As 2009 ended the number of default or delinquent mortgages was increasing steadily. This is the seventh straight quarter in which this has occurred. The difference between the last quarter and the six that preceded it is the type of mortgages that are now becoming seriously delinquent. The type I am talking about is prime mortgages. These are given to borrowers with the best credit so you can understand why this would raise some concern.  Almost 70% of all mortgages in the U.S. are prime mortgages.

What bothers me the most about this statistic is that these types of mortgages are the backbone of the housing market.  If they become unstable and begin foreclosing, there is no telling what the damage may be to the American economy.

Luckily, this has not gone unnoticed. The government has provided programs to help borrowers in this situation adjust their mortgages so they do not default. I believe this is a direct result of the Q4 statistics. The real question is whether or not it will make a difference. I believe it can, but it isn’t just going to happen. The only way that the modification programs work is if those who have delinquent mortgages do not default. If Americans choose modification over foreclosure, we should see the housing market recover this year. If the number of delinquencies and subsequent foreclosures continues to increase among prime mortgages, we may be in for another rough year.

Nance Blog

Let’s face facts, the economy is not strong. More Americans are in debt than
ever before. The government is taking steps to help those who are struggling
financially, but they cannot do it alone. It is up to each one of us to take
action before our debt becomes unmanageable.

Today, interest rates are near all time lows. The rates for a fixed
FHA mortgage over a 30 year term are being quoted under 5% for those with
good credit. In the previous era of Freddie Mac and Fannie Mae, home owners
were unable to refinance their mortgage and take advantage of the lower
rates. The Making Home Affordable initiative, a breakthrough of the Obama
Administration, has enabled home owners to make this change.

These new low interest rates, however, are not going to be simply handed
out. The government has made it clear that those who have poor credit, many
home equity loans, or other major debt, will not qualify for the best rates.
Also, anyone who has missed a mortgage payment in the last 12 months will
not be able to take full advantage of these rates. This does not mean that
refinancing is still not going to be a good option for you. In my experience
I have learned the importance of research. If you don’t ask, how will you
know if refinancing is right for you? Get your credit score checked and
crunch the numbers. Even a small decrease in monthly payments can make a big
difference in your overall budget.

For those who have been diligent throughout the recent economic downturn,
you are in luck. Some of the best refinancing rates in history are at your
finger tips, check out www.refinance.com.

Nance Blog

When I look in a real estate magazine it is clear that most of the houses on the market today are short sales. As a seller it is important to understand the repercussions that selling your home this way can have.

I am sure that most home owners understand that short sale home selling can hurt your credit score. This is true in most cases. What a lot of potential sellers don’t know, is that it can hurt a lot more than just your credit score if you don’t meet the requirements.

What does it take to be a good short sale candidate, you ask? In short, you must show hardship and an attempt to repay your loan through refinancing or loan modification. Death, illness, and job loss are all good reasons for needing a short sale. Banks today will ask you for receipts, pay stubs, or anything else that proves your situation is dire. The reason for this is that home owners have not been entirely honest. Some have taken advantage of the poor housing market defaulting on their mortgage prematurely to avoid excess hardship.

If you are truly suffering and have tried everything to repay your loan, a short sale can be your breath of fresh air. My own experience has taught me that there is always another option. I know that a lot of Americans are suffering right now and I want you to understand, there is hope. If you have tried everything else and nothing has solved your financial problems, talk to your lender about a short sale. It may not only be the best option for you, but for them as well.

Nance Blog

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

cringely Uncategorized

Among the more interesting of the Federal Reserve proposals for amending the Truth in Lending Act (TILA) is one to expand the disclosures required at application. The purpose is to encourage borrowers to shop before they commit themselves.

The major new disclosure is one called “Key Questions to Ask About Your Mortgage”. The heading atop the list of key questions states “The only way to make sure you get the best possible loan terms is to talk to several lenders: SHOP, COMPARE, NEGOTIATE”.

This is a great idea, except that the 7 questions posed by the Fed will be answered in the same way by every lender. I will illustrate with answers to the first 3 questions that would work for every lender.

Fed Question: “Can my interest rate increase?”

My Answer: It can if you select an adjustable rate mortgage (ARM).

Fed Question: “Can my monthly payment increase?”

My Answer: It can if you select an ARM, or a fixed-rate mortgage (FRM) with an interest-only option.

Fed Question: “Will my monthly payments reduce my loan balance?”

My Answer: It will unless you select an FRM with an interest-only option, or an ARM with an interest-only option or a negative amortization option, and you take advantage of the option.

I could do the same with the remaining 4 questions. The problem is that the questions apply to mortgage types or options rather than lender operating policies. Since with minor qualifications all lenders offer the same types of mortgages and options, they will all answer the 7 questions in the same way. The answers would be useless to borrowers trying to select among different lenders.

To help borrowers select from among different lenders, the questions must apply to lender operating policies, not to their mortgages. There are important differences in operating policies that borrowers currently have no way of knowing. The following are 7 questions that I would want the answers to if I were selecting a lender.

Q: Do you allow your loan officers (LOs) to charge “overages?’

Comment: I would not want to deal with an LO who has a financial incentive to over-charge me. An overage is a price higher than the price the lender shows on its price sheets, which show the prices the lender will accept. Overages are usually shared with LOs, encouraging them to charge what the traffic will bear. Some lenders do not allow overages, and this disclosure at the point of application will give them the edge they deserve.

Q: Do you have a financial interest in, or a financial arrangement with any of the third parties providing services to your borrowers?

Comment: I would not want to deal with a firm that referred me to title agents or other service providers in which they had a financial interest. Over-charges on third party services are chronic, and lender deals with service providers are a major reason. The RESPA restrictions on payment of referral fees has had no impact but a disclosure requirement would. Note to home purchasers: this is also a good question to ask your Realtor.

Q: Are any of your mortgages (other than HELOCs) simple interest, or convertible into simple interest?

Comment: I would not knowingly take a simple interest mortgage because it accrues interest daily, eliminating the benefit of having a payment grace period. It has never been a required disclosure, and some borrowers have been surprised to find themselves with one. In some cases, borrowers have been converted to simple interest after their loan was sold because their note could be interpreted as permitting it.

Q: What must a borrower do before you will lock the price of their loan,

and will you provide a written lock confirmation?

Comment: I would not deal with a lender that did not have well-defined rules regarding exactly when I was able to lock the price, with confirmation of the lock in writing. Ambiguity that in effect allows the lender to lock when it wants to lock can seriously disadvantage borrowers who have no place else to go..

Q;: What fees must a borrower pay to lock, and under what circumstances are they refundable?

Comment: This is another essential part of a lender’s lock policy.

Q: When you lock the price of a mortgage, do you also lock the total of your fixed-dollar lender fees?

Comment: I would not deal with a lender that did not include all its charges in the lock. Most lenders lock only the rate and points, leaving fixed-dollar fees outside the lock. This practice makes the borrower vulnerable to fee escalation as the loan goes to closing. The Fed recognizes the problem in its reform proposals, but its remedy is to require that the lender raising its fees issue another TIL statement. All that does is give borrowers advance notice that they will be fleeced at closing.

Q: What proportion of your loan officers are certified financial planners?

Comment: Most replies in the short-run will be zero, but this puts the borrower on notice that the LO really isn’t qualified to offer financial advice. In the long-run, it may stimulate lenders to upgrade the quality of LOs.

- By Jack Guttentag

Jack is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania.  Comments and questions can be left at http://www.mtgprofessor.com

Jack Guttentag Pulse

Interest rates were a little lower this week, but only for the relatively small group of prime borrowers who qualify for the best rates. There are no signs yet of any easing in the tough eligibility standards that have resulted from the financial crisis. These standards are unreasonably restrictive, and prevent all too many consumers from purchasing a home or refinancing their current mortgage.

Much of this can be laid at the feet of Fannie Mae and Freddie Mac, who have substantially increased the rate penalty for not being a prime borrower. Anyone with a credit score below 740 pays a risk premium. Want to take cash-out of a refinance, the premium is bigger, and if the house is rented, the premium increases even more.

The private mortgage insurers, attempting to recover some of their losses on defaulted loans, now require a credit score of 680, which is only slightly below the national average. That means that almost half of all borrowers don’t qualify for mortgage insurance, and therefore can’t get a loan without putting 20 percent down.

Yes, life can be unfair, but instead of drowning yourself in self-pity, we recommend you start down the road toward becoming a prime borrower. The chances are very good that low rates for prime borrowers, and low house prices, will continue for some time, so if you can manage to shift yourself into the prime category within the year, the deals will still be there.

That means learning to understand why your credit score is not as good as it should be, and exactly what you need to do to raise it. That takes a little time. It also means understanding why you don’t have the cash needed to buy a house, and how to establish the control over your finances that are needed to accumulate cash. Developing the budgets and savings plans required for this also takes a little time. But you will have a mortgage for a much longer period, and if you are a prime borrower, you will save a ton.

The writer is mortgage lender with over 20 years of experience and one of the founders of www.home-account.com . Comments and questions that require response jack@home-account.com

Jack Guttentag Pulse

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.”

cringely Pulse

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.

cringely Pulse

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.

cringely Pulse

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