Mortgage Blog

I have been waiting, (and procrastinating), to make a blog entry, mostly because I was awaiting the outcome of the election and the effect it might have on our markets. Now that the election is over, here’s a summary of some of the items that are newsworthy in the lending industry:

Lenders still hesitant: Even though the Federal Reserve has lowered bank borrowing costs and the Treasury department has pumped billions of dollars into the banking system, banks have been slow to lend money. All of the tangibles are in place, they have the money, they have the right margin spreads, they just don’t have the confidence. With all of the daily financial turmoil and fear of the unknown, it’s not a surprise. Again, we need stability and confidence in our markets before the banks will open up their lending practices. The catch is that without the banks lending money to individuals and businesses, the economy will get worse, which will cause even more lack of confidence in these markets. I believe that if our banks took the chance and substantially lowered interest rates and started lending money to businesses and credit worthy individuals, it would stimulate the economy more than the failed bailout and mortgage rescue plans.

Speaking of Mortgage Rescue Plans: So far, the highly touted mortgage rescue plans that were part of the housing bills passed this summer have not helped much. Borrowers have been hesitant to sign up for these programs due to the red tape and restrictions placed on the individuals that would qualify for these plans. My contacts in the lending industry are telling me that these plans are a joke. Borrower’s who are in trouble, have better options. Many lenders are willing to rewrite or renegotiate loans for people who are in trouble.

Speaking of Loan Modifications: I have noticed some new companies that are actively soliciting clients for “Loan Modifications”. Several have contacted me to become a representative for them. It works like this - for a fee of approximately $2,000, they will negotiate with your existing lender to reduce the payment or principal balance of your loan. I was intrigued and decided to get the details, here’s a summary of my recent conversations:

My first question: Ok so you want the $2000 up front from my client, what is your guarantee? They replied: “We guarantee a modification to the existing loan”. Ok, so how much loan modification do you guarantee? “We aim for a 30% reduction in your payment or principal reduction”. Ok, so are you “guaranteeing” that my client would receive a 30% reduction in the payment or principal balance? “Well no, it’s only a guarantee that there will be some kind of modification to the loan, but we aim for 30% reduction.” Ok, so what if you reduce the mortgage payment by only $10 per month, the client has paid you $2000 and you have fulfilled your part of the deal. That doesn’t seem right. “Well – technically that is correct, but we still aim for a 30% reduction.”

Now I am obviously getting nowhere, so I ask for references: “Well we just recently opened up in your area and we really can’t give out our client’s information….. But we really do try for a 30% reduction.”

Bottom line is that loan modifications can be negotiated without the help from one of these companies if you contact your lender directly. It is too early to tell if these “modification companies” are legit or are just trying to take advantage of homeowners. I will continue to monitor this and let you know how this plays out.

Bailout of the week:  This week it's the auto industry.  If our government bails out or gives money to the "big three" in order for them to stay in business, what will this accomplish?  it will allow these auto giants to continue with a failed business plan.  General Motors has an average hourly employee cost of $73.  That means GM has to spend an average of $151,000 per year per employee to fund their salary and benefits!!!

Meanwhile, Toyota spends an average of $48 per hour or $100,000 per year per employee.  It is no wonder that US automakers have to charge more money for a car in order to make a profit. 

By bailing them out we have essentially subsidized another industry, because they cannot compete in a fair marketplace due to the self inflicted high costs of salary and benefits. 

Bankruptcy would allow these companies to renegotiate these bloated union contracts that are main cause of the problem.

Other Lending news

Conforming loan limits for 2009: Fannie Mae/Freddie Mac recently announced the new conforming loan limits. Meaning any loan amount above these limits is classified as a “jumbo” loan and is subject to extremely high interest rates – the new limit for a single family home in the Sacramento, El Dorado, Placer and Yolo counties is now $474,950, (up from $417,000 in 2008). Higher cost counties such as San Francisco, Santa Clara, etc have a new conforming loan limit of $625,500. For the nationwide list of limits by State and County, click here: http://www.fhfa.gov/GetFile.aspx?FileID=134

Average interest rates for a normal 30 year fixed mortgage are still in the low 6% range. You can obtain rates in the high 5% range if you pay points.

Kevin

This morning the Federal Reserve and Treasury Department have announced that they will start buying 800 billion worth of bad debt from banks and lenders. This is a significant change from their earlier stance when they wanted to just invest in the banks. Since this announcement banks and lenders have dropped their lending rates drastically. On average, rates for home loans have dropped anywhere from ½ to ¾ percent overnight.

Even though I still do not like the idea of government bailing out or injecting money into private enterprise, this is one act that can have a huge impact on the recovery of our economy. By lowering interest rates for homes, cars and credit cards, etc… banks have created their own boost to the economy. They are betting on the consumer to pull us out of this financial crisis. Lower borrowing costs encourage consumers to purchase homes. When more homes are purchased, the supply of homes for sale decreases. More demand and less supply halts the free fall of home prices. If home equity is stabilized, then homeowners are not as likely to let homes go to foreclosure or short sale.

You may ask if the banks are willing to lend money in abundance now, will this create the same problem we recently had with bad mortgages? The answer is no. The difference now is that banks have tightened their lending standards. Only borrowers with verifiable income and assets and good credit history will qualify. Sub prime loans are essentially non existent, which is the way it should be. When the well qualified borrowers are the only ones able to obtain a home loan you will have less loans going to foreclosure. All of this instills confidence among the banks and lending institutions, allowing them to lend more money to consumers, thus reducing rates even more.

Of course I am somewhat biased and this development will help my industry, so there is probably more hope than the average analyst. It just makes sense to me that this is the one move that could actually help our economy for the long term.

Market Update: 30 year fixed rate mortgages have dropped to an average of 5.5% with 1 point. I expect some volatility in rates in the next few days as banks will be attempting to figure out where to price their loans to make a profit and encourage borrowing.

Don’t be surprised to hear radio ads saying rates have hit 4.75% , this is true for loans with very high closing costs, (points) or shorter terms like a 15 year fixed.