National Association of Responsible LO's

Home Prices Up, Sales Increase for Homes in NYC

October 16, 2009 Origination News Report

Reversing the trend that began last year, average home prices in New York edged upward in the third quarter of 2009 compared to the previous quarter, which could be a sign that the market is leveling off, according to a new report by ResidentialNYC.com, a public real estate listings website of The Real Estate Board of New York. Average home sales prices for cooperatives, condominiums and one-to-three family dwellings increased by 6% in Brooklyn to $534,000 and by 3% in the Bronx to $367,000 compared to the second quarter of 2009. Average prices in Queens increased by 1% to $406,000 and Staten Island home prices declined by 1% to $382,000 compared to last quarter. The report found that citywide sales volume increased 35% to 9,734 compared to last quarter. Manhattan sales volume increased 59% to 2,840 while sales volume in Brooklyn increased 27% to 2,102. "The residential real estate market came back to life in the third quarter. The trend needs to continue for at least two more quarters before we can say with confidence that a recovery is underway," said Steven Spinola, REBNY president.

Realestateloans.com, new york home loans

A report from Deutsche Bank was recently released: The European bank reported that the percentage of U.S. homeowners that owe more on their mortgage than their properties are worth will rise to 48% by 2011. Up from 25% in March or 2009.

Analysts Karen Weaver and Ying Shen stated price declines will have the biggest impact on prime loans which are two thirds of all mortgages. 40 plus % will have negative equity by the first quarter of 2011. An estimated 46% of prime jumbo loans will be negative up from 25% as of q1 2009.

Also, 69% of subprime loans will be underwater in 2011 and 89% of option arms.

By 2011 negative equity will climb to 90% in parts of California, Florida, Nevada and Arizona.

The Obama Administration introduced sweeping financial regulatory reform late Tuesday through a “Consumer Financial Protection Agency” to oversee consumers in credit and financial markets.

Mortgage brokers will be obligated to sell the best available mortgage loans to avoid conflicts of interest between themselves and borrowers while also determining the mortgages they sell are affordable to borrowers.

Remember, most toxic private label securities have disappeared. Is it the mortgage broker that only offers programs that are created by Fannie Mae and Freddie Mac (GSE's). Fact is loan officers only originate loans they do not create loan programs, larger entities like Fannie Mae and Freddie Mac actually create the program guidelines.

Much of our current mess was GSE i.e. government sponsored entity endorsed. Fannie Mae and Freddie Mac bought and sold trillions of dollars worth of mortgage loans consisting of stated income loans, high debt to income zero down loans, interest only, option arms, etc. In addition to the government (GSE) sponsorship of these toxic loans, the government also mandates pages and pages of loan disclosures that very few consumers can and want to read.

Is the government realistic when looking at the retail mortgage channel or are they ignoring history and facts? Again, loan officers only sell loans that the GSE's create. If the GSE's produce conservative and prudent loan programs, loan officers and mortgage brokers must/will comply.

In the 90's our industry produced a great deal of low down payment loans but never experienced the level of foreclosures and defaults that we have today. Back then, lenders required prudent debt to income ratios and full income and asset documentation.

Starting in 2003ish Fannie Mae and Freddie Mac drastically loosened their requirements in order to increase revenue and subsequent bonus payouts to GSE executives. Prudent qualification measures on fundemental safeguards such as those on debt to income ratios were eliminated.

Those of us in the industry that wanted to provide safe FHA programs years ago were not permitted to do so because of regulatory constraints- hence the invention of FHA look alikes through private label securitization. The lack of intelligent regulation of private label securitization programs are an additional reason we are experiencing this crisis. The Fed knew about these programs but were not astute enough to intervene. 

The government is at the center of these problems. They were not only deficient in their oversight but were also profiting from the revenue generated by these securitization processes.

In the new regulatory regime, yield spread premiums will also be banned and mortgage brokers will be paid over time based on loan performance rather than a lump sum at closing. It’s unclear how compensation will be treated for retail loan originators. Would a home contractor install a new kitchen and accept payment over years and only as long as the owner owned the home? Deferred compensations models won't work. Consumers may eventually be required to pay additional fees up front in order to bridge the service providers income shortfall.

Regulation: Proceed with caution.

Florida Attorney General Bill McCollum recently said that his office secured a federal court order remanding his lawsuit against former Countrywide CEO Angelo Mozilo back to Broward County Circuit Court. The suit from last June addressed deceptive trade practices related to Countywide allegedly putting borrowers into faulty loans.

When the complaint was originally filed, Countrywide and Mozilo sought to remove the action to Federal Court in Florida and the case was later consolidated in the Southern District of California. But the Federal Court has since agreed with Attorney General McCollum’s position that Mozilo should be held liable for Countrywide’s misleading and deceptive practices associated with the sale and marketing of mortgages and mortgage-backed securities.

“Angelo Mozilo should absolutely face a Florida court and Florida’s citizens for his business practices, especially those which victimized Florida homeowners,” Attorney General McCollum said in a statement.

Additionally, the Court agreed with the Attorney General’s claim that Mozilo’s management and participation in the day-to-day activities of Countrywide are sufficient grounds to subject Mozilo to stand trial in Florida state court.

“I am pleased the Federal Court sent the case back to our state court and my office will continue to aggressively pursue its case against Mr. Mozilo,” McCollum added.

At least someone out there still wants Mozilo to pay for his years of abusive lending.  Hopefully this pans out. Care of and thanks to the truth about mortgage for the above report!

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Conforming rates can play tricks depending on what secondary investor markets crave.

Mortgage rates went lower this week but remain above record lows seen three weeks ago according to Freddie Mac. The 30 year fixed dropped to 4.80% for the week ending April 23 and is much lower than its year ago average of 6.03%.

The five year ARM averaged 4.85% this week down from 4.88% last week and 5.68% a year ago, the lowest since Freddie Mac started tracking in January 2005.

“Although long-term mortgage rates eased slightly this week, ARM rates remain elevated relative to those fixed rate mortgages. For instance, interest rates for 1 year ARMs exceeded those for 30 year fixed rate mortgages over the last two weeks; this is the first time this has happened since Freddie Mac began collecting data for ARMs in January 1984.” said Frank Nothaft, Freddie Mac chief economist. “The housing market is showing further signs of possible improvement.  House prices rose for the second consecutive month in February, the first back-to-back increase since April 2007, according to the Federal Housing Finance Agency.  Among the nine Census divisions, six experienced positive gains in February, led by a monthly increase of 3.8% in the Pacific Division."

The OTS released its Q4 2008 Mortgage Metrics Report, stating that close to 50% of recent loan modifications went back into default within months.

“For example, the percentage of modified loans that were seriously delinquent (60 or more days past due) after eight months was 41 percent for loans modified in the first quarter and 46 percent for loans modified in the second quarter. The reasons for high re-default rates are not clear.  As noted in the previous quarter’s report, high re-defaults could be the result of a worsening economy, excessive borrower leverage, or poor initial underwriting. Servicers also said their flexibility to reduce payments was in many cases constrained by servicing agreements with government-sponsored entities and other private investors that defined the type and the amount of modification permitted,” per the OTS.

 

United Guaranty Mortgage Indemnity a unit of AIG has filed a lawsuit against Countrywide. AIG states Countrywide lied about the quality of the loans AIG was buying according to Bloomberg.

The mortgage insurance division claims Countrywide secured mortgage insurance for the mortgage loans it originated to boost the credit ratings of the underlying securities they were bundled into. While making assurances the loans were originated to strict underwriting guidelines.

Gee, do you think so? I have to ask where the government regulators were? Where were the AIG auditors. These companies were all thick as theives. 

 

The AIG unit is seeking punitive damages and wants the insurance policies tied to those loans voided.

Mortgage rates dipped lower for the 2nd straight week according to Freddie Mac. The 30 year fixed averaged around 5.0 with one point in the regions with the lowest rates. A year ago they were close to 6.0% and sometime in February they reached around 6.875%. 

During the height fo the market we were seeing 6.25-6.5% rates. Sad to see so many homes going unsold at these rate levels. 

Will a grown up walk into the room and take control of the situation!

“Mortgage rates followed bond yields lower this week as recent economic reports suggest the economy is still slowing, which reduces the future threat of inflation,” said Freddie Mac chief economist Frank Nothaft.

The 15-year fixed went down to 4.68% with one point down from 5.0% percent last week and 5.675% a year ago.

Adjustable-rate mortgages got better also- five-year ARM fell to 5.0% from 5.25%.

These rates are good for conforming loan amounts with a loan-to-value of 80%.

We are currently offering a special on Jumbo loan mortgage rates at 5.875%. 

Many factors can have an impact on mortgage interest rates. The overlying obvious is that mortgage interest securities compete for capital in the financial markets.

Competing for capital means that investments such as mortgage backed securities are chasing investment dollars. If a large investment pool such as a pension fund or hedge fund is looking for the highest rate of return, that's exactly where their "capital" will go, to wherever the investment will receive the highest rate of return.

Though return is the most important component of an investment choice, security is a very close second. Let’s discuss return for a little bit longer, and then come back to security. I'll give you a quick scenario:

I'm a big pension fund manager and I control contracts for a large sum of investment dollars which come due on a certain day. On that day, I and my team have to decide where to reinvest those dollars. I will look at the stock market, S and P, riskier overseas investments, Real Estate Investment Trusts, Treasuries or Mortgage Backed Securities. I've just named a few very common investment resources but there are tens of thousands of places and ways to invest these dollars. Keeping it simple for the sake of time… I decide to put the dollars into mortgage backed securities. I call the MBS sales desk of whatever investment house I work with, and place an order for x numbers of shares in an MBS fund. The MBS sales entity fills my order and now I'm the proud owner of a bunch of mortgage backed securities.

It seems that I wasn't the only one that decided to buy a large pool of mortgage backed securities, many other giant investors also did. This resulted in a classical supply and demand situation. Investors are pouring money into MBS and the demand is high, so the "return" or interest rate can be lowered. If I have a lot of demand for my security, do I have to keep offering a higher rate? No. As demand picks up for this type of investment, interest rates usually go down. Why does demand pick up? Security.Often times demand for these types of securities rises due to what's called a "flight to security". Generally speaking, MBS's are fairly secure. Not as secure as Treasuries but still secure. If the stock market or global financial markets are experiencing volatility for some reason e.g. terrorism, investors will typically move their dollars to safer waters- Treasuries or MBS products. This results in a market shift in rates. More inflow means that the rates don’t have to stay up, they will start coming down.

In the recent days, potential inflation has been the mover of rates. The Fed has raised short term rates in order to take money out of the economy in order to slow spending. Inflation is when there is too many dollars chasing too few goods. Take money out of the system and you will find balance. But why don't they put more goods into the system? We need those Xboxes. Believe it or not, manufacturing can’t keep up with demand. This doesn’t only apply to the XBOX but also to food and Fuel. Storms or political interference can hamper production.

Are you still with me? You didn’t fall asleep did you? Sometimes I'm the only one at the dinner table that gets excited about this stuff.

Anyway, just know that money needs a rate of return. If mortgage rates are going up, it's because there is not enough money being pumped into these products for whatever reason. The money is going into other investments or the supply of money is limited.

If you are reading this in an attempt to "play the markets", stop! It's too complicated to think you can hedge. If you win, it's only because you were probably lucky. Hey, you could be smart too, but it would still be more luck if you got it right.

December saw an additional 20% in mortgage defaults from November 2008 numbers- Mortgage Insurance Companies of America reports. November 2008 saw a little over 82,000 defaults. As we can clearly see the default rate is increasing at a fairly strong clip.

The positive news is that we had a slight increase in catch ups do to modification efforts and the decrease in adjustable rate resets.

December mortgage applications utilizing private mortgage insurance nationally was 62,000, up from 40,000 in November but only a third of the 154,000 seen in December 2007.

MICA includes the largest private mortgage insurers: AIG United Guaranty, Genworth Mortgage Insurance, Mortgage Guaranty Insurance, PMI, Radian Guaranty and Republic Mortgage Insurance Company. Triad has gone out of business.

Private mortgage insurance has become almost a non factor when we look at the above numbers. Most of the mortgage orginators on the frontline are gravitating to FHA as their primary loan program. Many borrowers are being forced out of the market, in the higher home price values due to the lack of private mortgage insurance.

Many regions across the country have been designated as declining markets precluding a downpayment of less than 10%. 

The three repositories- Transunion, Equifax and Experian each offer their own statistical models for credit scores. Unless you've worked in the credit reporting industry, or are closely affiliated with the process, the scoring system may seem unusual.

I've seen credit scores 100 points apart from each other and I've seen scores where two repositories were exactly the same and the third was far lower. Regardless of how the scoring is done, it's seems like a good system overall.

Mortgage companies understand the variances in the score models, and generally use the middle of the three. I think this is a sensible safeguard while offering the consumer wiggle room.

So, Whether the borrower is looking for a home purchase loan, mortgage refinance loan, real estate investment loan, FHA loan, VA loan, student loan or auto loan, credit scores are viewed in essentially the same manner. Credit scores are quick to obtain, and are a reliable analysis tool for the vendor.
Notwithstanding credit issues due to a hardship from career or medical, generally the rule holds- the lower the credit score the more unreliable the person is.

Now, what makes a good credit score? Let's quickly list the basics that everyone should know:

* Paying your bills on time
* Having a handful of established credit lines older than 24 months
* No liens
* No judgments
* No adverse reporting
What makes a poor credit score? Obviously, the opposite of the above and more.

One little known feature that causes poor scores, is High credit balances. A borrower may be given a credit line of $10,000, choosing to use the entire amount. Anything above 50% of the limit can be reason for the agencies to ding someone’s credit score. Conversely, keeping the balance below 50% of the limit would be a positive.

Many of the negative impacts are a result of borrowers liberally "testing" the limits of credit. Some common causes of low credit scores arise due to; simply not paying or not paying due to a dispute, maxing out credit lines, opening too many lines or making too many inquiries. Most of these characteristics imply that the borrower is loose with credit, and or shows a imbalanced regard for commitments.

Borrowers wishing to increase their credit scores need to be disciplined, ethical and moderate in their credit usage. The opposite situation of not seeking credit, as with an earlier era, can have the same impact on credit scores.

See also my article Part I Credit

When a consumer applies for credit, most businesses such as auto dealers or mortgage companies can quickly and easily retrieve a suprisingly large amount of personal data.

Basically, a government license gives the three big repositories the authority to gather more personal information than the public should feel comfortable with. Recently, there has been many complaints about identity theft when all along the three big credit agencies- Equifax, Transunion and Experian, send personal information through a multitude of unsecure channels.

Anyone with access to the credit reporting software in their organization, can dig up your personal data. All one needs is your name, address and social security number. Theoretically the requestor is supposed to have a written authorization but in most cases does not. Authorizations may also be verbal (Imagine that).

How it works?: The retailer pulls a borrowers credit information from any number of credit information sub-merchants, which in turn directly communicate with the big three to gather the needed data. There exists a giant industry full of these little credit merchants, and the competition is fierce. Since the competition is so fierce, many of the information providers prefer to sign up as many clients as possible with little consideration for security. There are basic requirements for the person or entity initiating the credit vendor agreement, but from that point the security is lost. The person signing the agreement is rarely the only individual pulling credit reports. Almost anyone in the chain can begin pulling reports.

With one of these credit reports someone can find out: employment information, date of birth, past residences, existing open credit lines and much more.

A mortgage company usually pulls a borrowers credit using whats called a Tri-Merge report. This means that the pulling entity wants all data and scores from the three main agencies simultaneously. The alternative would be a single merge wherein the pulling entity requests a score from one of the repositories, usually Transunion due to TU's lower more conservative score model.

You would think, with all this sensitive data transfer, there would be very strict standards for pulling credit. Unfortunetly there are no standards other than the willingness to sign up and pay the bill.

Who's pulling your credit?

In part two we'll discuss what makes a good credit score.

Title insurance is a mandatory component of loans that involve a lender. Lenders require borrowers to obtain a title insurance policy on the lenders behalf- to cover the lender, in case of errors in past title transfers, easements and liens.

Title insurance is unlike other insurance, in that title insurance covers problems with what may have transpired in the past. If you buy auto or home insurance, you are requesting protection for possible future mishaps. With title insurance the policy covers missteps in the chain of title going back from the date you close.

There are many title companies across the country and most are very large and unheard of. In most states, title companies are regulated by that states department of insurance. Title insurance premiums are not cheap. A $500,000. home may require the buyer to pay $1500. for a title insurance policy, depending on the state.

Whether you are arranging a commercial real estate loan; refinancing your home mortgage loan, taking a real estate investment loan or a home purchase loan, you will be required to obtain a real estate title insurance policy.
Generally the real estate property buyer is not the one that obtains the policy. This is usually done through the closing agent for the real estate transaction. The closing agent may be an attorney, escrow company or the title company itself. Some real estate broker direct which company is to get the title policy business. Property buyers can shop title policies but never do.

Let's say Jim owned a little piece of land in Oklahoma- not a big parcel but something nevertheless. He was gambling with some friends one night and ran out of cash. On one of the hands Jim puts up a deed for the land, and lost. Sue, the winner of the hand places the deed in the side pocket of her gambling purse, goes home and puts the purse away forgetting about the deed for six months. Jim has recently gone broke because of his gambling habit, decides to sell his land and leave town. One day Sue comes across the deed and acts on it. Sue finds out the land is sold to a new owner, finds and presents the new owner with the deed. The new owners review their title policy and find out they are covered for unrecorded liens. The new owners give Sue the name of the title company and ask her to contact them directly. The title company, in this situation may be liable for the claim.

Most title companies, like most insurance companies, have written exceptions into their policies. When a buyer purchases a title policy they will be given the terms and exceptions in the "preliminary policy". Suffice it to say no one reads their prelim and the title companies know this. Banks require title insurance policies because it's a small additional safety measure and the bank isn't the one paying for the policy anyway.

The insurance industry strikes again with the help of wise and thoughtful insurance regulation division of your state. Are you really covered by the title insurance policy? Take a look at yours and find out what the exceptions are. You may find out that most of the issues that can arise have exceptions to them. Yes, title insurance companies encounter litigation, but you'd be surprised to find out how few transactions ever go to court.

Many borrowers feel deep frustration at their real estate loans coupon management being routinely transferred to other lenders. This frustration is felt by most borrowers regardless of if they are refinancing their home mortgage loan or the effects felt after the closing of their home purchase loan.

A borrower will start and close the loan process with a specific lender, and at some point in the life of the loan whether we're talking; real estate investment loans or mortgage refinance loans or a home purchase loan, that same loan coupon management service is transferred to another lender. This transfer can take place immediately or later on. Transfers can happen randomly or very often. Borrowers have no control or say so in this matter and long as the terms of the loan don't change. Amounts collected for taxes and insurance can change if the premiums or tax bills increase.

The active management of receiving payments, monitoring taxes, updating flood insurance requirements and home owners insurance is a service known as "loan servicing".

"Servicing" lenders receive a small monthly fee from the final investors (buyer of your note) to manage the loan payment collection monthly. Investors on Wall Street, we use the term Wall Street as an easy catch all, are not in the business of looking at the micro details of your loan payments. They are much better equipped at pooling large sources of financing rather than small payment aspects.
Let's look at a typical home purchase loan example: Jane buys a home and closes her real estate loan in January. Her mortgage broker had her sign what's called a "servicing release" disclosure form. This form is boring, nothing to be too concerned about, and discloses to Jane that the company she is making the loan with may, or may not "service" the loan. Most often servicing has nothing to do with mortgage rates and terms. It most often has an impact on another aspect of the real estate loan or mortgage loan, which is the collection of insurance and taxes, better known as "escrow or impound" accounts.

Escrow or impound accounts are established when a real estate loan is created. This little pool of money that is paid to the mortgage loan lender, by the borrower, is established to insure that the lender has enough money to cover taxes and insurance when the bills come due.

The frustration on the part of most borrowers comes from the tracking of this "reserve" account. Servicing companies are notoriously sloppy with accounting and hard to speak with. The employees at servicing companies, however nice, are more oriented to data input than data analysis.

When a servicing lender transfers an account to another lender, sometimes account is not updated and the transfer amount is wrong. Many things can arise and usually happen between servicing exchanges. Insurance premiums go up or tax supplemental bills come out and are not noted into the servicing management system; Really who knows what else.

Each time a new "servicer" comes in the picture, real estate loan borrowers should ask for an accounting of their reserves and try to bridge any monetary gaps that seem inaccurate.

Last we left, Jim was committing to buying a 25 unit building. The building had all the amenities he was looking for and was a great buy. It took Jim months to find this property and now he is ready to pull the trigger.

Jims commercial broker wrote up the offer, the seller countered with another offer and they met somewhere in between. The seller, through the broker, has provided Jim with ALL of the property financials: Rent rolls, profit and loss, various expense sheets, the sellers' tax schedules and whatever else may help. Jim has taken ten pictures of the property from all different angles. He has pulled together his personal information- tax returns, bank statements and credit report. He's ready to talk to a lender with a complete picture. If he went to the lenders without important information such as the property financials or his personal information, the lender would make faulty assumptions about the deal, leading to a delayed or hard close.

The seller needs to finalize this deal within a certain timeframe because he has a 1031 exchange taking place, and doesn't want to get hit with tax penalties. If Jim's financing doesn't go through, not only will Jim lose a great property but the seller may experience negative tax consequences.

Jim has been working with a mortgage broker for the last six years on his residential property refinances, and the mortgage broker states that he can do this loan "no problem"- famous last words! Jim did speak to a commercial loan officer at his bank but the terms weren't very good.

So what does Jim do? Time and accuracy are of the essence. There should be no room for "maybe we cans", or "sounds like a deal we'd take". Jim has to be a good judge of character, be able to read between the lines and ask a LOT of questions. He has to work with an entity that has had at least ten years of commercial lending experience. Experience, reputation and ethics are important- I can't overstate this.

My recommendation firstly is to ask the seller where he had the property financed. Maybe even the seller might be open to carrying a portion of the loan to create an annuity for himself. This would be favorable to everyone; Jim, the seller and the new lender because of the shared risk.

I would then approach the current lender on the property to find out if they would be able to fund the deal, and what their terms would be.

Often times the bank that Jim drives by everyday; the one that doesn't have a million branches in supermarkets or advertising, is the best source. They are familiar with the area, which is important. They may even be familiar with the property.

Jim needs to take a day and call five to eight local lenders, set up appointments with their commercial lending V.P.'s and sit with them to present the deal. Jim will ask lots of questions as should the lender. All aspects of the deal need to be put on the table right away- no hiding anything. The commercial real estate loan officer will build a prospectus of the deal and possibly present it to a loan committee at their weekly meetings, to see if it's a deal the bank wants to buy into at this time.

Jim will contact the lenders in a week and ask professionally for a status and offers. The lenders, if they are interested should detail their offer of terms. Nothing is ever set in stone with lenders. Some put forth one program in the initial stage but as the deal gets close to closing, they counter with something else. Here is where the experience, reputation and ethics are important. A lender with these traits will stick to their word and follow through on their commitments in a timely manner. If you find a lender like this, develop a strong relationship with them and keep it.

Though local banks are a great source for commercial financing, a great commercial mortgage broker can be better. The trick here is to find one with the experience, reputation and ethics. A mortgage broker is a better source when it comes to finding the best terms available. Most banks offer narrow loan program categories. These may be fine but a great mortgage broker has a bird's eye view of what everyone is offering and can pick and choose the best for his clients.