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First Tuesday newsletter
President Obama’s plan to fix everybody
Four thousand four hundred forty five words for a brighter tomorrow according to our leader.
THE WHITE HOUSE
Office of the Press Secretary
FOR IMMEDIATE RELEASE
February 1, 2012
FACT SHEET: President Obama’s Plan to Help Responsible Homeowners and Heal the Housing Market
In his State of the Union address, President Obama laid out a Blueprint for an America Built to Last, calling for action to help responsible borrowers and support a housing market recovery. While the government cannot fix the housing market on its own, the President believes that responsible homeowners should not have to sit and wait for the market to hit bottom to get relief when there are measures at hand that can make a meaningful difference, including allowing these homeowners to save thousands of dollars by refinancing at today’s low interest rates. That’s why the President is putting forward a plan that uses the broad range of tools to help homeowners, supporting middle-class families and the economy.
Key Aspects of the President’s Plan
Broad Based Refinancing to Help Responsible Borrowers Save an Average of $3,000 per Year: The President’s plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates, cutting through the red tape that prevents these borrowers from saving hundreds of dollars a month and thousands of dollars a year. This plan, which is paid for by a financial fee so that it does not add a dime to the deficit, will:
Provide access to refinancing for all non-GSE borrowers who are current on their payments and meet a set of simple criteria.
Streamline the refinancing process for all GSE borrowers who are current on their loans.
Give borrowers the chance to rebuild equity through refinancing.
Homeowner Bill of Rights: The President is putting forward a single set of standards to make sure borrowers and lenders play by the same rules, including:
Access to a simple mortgage disclosure form, so borrowers understand the loans they are taking out.
Full disclosure of fees and penalties.
Guidelines to prevent conflicts of interest that end up hurting homeowners.
Support to keep responsible families in their homes and out of foreclosure.
Protection for families against inappropriate foreclosure, including right of appeal.
First Pilot Sale to Transition Foreclosed Property into Rental Housing to Help Stabilize Neighborhoods and Improve Home Prices: The FHFA, in conjunction with Treasury and HUD, is announcing a pilot sale of foreclosed properties to be transitioned into rental housing.
Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for Work:Following the Administration’s lead, major banks and the GSEs are now providing up to 12 months of forbearance to unemployed borrowers.
Pursuing a Joint Investigation into Mortgage Origination and Servicing Abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis under the leadership of federal and state co-chairs.
Rehabilitating Neighborhoods and Reducing Foreclosures:In addition to the steps outlined above, the Administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity, and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild.
Broad Based Refinancing Plan
Millions of homeowners who are current on their mortgages and could benefit from today’s low interest rates face substantial barriers to refinancing through no fault of their own. Sometimes homeowners with good credit and clean payment histories are rejected because their mortgages are underwater. In other cases, they are rejected because the banks are worried that they will be left taking losses, even where Fannie Mae or Freddie Mac insure these new mortgages. In the end, these responsible homeowners are stuck paying higher interest rates, costing them thousands of dollars a year.
To address this challenge, the President worked with housing regulators this fall to take action without Congress to make millions of Americans eligible for lower interest rates. However, there are still millions of responsible Americans who continue to face steep barriers to low-cost, streamlined refinancing. So the President is now calling on Congress to open up opportunities to refinancing for responsible borrowers who are current on their payments.
Under the proposal, borrowers with loans insured by Fannie Mae or Freddie Mac (i.e. GSE-insured loans) will have access to streamlined refinancing through the GSEs. Borrowers with standard non-GSE loans will have access to refinancing through a new program run through the FHA. For responsible borrowers, there will be no more barriers and no more excuses.
Key components of the President’s plan include:
Providing Non-GSE Borrowers Access to Simple, Low-Cost Refinancing: President Obama is calling on Congress to pass legislation to establish a streamlined refinancing program. The refinancing program will be open to all non-GSE borrowers with standard (non-jumbo) loans who have been keeping up with their mortgage payments. The program will be operated through the FHA.
Simple and straightforward eligibility criteria: Any borrower with a loan that is not currently guaranteed by the GSEs can qualify if they meet the following criteria:
They are current on their mortgage: Borrowers will need to have been current on their loan for the past 6 months and have missed no more than one payment in the 6 months prior.
They meet a minimum credit score.Borrowers must have a current FICO score of 580 to be eligible. Approximately 9 in 10 borrowers have a credit score adequate to meet that requirement.
They have a loan that is no larger than the current FHA conforming loan limits in their area: Currently, FHA limits vary geographically with the median area home price – set at $271,050 in lowest cost areas and as high as $729,750 in the highest cost areas
The loan they are refinancing is for a single family, owner-occupied principal residence. This will ensure that the program is focused on responsible homeowners trying to stay in their homes.
Streamlined application process: Borrowers will apply through a streamlined process designed to make it simpler and less expensive for borrowers and lenders to refinance. Borrowers will not be required to submit a new appraisal or tax return. To determine a borrower’s eligibility, a lender need only confirm that the borrower is employed. (Those who are not employed may still be eligible if they meet the other requirements and present limited credit risk. However, a lender will need to perform a full underwriting of these borrowers to determine whether they are a good fit for the program.)
Program parameters to reduce program cost: The President’s plan includes additional steps to reduce program costs, including:
Establishing loan-to-value limits for these loans. The Administration will work with Congress to establish risk-mitigation measures which could include requiring lenders interested in refinancing deeply underwater loans (e.g. greater than 140 LTV) to write down the balance of these loans before they qualify. This would reduce the risk associated with the program and relieve the strain of negative equity on the borrower.
Creating a separate fund for new streamlined refinancing program. This will help the FHA better track and manage the risk involved and ensure that it has no effect on the operation of the existing Mutual Mortgage Insurance (MMI) fund.
EXAMPLE: How Refinancing Can Benefit a Borrower With a Non-GSE Loan
A borrower has a non-GSE mortgage originated in 2005 with a 6 percent rate and an initial balance of $300,000 – resulting in monthly payments of about $1,800.
The outstanding balance is now about $272,000 and the borrower’s home is now worth $225,000, leaving the borrower underwater (with a loan-to-value ratio of about 120%).
Though the borrower has been paying his mortgage on time, he cannot refinance at today’s historically low rates.
Under the President’s legislative plan, the borrower would be eligible to refinance into a 4.25% percent 30-year loan, whichwould reduce monthly payments by about $460 a month.
Refinancing Plan Will Be Fully Paid For By a Portion of Fee on Largest Financial Institutions:The Administration estimates the cost of its refinancing plan will be in the range of $5 to $10 billion, depending on exact parameters and take-up. This cost will be fully offset by using a portion of the President’s proposed Financial Crisis Responsibility Fee, which imposes a fee on the largest financial institutions based on their size and the riskiness of their activities – ensuring that the program does not add a dime to the deficit.
Fully Streamlining Refinancing for All GSE Borrowers:The Administration has worked with the FHFA to streamline the GSEs’ refinancing program for all responsible, current GSE borrowers. The FHFA has made important progress to-date, including eliminating the restriction on allowing deeply underwater borrowers to access refinancing, lowering fees associated with refinancing, and making it easier to access refinancing with lower closing costs.
To build on this progress, the Administration is calling on Congress to enact additional changes that will benefit homeowners and save taxpayers money by reducing the number of defaults on GSE loans. We believe these steps are within the existing authority of the FHFA. However, to date, the GSEs have not acted, so the Administration is calling on Congress to do what is in the taxpayer’s interest, by:
a. Eliminating appraisal costs for all borrowers: Borrowers who happen to live in communities without a significant number of recent home sales often have to get a manual appraisal to determine whether they are eligible for refinancing into a GSE guaranteed loan, even under the HARP program. Under the Administration’s proposal, the GSEs would be directed to use mark-to-market accounting or other alternatives to manual appraisals for any loans for which the loan-to-value cannot be determined with the GSE’s Automated Valuation Model. This will eliminate a significant barrier that will reduce cost and time for borrowers and lenders alike.
b. Increasing competition so borrowers get the best possible deal: Today, lenders looking to compete with the current servicer of a borrower’s loan for that borrower’s refinancing business continue to face barriers to participating in HARP. This lack of competition means higher prices and less favorable terms for the borrower. The President’s legislative plan would direct the GSEs to require the same streamlined underwriting for new servicers as they do for current servicers, leveling the playing field and unlocking competition between banks for borrowers’ business.
c. Extending streamlined refinancing for all GSE borrowers:The President’s plan would extend these steps to streamline refinancing for homeowners to all GSE borrowers. Those who have significant equity in their home – and thus present less credit risk – should benefit fully from all streamlining, including lower fees and fewer barriers. This will allow more borrowers to take advantage of a program that provides streamlined, low-cost access to today’s low interest rates – and make it easier and more automatic for servicers to market and promote this program for all GSE borrowers.
Giving Borrowers the Chance to Rebuild Equity in their Homes Through Refinancing:All underwater borrowers who decide to participate in either HARP or the refinancing program through the FHA outlined above will have a choice: they can take the benefit of the reduced interest rate in the form of lower monthly payments, or they can apply that savings to rebuilding equity in their homes. The latter course, when combined with a shorter loan term of 20 years, will give the majority of underwater borrowers the chance to get back above water within five years, or less.
To encourage borrowers to make the decision to rebuild equity in their homes, we are proposing that the legislation provide for the GSEs and FHA to cover the closing costs of borrowers who chose this option – a benefit averaging about $3,000 per homeowner. To be eligible, a participant in either program must agree to refinance into a loan with a no more than 20 year term with monthly payments roughly equal to those they make under their current loan. For those who agree to these terms, the lender will receive payment for all closing costs directly from the GSEs or the FHA, depending on the entity involved.
EXAMPLE: How Rebuilding Equity Can Benefit a Borrower
A borrower has a 6.5 percent $214,000 30-year mortgage originated in 2006. It now has an outstanding balance of $200,000, but the house is worth $160,000 (a loan-to-value ratio of 125). The monthly payment on this mortgage is $1,350.
While this borrower is responsibly paying her monthly mortgage, she is locked out of refinancing.
By refinancing into a 4.25 percent 30-year mortgage loan, this borrower will reduce her monthly payment by $370. However, after five years her mortgage balance will remain at $182,000.
Under the rebuilding equity program, the borrower would refinance into a 20-year mortgage at 3.75 percent and commit her monthly savings to paying down principal.After five years, her mortgage balance would decline to $152,000, bringing the borrower above water.
If the borrower took this option, the GSEs or FHA would also cover her closing costs – potentially saving her about $3,000.
Streamlined Refinancing for Rural America: The Agriculture Department, which supports mortgage financing for thousands of rural families a year, is taking steps to further streamline its USDA-to-USDA refinancing program. This program is designed to provide those who currently have loans insured by the Department of Agriculture with a low-cost, streamlined process for refinancing into today’s low rates. The Administration is announcing that the Agriculture Department will further streamline this program by eliminating the requirement for a new appraisal, a new credit report and other documentation normally required in a refinancing. To be eligible, a borrower need only demonstrate that he or she has been current on their loan.
Streamlined Refinancing for FHA Borrowers: Like the Agriculture Department, the Federal Housing Authority is taking steps to make it easier for borrowers with loans insured by their agency to obtain access to low-cost, streamlined refinancing. The current FHA-to-FHA streamlined refinance program allows FHA borrowers who are current on their mortgage to refinance into a new FHA-insured loan at today’s lower interest rates without requiring a full re-underwrite of the loan, thereby providing a simple way for borrowers to reduce their mortgage payments.
However, some borrowers who would be eligible for low-cost refinancing through this program are being denied by lenders reticent to make loans that may compromise their status as FHA-approved lenders. To resolve this issue, the FHA is removing these loans from their “Compare Ratio”, the process by which the performance of these lenders is reviewed. This will open the program up to many more families with FHA-insured loans.
Homeowner Bill of Rights
EXAMPLE: How Rebuilding Equity Can Benefit a Borrower:
The Administration believes that the mortgage servicing system is badly broken and would benefit from a single set of strong federal standards As we have learned over the past few years, the nation is not well served by the inconsistent patchwork of standards in place today, which fails to provide the needed support for both homeowners and investors. The Administration believes that there should be one set of rules that borrowers and lenders alike can follow. A fair set of rules will allow lenders to be transparent about options and allow borrowers to meet their responsibilities to understand the terms of their commitments.
The Administration will therefore work closely with regulators, Congress and stakeholders to create a more robust and comprehensive set of rules that better serves borrowers, investors, and the overall housing market. These rules will be driven by the following set of core principles:
Simple, Easy to Understand Mortgage Forms:Every prospective homeowner should have access to clear, straightforward forms that help inform rather than confuse them when making what is for most families their most consequential financial purchase. To help fulfill this objective, the Consumer Financial Protection Bureau (CFPB) is in the process of developing a simple mortgage disclosure form to be used in all home loans, replacing overlapping and complex forms that include hidden clauses and opaque terms that families cannot understand.
No Hidden Fees and Penalties:Servicers must disclose to homeowners all known fees and penalties in a timely manner and in understandable language, with any changes disclosed before they go into effect.
No Conflicts of Interest:Servicers and investors must implement standards that minimize conflicts of interest and facilitate coordination and communication, including those between multiple investors and junior lien holders, such that loss mitigation efforts are not hindered for borrowers.
Assistance For At-Risk Homeowners:
Early Intervention: Servicers must make reasonable efforts to contact every homeowner who has either demonstrated hardship or fallen delinquent and provide them with a comprehensive set of options to help them avoid foreclosure. Every such homeowner must be given a reasonable time to apply for a modification.
Continuity of Contact:Servicers must provide all homeowners who have requested assistance or fallen delinquent on their mortgage with access to a customer service employee with 1) a complete record of previous communications with that homeowner; 2) access to all documentation and payments submitted by the homeowner; and 3) access to personnel with decision-making authority on loss mitigation options.
on Time and Options to Avoid Foreclosure: Servicers must not initiate a foreclosure action unless they are unable to establish contact with the homeowner after reasonable efforts, or the homeowner has shown a clear inability or lack of interest in pursuing alternatives to foreclosure. Any foreclosure action already under way must stop prior to sale once the servicer has received the required documentation and cannot be restarted unless and until the homeowner fails to complete an application for a modification within a reasonable period, their application for a modification has been denied or the homeowner fails to comply with the terms of the modification received.
Safeguards Against Inappropriate Foreclosure
Right of Appeal: Servicers must explain to all homeowners any decision to take action based on a failure by the homeowner to meet their payment obligations and provide a reasonable opportunity to appeal that decision in a formal review process.
Certification of Proper Process:Prior to a foreclosure sale, servicers must certify in writing to the foreclosure attorney or trustee that appropriate loss mitigation alternatives have been considered and that proceeding to foreclosure sale is consistent with applicable law. A copy of this certification must be provided to the borrower.
The agencies of the executive branch with oversight or other authority over servicing practices –the FHA, the USDA, the VA, and Treasury, through the HAMP program – will each take the steps needed in the coming months to implement rules for their programs that are consistent with these standards.
Announcement of Initial Pilot Sale in Initiative to Transition Real Estate Owned (REO) Property to Rental Housing to Stabilize Neighborhoods and Improve Housing Prices
When there are vacant and foreclosed homes in neighborhoods, it undermines home prices and stalls the housing recovery. As part of the Administration’s effort to help lay the foundation for a stronger housing recovery, the Department of Treasury and HUD have been working with the FHFA on a strategy to transition REO properties into rental housing. Repurposing foreclosed and vacant homes will reduce the inventory of unsold homes, help stabilize housing prices, support neighborhoods, and provide sustainable rental housing for American families.
Today, the FHFA is announcing the first major pilot sale of foreclosed properties into rental housing. This marks the first of a series of steps that the FHFA and the Administration will take to develop a smart national program to help manage REO properties, easing the pressure of these distressed properties on communities and the housing market.
Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for Work
Last summer, the Administration announced that it was extending the minimum forbearance period that unemployed borrowers in FHA and HAMP would receive on their mortgages to a full year, up from four months in FHA and three months in HAMP. This forbearance period allows borrowers to stay in their homes while they look for jobs, which gives these families a better chance of avoiding default and helps the housing market by reducing the number of foreclosures. Extending this period makes good economic sense as the time it takes the average unemployed American to find work has grown through the course of the housing crisis: nearly 60 percent of unemployed Americans are now out of work for more than four months.
These extensions went into effect for HAMP and the FHA in October. Today the Administration is announcing that the market has followed our lead, finally giving millions of families the time needed to find work before going into default.
12-Month Forbearance for Mortgages Owned by the GSEs: Fannie Mae and Freddie Mac have both announced that lenders servicing their loans can provide up to a year of forbearance for unemployed borrowers, up from 3 months. Between them, Fannie and Freddie cover nearly half of the market, so this alone will extend the relief available for a considerable portion of the nation’s unemployed homeowners.
Move by Major Servicers to Use 12-Month Forbearance as Default Approach: Key servicers have also followed the Administration’s lead in extending forbearance for the unemployed to a year. Wells Fargo and Bank of America, two of the nation’s largest lenders, have begun to offer this longer period to customers whose loans they hold on their own books, recognizing that it is not just helpful for these struggling families, but it makes good economic sense for their lenders as well.
A New Industry Norm:With these steps, the industry is gradually moving to a norm of providing 12 months of forbearance for those looking for work. This is a significant shift worthy of note, as only a few months ago unemployed borrowers simply were not being given a fighting chance to find work before being faced with the added burden of a monthly mortgage payment.
Joint Investigation into Mortgage Origination and Servicing Abuses
The Department of Justice, the Department of Housing and Urban Development, the Securities and Exchange Commission and state Attorneys General have formed a Residential Mortgage-Backed Securities Working Group under President Obama’s Financial Fraud Enforcement Task Force that will be responsible for investigating misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities. The Department of Justice has announced that this working group will consist of at least 55 DOJ attorneys, analysts, agents and investigators from around the country, joining existing state and federal resources investigating similar misconduct under those authorities.
The working group will be co-chaired by senior officials at the Department of Justice and SEC, including Lanny Breuer, Assistant Attorney General, Criminal Division, DOJ; Robert Khuzami, Director of Enforcement, SEC; John Walsh, U.S. Attorney, District of Colorado; and Tony West, Assistant Attorney General, Civil Division, DOJ. The working group will also be co-chaired by New York Attorney General Schneiderman, who will lead the effort from the state level. Other state Attorneys General have been and will be joining this effort.
Putting People Back to Work Rehabilitating Homes, Businesses and Communities Through Project Rebuild
Consistent with a proposal he first put forward in the American Jobs Act, the President will propose in his Budget to invest $15 billion in a national effort to put construction workers on the job rehabilitating and refurbishing hundreds of thousands of vacant and foreclosed homes and businesses. Building on proven approaches to stabilizing neighborhoods with high concentrations of foreclosures – including those piloted through the Neighborhood Stabilization Program – Project Rebuild will bring in expertise and capital from the private sector, focus on commercial and residential property improvements, and expand innovative property solutions like land banks.
In addition, the Budget will provide $1 billion in mandatory funding in 2013 for the Housing Trust Fund to finance the development, rehabilitation and preservation of affordable housing for extremely low income families. These approaches will not only create construction jobs but will help reduce blight and crime and stabilize housing prices in areas hardest hit by the housing crisis.
Expanding HAMP Eligibility to Reduce Additional Foreclosures and Help Stabilize Neighborhoods
To date, the Home Affordable Mortgage Program (HAMP) has helped more than 900,000 families permanently modify their loans, providing them with savings of about $500 a month on average. Combined with measures taken by the FHA and private sector modifications, public and private efforts have helped more than 4.6 million Americans get mortgage aid to prevent avoidable foreclosures.Along with extending the HAMP program by one year to December 31, 2013, the Administration is expanding the eligibility for the program so that it reaches a broader pool of distressed borrowers. Additional borrowers will now have an opportunity to receive modification assistance that provides the same homeowner protections and clear rules for servicers established by HAMP. This includes:
Ensuring that Borrowers Struggling to Make Ends Meet Because of Debt Beyond Their Mortgage Can Participate in the Program: To date, if a borrower’s first-lien mortgage debt-to-income ratio is below 31% they are ineligible for a HAMP modification. Yet many homeowners who have an affordable first mortgage payment – below that 31% threshold – still struggle beneath the weight of other debt such as second liens and medical bills. Therefore, we are expanding the program to those who struggle with this secondary debt by offering an alternative evaluation opportunity with more flexible debt-to-income criteria.
Preventing Additional Foreclosures to Support Renters and Stabilize Communities:We will also expand eligibility to include properties that are currently occupied by a tenant or which the borrower intends to rent. This will provide critical relief to both renters and those who rent their homes, while further stabilizing communities from the blight of vacant and foreclosed properties. Single-family homes are an important source of affordable rental housing, and foreclosure of non-owner occupied homes has disproportionate negative effects on low-and moderate-income renters.
Increasing Incentives for Modifications that Help Borrowers Rebuild Equity
Currently, HAMP includes an option for servicers to provide homeowners with a modification that includes a write-down of the borrower’s principal balance when a borrower owes significantly more on their mortgage than their home is worth. These principal reduction modifications help both reduce a borrower’s monthly payment and rebuild equity in their homes. While not appropriate in all circumstances, principal reduction modifications are an important tool in the overall effort to help homeowners achieve affordable and sustainable mortgages. To further encourage investors to consider or expand use of principal reduction modifications, the Administration will:
Triple the Incentives Provided to Encourage the Reduction of Principal for Underwater Borrowers:To date, the owner of a loan that qualifies for HAMP receives between 6 and 21 cents on the dollar to write down principal on that loan, depending onthe degree of change in the loan-to-value ratio. To increase the amount of principal thatis written down, Treasury will triple those incentives, paying from 18 to 63 cents on thedollar.
Offer Principal Reduction Incentives for Loans Insured or Owned by the GSEs: HAMP borrowers who have loans owned or guaranteed by Fannie Mae or Freddie Mac do not currently benefit from principal reduction loan modifications. To encourage the GSEs to offer this assistance to its underwater borrowers, Treasury has notified the GSE’s regulator, FHFA, that it will pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.
A warning wakeup call
The due-on time bomb
By Jeffery Marino • Jan 6th, 2012 • Category: Feature Articles, January 2012 Journal, Journal Articles
This article warns of the impending era of due-on-sale enforcement that will befall the real estate market in the approaching age of rising interest rates.
Interest rates — WWII to Reagan and back
At the dawn of America’s postwar economy, interest rates were at historic lows. In 1951, the 30-year fixed rate mortgage (FRM) hovered around 4%, as it did for most of that decade. The personal savings rate was also historically low.
Despite the fact that personal wealth was still recovering from the body blow of the Great Depression, jobs were in great abundance. The advent of the military-industrial complex Eisenhower so distrusted (WWII to Vietnam), coupled with the need to restore America’s crumbling infrastructure led to surging employment, booming gross domestic product (GDP) and a seemingly unquenchable demand for houses, goods and services.
By 1965, the constricted money supply set interest rates on a long upward trajectory, and inflation started to soar under the wartime economy. Almost a quarter of all the savings and loan associations (S&Ls) in California were in serious financial turmoil. The S&Ls had lent on anything to everyone during the booming early ‘60s, and had done so at rates that did not adequately cover the risk of future inflation, eventually causing their total demise by the early ‘90s.
The result was not unlike what we saw in 1991 and 2008. Foreclosures spread like wildfire, and rather than receiving a bailout, a large number of California-based S&Ls were allowed to collapse. Lenders were forced to acquire property by foreclosure, and lender insolvency ran rampant. Thus, merger upon merger occurred. Most often, mergers were induced by governmental pressure (and money) to keep weak lenders from going under or being taken over at greater expense to the government (sound familiar?).
Inflation, Boomers and interest rate uprisings
By the early 1970s the Baby Boomers had arrived and were setting the economy on fire. The Federal Reserve (the Fed) in those days was not as alert and proactive as our current Fed, allowing inflation to hit double digits, turning homeownership into a hedge against inflation-investments. In 1979, the new Fed Chairman promptly shut down the over-exuberant economy by raising short-term rates to 18% plus, on and off for two years before the Fed single handedly brought inflation under control.
Once this occurred, mortgage rates began a long and steady 30-year decline, until they reached the point of absolute zero that we see today. Today, we are right where we were at the end of WWII in terms of low interest rates and inflation, but not in terms of having come out of the recession as occurred by the end of that economic period. [For a comprehensive financial history of the U.S. real estate market spanning WWII to the present, see the first tuesday publication Real Estate Finance, Fifth edition, Chapters 1 and 2.]
Interest rates at the real bottom
Based on the current historically low 30-year FRM interest rate, many industry pundits have speculated about the future fluctuations of the interest rate and its effect on prices. The prevailing question in the press has been oversimplified and uninformed: will the interest rate go any lower? This query is typically accompanied by the seemingly eternal and intrinsically related refrain, when will prices increase? [For current real estate-related interest rate data, see the December 2011 first tuesday article, Current market rates.]
The simple answer to the first question is: no, rates cannot go any lower. This, of course, answers the second question in the negative, since prices will only increase if mortgage ratesdrop, (or production of goods and services increases beyond the rate of inflation).
Allow us, dear reader, to explain.
Although the current 30-year FRM interest rate hovers around 4%, the real interest rate is effectively zero. Thus it is impossible for the rate to go any lower, lest lenders start paying borrowers to accept their loan funds — a fantasy that is possible but highly improbable (called going negative by bankers).
In order to understand the reason why mortgage rates are now essentially zero, one must first grasp the concept of real vs. nominal interest rates — a fairly straightforward concept. Essentially, the nominal interest rate is the mortgage rate advertised by lenders, stated in the note and reported by the media. In theory, the nominal rate includes a premium rate sufficient to account for expected future consumer inflation.
In turn, the real rate of interest is the nominal interest rate minus the current rate of inflation. Since the core rate of inflation is currently 2%, the real interest rate of today’s 30-year FRM is 2%.
Editor’s note — The rate of inflation used for this analysis reflects the core rate of inflation, an adjusted index excluding food and energy prices, which are volatile and properly adjusted out of inflation calculations. The reason: commodities return to their mean-price level leaving little long-term effect on the core rate of consumer inflation. Evidence: Gasoline and copper prices are all over the place every few years, but your mechanic has been charging you $100 n hour since the ‘80s.
Additionally, the core rate of inflation is reported monthly and has fluctuated marginally above and below 2% for the past two decades. Thus, we use the 2% figure here for the sake of clarity and simplicity, acknowledging that it is the targeted level of inflation set by the Fed for their long-standing monetary policy. The same is true for the mortgage rate discussed in this article, which has marginally fallen below and risen above 4% for the past year or so and will most likely do so well through 2013.
The zero lower bound and the liquidity trap
But 2% is not zero, as we have claimed the effective rate on the 30-year FRM to be. This vestigial 2% is eaten up by two inexorable factors: the discount rate and the risk premium rate (to cover defaults) added to mortgages, a margin to assure profitability. The discount rate (the rate paid by lenders to borrow funds directly from the Fed) is currently at .75%, which puts the effective rate of return on a 30-year FRM at 1.25%. This just happens to be the approximate risk premium added to 30-year mortgages, as they are typically pegged at 1.4% or so higher than the 10-year Treasury note (T-note) in order to effectively capture investor dollars for mortgages that might otherwise be invested in “risk-free” government bonds.
The current real rate of return for the 10-year T-note runs just a few tenths of a percentage point above the core rate of inflation. This is due mainly to excessive world-wide currency risks which have driven the yield on the T-note down, the U.S. dollar being the safe haven delivering the real estate industry this benefit.
Thus, the real interest rate on the 30-year FRM is currently zero, offering only a high enough nominal yield for lenders and their investors to keep pace with inflation and retain their money’s purchasing power until they find themselves clear of this rippling global downturn.
It is axiomatic, dear reader. Just like bonds, mortgage rates operate in inverse proportion to prices. As rates go down, prices go up, and vice versa.
Since rates literally cannot go down, prices will not go up until the money supply is unleashed and consumers begin to spend. Although money in the form of loan funds is basically free, no one, especially lenders, is spending it — a phenomenon known as the liquidity trap.
In order for prices to rise any further, we must first pass through a full cycle of rising-then-falling interest rates. As inflation picks up, mainly due to the trillions of dollars of cash the Fed has injected into the private banking system since 2007, and as we gain more jobs into 2014-15, interest rates will be driven up by the Fed to withdraw excess liquidity (money) pumped-in to keep the economy from tanking.
The question is not if, but when — and by how much will interest rates rise to keep the economy from recovering at breakaway speed.
The due-on time bomb: be aware and ready
Now here is the rub. The fact that interest rates have bottomed-out and will begin increasing over the next several years is a paradigmatic game-changer for the real estate market. That includes you, our readers.
Since the interest rate spike of the 1980s, when rates peaked at 18%, interest rates have been on a steady decline, and have come to rest at a point beyond which they cannot go. An entire generation of homebuyers has become accustomed to not only low interest rates, but interest rates that have continuously gotten lower.
Thus, the notion of a double-digit interest rate on a 30-year FRM is unthinkable to most potential homebuyers. Aside from the negative implications that zero-bound rates carry for a recovering economy that depends on consumer confidence, a surge in the heretofore receding interest rate tide heralds the resurrection of a most insidious barrier to real estate transactions: enforcement of the due-on-sale clause. [For a comprehensive overview of the due-on-sale clause inherent in all trust deeds, see the March 2011 first tuesday article, The due-on-sale clause: barricading homeowners since ’82.]
Events to occupy a broker’s mind
Thus, while the housing market lingers in the purgatory of low interest rates and low prices, waiting for interest rates to begin their inevitable rise, there exists a due-on time bomb ticking silently just below the surface of real estate sales volume numbers. The bomb will not explode all at once but in slow motion, as rates will rise gradually with creeping inflation and as the employment rate picks up.
This calculus is well-known to brokers who arranged sales during the high interest rate period of 1977 to 1982, a period during which the due-on clause was held at bay by the courts and the strong-arm sheriff – until deregulation let the bears of Wall Street roam at will and build strength, gorging themselves on profits for the last 30 years.
However, once those who have been lucky enough to secure a mortgage at today’s low rates are ready to sell and interest rates have begun to rise (likely during a 2016-forward real estate boomlet), prospective buyers everywhere will be asking the same question that most did in the late ‘70s and early ‘80s: how can I assume the seller’s low-rate loan? At that moment, real estate brokers and agents will have to take the opportunity to educate their client buyers and sellers about the due-on-sale clause included in every trust deed.
Since most buyers in the near future have been raised on falling interest rates, they have had no occasion to learn the term due-on. Brokers have forgotten; agents have not been trained.
Dangerous assumptions
Buyers in the real estate market of the last 30 years would not be interested in assuming the seller’s loan, as they were almost always more likely to get a lower rate on a freshly originated loan.
The advent of Fair Isaac Corporation (FICO) scoring and the fears it engendered added to the lender’s dream of constantly rolling over mortgages to get origination fees (and prepayment penalties). In the off chance a real estate transaction took place which could trigger due-on enforcement, a lender would never exercise their right to call the loan; that would be insisting on making a new loan at a lower rate than the existing loan’s rate — something that will never happen as lenders have one goal only: profit. [For an analysis of the fallacy of FICO scoring, see the December 2011 first tuesday article, The FICO farce.]
As mortgage rates go up, as we have shown they will, lenders will not only pose a barrier to new deals, but they will also begin to call loans en masse on all “subject to” sales transactions, conduct creating high potential for another lender-instituted housing bust of a completely avoidable variety.
They will even sue brokers and agents in retaliation for assisting buyers and sellers in Wellenkamp-style loan assumptions, demanding payment of retroactive interest differential (RID) at the increased market rate over the note rate from the date of closing, a sum they cannot collect when they call the loan on discovery of the sale. [Wellenkamp v. BofA (1892) 12 C2d 212 (Disclosure: the legal editor of this publication was the attorney of record for the plaintiff in this case.)]
Who’s manning the ship?
What can be done to protect the housing market from the unbridled lender dominance instituted by the Garn-St. Germain Federal Depository Institutions Act of 1982 (Garn) and essentially ignored by lenders, brokers and principals ever since?
First, awareness of the deleterious effects of due-on enforcement (especially to a recovering economy and Multiple Listing Service (MLS) housing sales volume) must be developed amongst the professional gatekeepers of the real estate industry who have more at stake than padding their bottom line (read: brokers and agents who deal in real estate as their vocation).
This awareness must then coalesce into political action agitating for the repeal of Garn St. Germain due-on enforcement — for without repeal nothing can change. The momentum for such an action is already building with focus on mortgage lenders by elements of the Occupy Wall Street (OWS) movement. Do not ignore the increasing national consciousness that the successes of the 1% are now systemically integrated into the guts of our political system. [For more information real estate professional involvement in the OWS movement, see the October 2011 first tuesday article, Unions occupy Wall Street — where are the Realtors?]
Enforcement of the due-on sale clause is a prime example of such institutionalized avarice. It benefits no one but lenders to the detriment of society at large, no longer justified as serving any social good as it was portrayed before Congress 30 years ago.
Begin agitating for change now, before rates start rising — once the great boulder begins rolling again, you and your sales volume will get crushed.
Copyright © 2011 by the first tuesday Journal Online – firsttuesdayjournal.com;
P.O. Box 20069, Riverside, CA 92516
Readers are encouraged to reproduce and/or distribute this article.
Copyright © 2011 by first tuesday Realty Publications, Inc. Readers are encouraged to reprint or distribute this information with credit given to the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.
Lending Newsletter for December 19, 2011
Happy Holidays!
Market UpdateQUOTE OF THE WEEK…“Do what you can with what you have where you are.”–Theodore Roosevelt INFO THAT HITS US WHERE WE LIVE…The famous President’s sage advice from a century ago is still the appropriate approach to today’s housing market. In the midst of all the media noise, it’s always good to A recent economic forecast from the National Association of Realtors (NAR) reports existing home sales are expected to grow by 1.2% this year and 5.1% in 2012. And although the median existing home price is predicted to dip about 4% this year, it should recover and go UP 2.6% in 2012. Sales should also jump to 5.22 million units from this year’s projected 4.97 million. BUSINESS TIP OF THE WEEK…Now is a good time to think about setting goals. The key is to make those goals concrete–as specific as you can–with a time frame for when you want to achieve them. Review of Last WeekEURO TRASH…It was another week of European worries trashing stock prices. The Euro Summit the week before failed to come up with the “bazooka” solution investors had been looking for. Then ratings agencies warned of potential further downgrades in the region. All this made Wall Streeters feel quite risk averse, causing them to exit the equity markets, which sent all three major indexes decidedly down for the week. With our own economy, things weren’t so bad. Retail Sales were up for November, though less than expected, but up 6.7% versus a year ago. This wasn’t enough to impress the Fed, whose meeting Tuesday made it three years of interest rates at near-zero levels. The economic data isn’t For the week, the Dow ended down 2.6%, at 11866; the S&P 500 slipped down 2.8%, to 1220; and the Nasdaq dropped 3.5%, to 2555. Investors were still nervous about Europe and the Fed’s statement didn’t say anything to concern traders, so bond prices held up well. The FNMA 3.5% bond we watch ended the week UP .91, at $102.22. This is of course good for interest rates and, once again, Freddie Mac’s weekly survey had national DID YOU KNOW?…This week’s PCE (Personal Consumption Expenditures) measures inflation by tracking changes in prices. Unlike last week’s Consumer Price Index, based on a fixed basket of goods and services, the PCE changes with consumer spending habits. This Week’s ForecastHOUSING, GDP, INFLATION…The week jams in a bunch of Thursday will feature the Third Estimate for Third Quarter GDP, expected to stay an anemic 2.0%. Friday, Core PCE Prices, the Fed’s key measure of inflation, is forecast flat for November, which should make everyone happy. The stock market will be closed next Monday, December 26, in observance of the The Week’s Economic Indicator CalendarWeaker than expected economic data tends to send bond prices up and interest rates Economic Calendar for the Week of Dec 19 – Dec 23
Federal Reserve WatchForecasting Federal Reserve policy changes in coming months…Last week, the Fed kept the Funds Rate unchanged and that’s where economists expect it to stay well into the future. Note: In the lower chart, a 1% probability of change is a 99% certainty the Current Fed Funds Rate: 0%–0.25%
Probability of change from current policy:
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The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice, or a commitment to lend. Although the material is deemed to be accurate and reliable, there is no guarantee of its accuracy. The material contained in the newsletter is the property of imortgage and cannot be reproduced for any use without prior written consent. It is designed for real estate and other financial professionals only. It is not intended for consumer distribution. |
Loans 4 foreign nationals
Here’s something you don’t see everyday
Could you use a source for loans to folks that are not residents, have no social, income, green card, whatever.
All sorts of properties can be used as security. One of the loan requirements is they do need to be naturally respirating & have a pulse. Hopefully, they are from this planet, but if you are living in Southern California, that may be a questionable assumption.
Give us a call if you need more info.
Mortgage musings
The Mortgage Meltdown – How We Got Into This Mess, Who’s Responsible, and Why We Should Keep Capital Punishment
by Paul Elis, President, PMB Capital Inc.
Who’s most responsible for the mortgage debacle? It’s the powerful but blind and ignorant packagers and promoters of the eight, nine and ten digit stacks of securitized mortgages and the “experts” who represented the buyers of those securities. These captains of the universe poured hundreds of billions of dollars into weak mortgages, touted them as strong investments, and encouraged and fed this insanity. The vast majority of these mega-dollar movers and shakers are probably not larcenous as much as just ignorant of reality. They may know the securities industry but they don’t understand the basic building block of the securities we’re discussing – the individual mortgage.
First, let’s look at the contributing players who are not the people I consider the primary culprits:
First, and the least of the guilty, is the incredibly large number of owner borrowers who either really believed that a free lunch was being given away or that the day of reckoning on their adjustable rate mortgage would never come. Sure, some of them were “sold” a bill of goods by loan agents, but, let’s face it: The majority of these borrowers got into these loans knowingly. They took the easy way out; that of opting for the teaser rate and the low initial payment on an adjustable rate time bomb. They probably owed more on their house than they should have and then, as we all know, couldn’t walk the walk when the inescapable mortgage payment adjustment came around and payment shock followed. Many of these people blindly accepted the absurdity that prices would just continue to go up and up and, abracadabra, they could refinance – as though refinancing can cure any financial problem. They ignored or never understood the most basic tenet of consumer credit: You can’t borrow your way out of debt. I never fail to be amazed at how some people always, always, always choose the easy way out of every problem and are unconcerned with long term consequences. We know these people. They go through life snatching defeat from the clutches of victory.
Acknowledged: some empathy and sympathy needs to be expressed for those homeowners who we know really are the victims of economic and personal problems beyond their control. They are the minority but this article respects their personal difficulties and sympathizes with their tragedies.
Another constituency in this second tier cast of guilty characters are the loan agents. Some of these people are clearly unscrupulous but most of them fell into the same trap of unrealistic expectations and always-make-the-easy-choice mentality that affected so many homeowners.
Then there are the real estate speculators, not to be confused with legitimate long-term investors and competent rehabbers. Speculators were a major influence in driving home prices to unrealistic heights and are now, by virtue of their inevitable loan defaults, major contributors to the ensuing flood of loan defaults and, by extension, the resulting collapsing property market. Investing in real estate is a time honored way of building capital and serves a socially desirable purpose in supporting a stock of available rental housing. But, the only sure winners in this endeavor are those with long term perspective and technical knowledge of a great number of real estate business factors such as purchase contracts, financing negotiations, insurance policies, maintenance, lease documentation, title insurance, legalities, etc. I further submit that loan agents who encouraged speculators to take out loans on their primary residences in order to speculate should lose their licenses. And, the homeowners who bought into this mindless idea of risking their families’ well being in order to place bets on home should face ten years to life for being “felony-stupid,” although losing everything is probably sufficient punishment.
And, another contributing player is the government. I’m not faulting public policy of encouraging home ownership through the availability of high mortgage amounts at cheap rates. However, if Washington is going to facilitate highly leveraged home purchases, it better have a “plan B” ready when economic reality belies the underpinnings of these tenuous loans and the foreclosures begin. —Oh, I’m sorry, I forgot: Real Estate can’t go down in value, especially in California.
One more lesser guilty group I’d like to pounce upon: The home selling agents, mostly Realtors, who encouraged buyers to buy as much home as possible by using loans that obviously carried a downstream risk of a huge “payment shock” upon rate adjustment. —Not that a brokers’ counsel to a buyer to consider buying a less expensive house would have been well received or heeded.
NOW, HERE’S THE CENTRAL ISSUE. Let’s talk about primary responsibility, the 800 pound gorilla among the guilty. J’accuse: The folks who “packaged” and sold these bundles of securitized mortgages and the representatives of the buyers that stupidly recommended their purchase by institutions. These are the guys who kept shoveling fuel into the engine. We’ll add to this list of “most guilty” the rating agencies who, insanely, rated these securities backed by such fragile mortgages as strong investments. In fact, I think the rating agencies are probably the most inexcusably at fault, but that’s subject matter for another article. The captains-of-the-universe financial types who created and marketed the hundreds-of-millions and billion dollar securities had a total understanding of the securities business BUT— They had no understanding at all of the individual mortgages that comprise these bundles of loans. To paraphrase: they may have been able to navigate around their ivory towers but they didn’t know the street.
Putting aside the ruthlessly greedy and the downright criminal persons (and there were, no doubt, some of these), the people involved in the upper tiers of the securities business didn’t understand the one-loan-to-one-family consumer mortgage issues. Like so many real estate macro-economic conditions, the driving force of this industry came from the buyer’s of the securities product. In other words, there were vast sums of money lusting to buy these securities. So, of course, the high loan to value and subprime mortgage product was created, securitized and marketed. It’s kind of the debt counterpart of the real estate equities’ periodic phenomenon of overbuilding. The driving force in overbuilding often is not market requirement for the space so much as the availability of too much capital tempting otherwise unjustifiable development.
If each of the ivory tower-dwelling captains of the universe had earlier in their career spent six months as a street level loan officer working with homeowners and learning the nuts and bolts of the product itself and of the lender – home owner relationship and had then worked six months more as an underwriter learning each component of a healthy loan and acquainting themselves with the misinformation or fraudulent information so often submitted on loan applications, they would have had an appreciation of the realities of the mortgage industry. If they had worked for six months as a collection officer gaining real world knowledge of what goes wrong with defaulting borrowers, they would know that 90, 95 and 100% loans just don’t hold up when a borrower starts to have problems. As a former director of the California Mortgage Association, I have close friendships with many of the leading entrepreneurial lenders in the private money loan industry, “street level lending.” Many of these real-world business guys and gals won’t do a loan over 55 or 60% of the property value and many of them can instinctively sniff out a fraudulent loan application. They’re good at deal-making, they usually take an active part in the underwriting of each mortgage and they know when a loan is risky. I submit that if the mega-dollar shufflers had spent a six month internship with these top of the line mortgage entrepreneurs who wouldn’t consider doing a loan over 55 or 60%, they would have recognized the absurdity of trusting the 90, 95 and 100% loans.
The captains of the universe and their security lawyers obviously came up with criteria for individual mortgages to be placed in their securities bundles.” I’m wondering who sat at the conference table when these criteria were discussed. Was there a “lowly” loan collection agent with thirty years of real world experience present alongside with the billion dollar salesperson? Was there someone participating who is actually a successful entrepreneurial mortgage lender? Or, was the conference dominated by a senior vice president who saw visions of mega-dollar commissions and an annual bonus equal of 100 families’ home mortgages? Where were the scarred and experienced street-smart entrepreneurs when they were needed?
My mortgage investors haven’t had to take back a property through foreclosure on any loan written in the last nineteen years. My IQ is probably 20 or 30 points lower than that of the financial wizards – but I’m a whole lot smarter. I’m committed to designing and underwriting loans one at a time that economically work for my fund and for the borrower who, let’s not forget, is the guy or gal who has to actually write the mortgage payment check each month. My focus is where it belongs, on the borrower, not on the billion dollar securities buyer. The all-powerful financial emperors were focusing in the wrong direction!
A couple of random comments: First, I’m probably not going to vote for John McCain but I deeply and profoundly admire his stand on NOT bailing the mortgage industry out of its self-created mess. While Clinton and Obama were busy pandering to the masses about bankrolling a fix, only McCain had the guts to say that the rest of us tax payers shouldn’t bail out these morons and shouldn’t reward stupid investing or irresponsible borrowing. Good for you, Mr. McCain. I hope you will go down as my most admired unelected presidential candidate during my lifetime.
Second comment about the current state of the mess: If there needs to be a fix, I propose no grace at all for the lenders. But maybe we can do something for the “upside down” homeowner which could save his house and, thus, help stabilize the market. There is some talk about legislation or court mandates reducing mortgage loan balances downward to the market value of the homes. That’s another brilliant idea from the panderers. So, now we’re stealing from one class for the benefit of another class and creating a whole sea of bankrupt lending institutions who are, once again, going to cry for a bailout, except this time they would have a valid point. Here’s my thought: In cases of borrower distress, where the mortgage loan balance is now higher than the property value, the existing loan could be bifurcated into an economically sustainable first mortgage and a second mortgage representing the portion of the loan not supported by the property value. The second loan would become a “sleeping” second with no monthly payments and would be paid back with no or very little interest at such time as the owner occupied home is sold, to the extent that the sales price at that time covers that second. This way, the lenders maintain their rightful claim to their capital and the homeowners stand a better chance of staying in their homes. This would be both humane and economically responsible. Also, first mortgage loans with variable interest rates should be tightly capped as to payment increases.
Thirdly, loans are unfortunately not now readily available for investors who want to buy many of the distressed and foreclosed homes, the purchases of which would greatly help to stabilize the market. It’s every bit as stupid to NOT give strong and credit worthy investors 65 or 70% loans as it is to give weak and fraudulent home buyers 90 to 100% loans. I don’t understand the regulators’ policies here. Once again, the people who presume to regulate don’t have a clue how things really work.
Fourth comment: The lenders who were engaged in illegal lending practices and the borrowers and agents who submitted fraudulent loan applications should be aggressively prosecuted.
These people could give Capitalism a bad name.
Note: Paul Elis The author is a fund manager in the investment property mortgage business and does not make consumer or homeowner loans. Neverthelss, he’s one of the most astute proffessionals I know in this business. He is available at paulelis@pmbcapital.com
Brief Headlines of interest
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Foreclosures finally falling
The number of homes entering foreclosure in California fell to a four-year low in the second quarter of the year, according to a recent report.
The report credits the foreclosure lull on a more stable housing market as well as policy changes in the mortgage servicing industry. Hopefully this will improve the affordable housing markets .
A total of 56,633 Notices of Default were recorded during the April-to-June period, down 17 percent from 68,239 in the previous quarter, and down 19.2 percent from 70,051 in second-quarter 2010, according to DataQuick, a southern california reporting firm
Last quarter’s activity was the lowest for any quarter since the second quarter of 2007 at 53,493. This is particularly noteworthy because 2007 was pre “bubble burst”
“A lot of theories are being floated as to why the numbers are down,” said John Walsh, DataQuick president. “Bank policy changes. Legal challenges. Politics. Holding back temporarily so as not to flood the market. The fact of the matter is that no one really knows, outside of lending and servicing industry insiders. One thing is certain: Homeowner distress spreads fastest when home price declines are steepest. And it now appears likely that, barring some new economic shock, the worst of the price declines are behind us.”
On a similar vein; the statewide median sales price was $250,000
in the second quarter, while this was down 7.4 percent from $260,000 a year earlier. In first-quarter 2009, when foreclosure activity peaked, the $227,000 median was down 39.5 percent from $375,000 a year earlier.
