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

“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

Take a look at the chart, above, which comes courtesy of the Federal Reserve.  It makes the point that private label mortgages, which are mortgages securitized by Wall Street firms, mainly investment banks, are responsible for most of the mortgage mess we are in as a nation.  There is a lot to understand here and it is particularly damning if examined closely because it shows Wall Street to be at best incompetent and at worst criminal.

All of these organizations and organization types do the same thing — they buy or fund mortgages then package thousands of those mortgages together into securities they sell on the open market.  If the quality of every security was the same then the percentage of bad mortgages would exactly match the percentage market share for each player.  Yet that is far from the case.

Let’s do some numbers:

Organization        Mortgages (millions)          Troubled (100,000)              % Troubled

Banks/Thrifts              8                                            397                            4.9

Fannie Mae                18                                            444                            2.4

Freddie Mac               13                                            232                            1.7

Ginnie Mae                   6                                            378                           6.3

Private Label                8                                           1734                         21.6

All of these organizations perform similar functions, all employ the same staff functions, all buy, for the most part, from the same pool of available mortgages, except of course there are varying requirements for each organization like the maximum loan, minimum credit score, etc.  Yet the variation from best to worst is as high as 10-to-1.  How can that be?

From a strictly statistical standpoint it CAN’T be.  In theory the population of mortgages, like the population of homeowners, should be represented by a normal (bell shaped) curve, with the bad mortgages taking up a small section on the left side of that curve.  It should be a small section because, since these mortgage pools are designed by statisticians, in order to be statistically acceptable the risk must generally be within two standard deviation from the norm.

Here’s how it SHOULD look:

About 2.15 percent of mortgages are expected to go bad, which means that some of the government-backed and bank/thrift mortgages were a little better and some were a little worse, but they are all clustered not too far from that 2.15 percent number, which is as it should be.  And remember this is during an unprecedented world financial melt-down.

Then ther eare the private-label numbers, which are precisely TEN TIMES worse than expected.  Statistically that’s crazy, but NOT crazy if the population of mortgage holders isn’t normal.  fir example, if the population included a large number of people who had no intention to actually make their mortgage payments, which seems to be the case here.

Remember that these private label numbers include those from all Wall Street firms, including — presumably — some that weren’t intending to be crooks.  So the bad numbers within these numbers are actually even worse — far worse.

What’s particularly damning about these data is that the non-private label numbers are so good, yet some of those government programs DON’T EVEN TAKE CREDIT SCORES INTO ACCOUNT.

One particular irony here is the notion that the Clinton Administration, forcing an end to blue-lining and encouraging lenders to make more lower-income mortgages, exacerbated the mortgage crisis.  Some people claim this policy change is the entire basis of the current problem.  Then why isn’t it reflected in the bank/thrift and various Federal program numbers?  Because those people are wrong and theiur claim is simply a ruse.

What these data say about the private label (Wall Street) mortgage securities is that there was systemic fraud.  Wall Street would like to pin that fraud on homeowners, but itis so pervasive that it really has to be more properly pinned in the statisticians who allowed it to happen and on their bosses who ORDERED it to happen.  These aren’t just bad decisions, they are statitically impossible with a normal population.  These are CRIMINAL acts costing billions of dollars and damaging the nation as a whole.  Yet who is going to jail for it?

Nobody so far.

cringely Blog banks, fannie mae, FHA, foreclosure, foreclosures, freddie mac, mortgage crisis

The Obama Administration’s efforts to help homeowners stay in their homes and avoid foreclosure by modifying mortgages have already failed.  One would hope the Administration is smart enough to know that.  Maybe they are just hoping we wouldn’t notice, but we did.

Federal agencies have announced a variety of programs to discourage foreclosures and encourage mortgage modifications.  Some of these programs are for people who are current on their mortgages, some for people who are behind, some for people who have equity, and some for people who have none.  None have these programs has been a success, nor will they be successes in any time frame that is useful to the economy.

Treasury Secretary Geithner promised $75-$100 billion to help homeowners primarily through subsidies to lenders, NOT homeowners, but the reality is most of that money won’t be spent.  After throwing more than $1 trillion at Wall Street, perhaps $10 billion will eventually help homeowners — a 100-to-1 ratio that says loud and clear how disconnected both Republican and Democrat politicians are from the people who employ them.

This is strong language, I know, but I can prove it.  There is a lot of dubious and untested math being thrown about lately in press releases from the FDIC and FHA, but one fact that keeps being trumpeted is that so far 55,000 homeowners have been “helped” with mortgage modification offers (not actual modified mortgages) compared to the four million homeowners that these agencies said are qualified for such help.  That’s about 1.5 percent of the target achieved in the almost four months these modification programs have been enabled.  Having helped only 55,000 out of four million eligible homeowners in four months it will take at least two years (best case scenario) to reach the other 3,945,000. By then nearly all of them will have lost their homes.

About 45 years ago an old professor of mine, Ev Rogers, first noticed that cultural innovations from telephones and indoor plumbing to home computers and, yes, mortgage modifications, are adopted by populations at a rate that inevitably follows an S-shaped curve.  Innovations can’t happen until they are enabled by an invention or, in this case, legislation.  That’s when the clock starts ticking.

It takes awhile for anything to happen at all but eventually there are “pioneers” followed by “early adopters” and finally — if it is ever going to happen — the adoption rate hits an inflection point, a knee, and goes viral with a sudden and enthusiastic geometric growth phase called the “early majority,” which is where we’d get to the first half of those four million at-risk mortgages.  The problem is that we are 120 days into this process, are nowhere even close to an inflection point, and the mortgages in question are already at least 120 days late.

It’s too late.  Even if the inflection point is reached tomorrow, most of those homes are lost.

cringely Blog FHA, foreclosure, Geithner, mortgage crisis, mortgage modification, Obama Administration, TARP

Yogi Berra said, 'It's not over 'til it's over,' but there's a hint at least in recent housing numbers to suggest we'll have a real bottom to the real estate market later this year.

It all comes down to supply and demand, with supply being the number of new and existing homes for sale and demand being the number of sales actually completed. Families are started even in a recession so housing units are continually being absorbed. Unfortunately the housing bubble created too many new housing units causing the market to collapse. The question this week is when will that collapse end, housing prices will firm, and existing homeowners can start to recover from their underwater mortgages? Based on housing inventory numbers from the National Association of Realtors we have another six months or so to go.

That's how long it will take, at current building and sales levels for the inexorable population increase to absorb enough excess housing inventories to return us to historic norms. What even allows us to get back to those norms is the steep decline in builders of new homes, many of which are no longer in business.

The number of new and existing houses on the market historically is enough to last 3-4 months, which is to say at current sales rates without replacing any of those homes all would be sold in 3-4 months. But right now housing inventories stand at 9.7 months. With only a marginal influx of new homes the difference between 9.7 and 3.5 (6.2 months) is the best predictor of when the market will hit BOTTOM, after which prices will finally start to increase on a national basis.

Does this mean yu should wait six months to buy a house? NO! It means this is an ideal time to be shopping for a house because it is a buyer's market. But the perfect house is hard to find. When you find yours, BUY IT!

cringely Pulse housing prices, mortgage crisis

Two months after Treasury Secretary Timothy Geithner began talking about new programs to help holders of federally insured mortgages who have lost all their equity in the housing bust and are now under water, rules for the new programs are finally starting to appear. But like most of the other federal homeowner initiatives described to date, early details suggest the Making Home Affordable Program will be of little practical help to those with low-to-negative equity and less-then-perfect credit scores.

The new programs for mortgage refinancing and modification sound ideal on paper, often requiring no mortgage insurance and allowing loan-to-value ratios as high as 105 percent and requiring no specific credit rating at all as long as homeowners have remained current to date on their mortgage payments. But the devil is in the details and looking into the conforming rate sheets just published by major lenders we see new risk-based pricing adjustments (generally called “loan level pricing adjustments” in the mortgage industry) that can add up to four basis points to the mortgage principal for homeowners with LTV's above 95 percent and credit scores below 620 – the very heart of the homeowner group in the greatest trouble.

While the government claims the programs can help 7-9 million homeowners, that doesn't seem likely under the current rules.

On top of other pricing adjustments for property type and loan amount these new programs can add thousands to the loan balances of homeowners with low equity and less-than-perfect credit, with the increased costs often enough to price many homeowners out of the programs entirely.

A homeowner trying to refinance a loan with a 100 percent LTV and poor credit, for example, might easily see the required risk-based points take that loan beyond the 105 percent LTV limit. While it is possible to take the points from savings or investments rather than roll them into the loan, most homeowners in this group don't have such savings or investments available.

While the new programs are good for homeowners with credit ratings above 680 and LTVs in the 80s or lower, this does not describe most of today's conforming mortgage holders who truly need a refi or modification.

cringely Blog, Uncategorized fannie mae, freddie mac, Geithner, Making Home Affordable Program, mortgage crisis, mortgage modification, refinance

Jumbo mortgages, those in excess of $417,000 or $729,000 depending on the market, practically disappeared with the burst of the housing bubble, but now they are coming back with major lenders like Bank of America and ING putting some real effort into the segment. But that doesn't mean people are actually buying homes that require jumbo mortgages, according to lenders. There is a jumbo REFI boom of sorts, but nobody seems to be buying big houses that aren't short sales or foreclosures.

Jumbo mortgages have stringent requirements, including hefty down payments. Buyers are still waiting to see if the real estate market has bottomed out, and few people these days want to commit to a big down payment if it means selling securities that are already down..

Rates for 30-year fixed-rate jumbo mortgages have dropped from an average of 7.28 percent a year ago to 6.44 percent last week, the lowest since April 2007, according to HSH Associates, which tracks consumer loan information. Rates for smaller 30-year mortgages were averaging 4.97 percent last week.

Jumbo mortgages are those too large to be backed by the federal government through Fannie Mae and Freddie Mac. Mortgages that are under those limits — $417,000 or $729,000 depending n the market — are so-called “conforming” loans.

Jumbo rates are also higher because the secondary market — where mortgages are sold to generate new funds — has dried up. Now, lenders need to keep loans on their own books, assuming the risk themselves.

Keith Gumbinger of HSH, which is based in New Jersey, said the difference between conforming and jumbo mortgage rates used to run around one-fourth of a percentage point, or 25 basis points. “So if a conforming rate was 5 percent, a jumbo would be around 5 1/4. Right now, that gap is extraordinarily wide. Last week, it was exactly 150 basis points.”

The Federal Reserve's influence to lower conforming mortgage rates has produced the larger gap, he said. “The gap remains extraordinarily wide, not because jumbos aren't doing their part. They are. But because other prices have been artificially influenced lower.”

He advised anyone looking for a mortgage or to refinance to shop around more than ever. “Some lenders are in a better position to make you a competitive loan than others. You've got to go out and scour around your marketplace. Shop it effectively.”

Some large lenders, including Bank of America, are starting to promote jumbo rates below 6 percent.

In time the combination of falling home prices and lower mortgage rates will improve the affordability of higher-end properties and sales will start to rise. The concern about waiting for the bottom is the only way you know you've hit bottom is when it is on the way up.

cringely Lender Updates, News, Uncategorized Bank of America, banks, housing prices, jumbo mortgages, LendersME, mortgage crisis, refinance

One of the lessons of the current mortgage crisis has been that home ownership probably isnt for everyone. At Home-Account we work tirelessly for the interests of homeowners and would-be homeowners, but that doesn't mean we've never seen a buyer or a mortgage we didn't like. Our objective is home OWNERSHIP – actually owning your home outright. And toward that goal we try to encourage our subscribers to work toward legitimate loan qualification, which means buying a home you can actually pay for. The recent mortgage bubble, in contrast, was often based on lenders giving mortgages to people who shouldn't have qualified and honestly couldn't afford the houses they were buying. The fact that the system encouraged that was because lenders were paid fees for closing loans and loans were securitized in such a way that the inevitable default was someone else's problem. Though it turned out, of course, to be a problem for us all.

The goal of responsible home ownership then requires us to point out that there is a move afoot to return, somewhat, to the bad old days of subprime mortgages. Specifically there is a bill in Congress – H.R. 600 – which will allow seller-funded down payments for FHA mortgages. Couched as allowing friends or relatives or foundations or charities to GIVE FHA mortgage applicants the 3.5 percent minimum FHA down payment, in practical terms it allows the seller to do so, too.

Under H.R 600 it is possible under certain circumstances to get an FHA mortgage for no money down. This technique has been used before and it usually comes down to the purchase price being inflated by the amount of the down payment, which is then transferred from the seller to the buyer. This is not good.

The point of having a down payment is for buyers to be at risk a bit – to have some skin in the game — which ought to encourage them to be reliable mortgage payers. That's our goal here at Home-Account, too – to help our subscribers to be reliable mortgage payers. But giving sellers a way to finance the down payment is for the most part a return to the slippery slope of subprime lending and will hurt us all in the long run.

H.R. 600, as it is presently written, is a bad bill and should be defeated.

cringely Pulse FHA, mortgage crisis, Pulse

The terrible California housing market suddenly isn't so terrible after all, depending on how you look at it.  Home resales have soared, which is good.  Home prices have plunged – a natural result of foreclosures and short sales.  In other words, the nation's largest housing market is deleveraging itself quite handily with little government help.  Not that the government isn't involved, having already taken action to make FHA, Fannie Mae, and Freddie Mac loans readily available to buyers who qualify under new and more sustainable standards.

So what more should the government do?  U.S. Treasury Secretary Timothy Geithner's plan to help homeowners is months from being useful.  Maybe he should just forget it.

The best thing Congress could do at this point for the housing market might be to help mortage modifications by giving some protection to loan servicers, which currently do not have a liability shield against investors.  Congress could pass a law protecting mortgage security servicers from lawsuits, giving them the freedom to negotiate new terms with borrowers, allowing more people to keep their homes

cringely Blog Blog, financial crisis, foreclosure, housing prices, mortgage crisis, mortgage modification

New mortgage-backed securities issued by non-governmetn operations plunged 68.3 percent in the first quarter of 2009 from the same period a year earlier as investors fled the market leaving the housing market almost entirely with government bond issuers.  Thomson Reuters said U.S. mortgage-backed securities issuance totaled $21.6 billion in the first quarter of 2009, down sharply from $68.2 billion in the same period a year earlier, a drop of 68.3 percent.

Issuance of bonds backed by companies other than Fannie Mae (FNM.P) (FNM.N), Freddie Mac (FRE.P) (FRE.N) and Ginnie Mae has virtually come to a halt as investors refuse to buy securities backed by loans whose payments are not guaranteed.

Bank of America (BAC.N) was the top underwriter of U.S. mortgage-backed securities in the first quarter of 2009, the survey showed.

Bank of America underwrote 13 issues of mortgage-backed bonds totaling $4.9 billion, a 22.7 percent market share.

Barclays Capital, the investment banking arm of UK lender Barclays (BARC.L), ranked second among U.S. MBS underwriters in that quarter, with a 17.6 percent market share. The company underwrote five issues totaling $3.8 billion.

Goldman Sachs & Co (GS.N) was third, with a 14.0 percent share. The firm underwrote five issues worth $3.0 billion.

cringely Government News, News Bank of America, financial crisis, Goldman Sachs, LendersME, mortgage crisis