying lower rates of pay for bank executives.  Then came bank deregulation, exotic loans, booming bank profits, and huge annual bonuses — all paid for by American homeowners who were, frankly, pretty dumb about their finances.

So to save us from ourselves the Obama Administration wants to force simplification and — frankly — common sense on the lending industry.  It’s a whole new take on Truth in Lending. That ought to be good, right?  Not if you are a bank president expecting to give yourself a multi-million dollar  year-end bonus.  So there is an inherent conflict here that will be played-out in the months to come.  What Obama is trying to do is clearly the right thing, but it will be an uphill battle against very entrenched special interests with a lot of money to throw at the fight.

It is very doubtful that Obama will win and that’s a shame because the longer term implications here should be very troubling to everyone — even to the bankers.

cringely Blog banks, financial crisis, mortgage crisis, Obama Administration