Dennis' Mortgage Blog

Bailing Out Millionaires

The House of Representatives today passed by a huge margin (386-27) the “Mortgage Forgiveness Debt Relief bill (H.R. 3648) which if passed by the Senate and signed by President Bush would remove the tax penalty on homeowners when the principal amount of their mortgage is reduced due to loan modifications, short sales, or deeds in lieu. Of great interest is the limit in debt reduction allowed under the bill: $2 million! Yes multi-millionaires that could afford to purchase multi-million dollar estates in Nicholas Cage’s neighborhood in Newport Beach, or Oprah’s in Montecito, or Tiger’s in Isleworth but walk away from their mortgages can avoid a tax penalty of three-quarters of a million dollars thanks to Congress.

Recalling my School House Rock on How A Bill Becomes A Law (and Mr. Nimmons’ U.S. History classes!), I know this House Resolution must now go through committee in the Senate and then be voted on and approved by the Senate, any revisions back to the House and Joint Committee and then voted on again by both the House and Senate and then sent to the White House for signature or veto—that said bailouts up to $2 million is a very high starting point for any negotiations.

The premise of this bill is one I would be in favor of, the premise but not the current language. With the current language, the removal of the tax liability consideration in determining whether to keep a property or not creates a detrimental environment for lenders—particularly because of the lack of limits on the tax relief forgiveness. I am going to make a wild assumption that an individual who is in a position to have potentially $2 million in debt relief on a single property is a person of wealth and either very astute financially or pays someone to be financially astute for him or her. As such they are in a position to take advantage of this proposed Debt Relief bill.

The premise is to provide some relief to a family already facing financial difficulties, perhaps catastrophe, by preventing the I.R.S. from piling on while they are down. A family is in a position where they can no longer manage their home and must sell it—try to do what they feel is right rather than going through foreclosure; the proposed bill would end the financial hardship when the property sells. I understand the intent of some sort of relief like this would be to assist families facing financial hardship and sale or loss of their home who do not have the resources to “ride it out”, who are in the position because of job loss, job transfer, health factors or other singular life events. Instead as the bill is written it is open for abuse and what I would consider undeserved relief.

In the high foreclosure market in Southern California in the early 1990s when the state saw job losses of almost 20% from the severe reduction in defense and aerospace employers in the state, I and most of my fellow mortgage originators, had many clients who took advantage of the economic downturn to purchase a new home, and “upleg”, before their current residence sold. They took advantage of what were then new mortgage products allowing 5% down and purchased their new, bigger home, and then after they moved in either let their old home (often condos) go into foreclosure, or put on the market at reduced price and gave the lender a choice of short-sale or foreclosure. There was little concern for the derogatory reporting on their credit record because they already had the home they would be spending the next several years in. The industry saw this happen fairly often, I personally might have had up to twenty clients that I know of who took this route to get into their new home and out of their old one. Under the bill headed to the Senate these individuals, who faced no financial hardship, would be exempt from any tax relief for their taking advantage of the market and their lender.

Were I on the House Ways and Means Committee which originated this bill, I would have required the following modifications to get my vote:

1) Limit the amount of the Debt Relief that would be excluded from taxes, say $100,000

2) If the Debt Relief is on mortgage(s) that were used for cash out refinancing then there is no tax exemption

3) The Debt Relief must be on mortgages that are “seasoned”, i.e. have to have been in place for say 18 months or more

4) If a the borrower purchases any property within 24 months of the date of the loss that triggers the Debt Relief exemption then the exemption is lifted and the forgiveness is once again a taxable event

Essentially this bill should be for families that are not wealthy, did not purchase a property speculating they could flip it and make thousands (or tens of thousands), have an honest financial hardship and must sell their home. As it is now the bill could encourage more short-sales and foreclosures which could have very detrimental results in some regions for other homeowners trying to refinance or sell their homes without a loss. As well without the changes many lenders will face even more losses, which will result in even stricter qualifying guidelines and higher rates for all.

I am hopeful the Senators crafting their version of the Mortgage Forgiveness Debt Relief bill will insert some caps and limits so the provisions benefit those family most in need of escape from further financial hardship.

Dennis

 Friday, October 05, 2007

Originally posted on www.lbpost.com under my column "My Front Porch" on 10-28-07.

Benefiting Greed

George called me. Carol, a real estate agent with whom I had worked for several years, had referred him to me. George wanted to buy a condo in Santa Ana. He had no money for a down payment or closing costs, no retirement or other savings. His income was very low, so low the payment for the unit he was looking at would be approximately 70% of his gross income. Add to the equation federal and state taxes, and property insurance, and George’s take-home pay would not cover the condo payment, much less electricity, food, clothing or other essentials. George had a very low credit score from making late payments, but he wanted to purchase the condo and Carol wanted to sell it to him.

We had a program through a lender that shut down this year that would have allowed me to lie and bump up George’s income to put him in a 100% program for those with poor credit. Instead, I told George I could not help him, he simply did not make enough money to purchase the property and I felt he would likely lose the unit through foreclosure. He did not care, he said before it got to foreclosure he could sell the unit and make money since values in the area were climbing almost 20% per year. I called Carol and said I was sorry to tell her but I could not help George.

“Can’t or won’t?” she asked.

“Won’t,” was my reply. I would not help someone buy a home he could not afford.

George bought the condo. He went to another mortgage broker who funded the loan, and I bet that broker made a lot of money. Funny, I never received another referral from Carol.

The bulletin boards and blogs on mortgage industry websites are filled with stories such as George’s. Reading through them I recall similar situations with many prospective clients. There are numerous incidents of people wanting to buy units with no money down, million dollar homes with no income, no money, and no credit. Condos, houses, duplexes, you name it, unqualified people called to buy. I, and others like me, said, “No,” but they all got loans elsewhere.

In addition to purchasers, mortgage brokers service those who already own homes and want to refinance. I was able to help many past clients and other families refinance and significantly lower their monthly mortgage payments, in many instances helping them establish a savings program for retirement or kids’ college funds. As well, I had the habitual “equity-eater” clients call every year or so to refinance and pull more cash out of their homes to pay-off the consumer debt they had run-up the year before. Their homes were climbing in value and they were spending that equity every month. I had one client I had to “fire,” telling them I could no longer abet them in their consumption habits and leveraging of their family home to buy ever more “stuff.” Billions of dollars of equity was converted to consumer spending in the past several years, much of it by the same families refinancing repeatedly.

In the media there has been article after article addressing the government response—if any to the situation. One article “Congress Struggling to Address Mortgages”, in the Press-Telegram was correctly titled. Congress is struggling to address mortgages, the problem is they should not even try to intervene in the housing and mortgage markets. So far each of the proposals put forth by state and federal governments to “help” “affected” homeowners have the long-term effect of hurting housing markets, bailing out those who put themselves in bad financial situations, and signaling to unscrupulous mortgage originators and lenders that their greed-motivated business practices were successful.

Those in Congress “struggling to address” the mortgage and housing markets are reacting to a problem receiving huge media attention but encountered by a small percentage of their constituencies: foreclosure due to subprime mortgage products with increasing adjustable rates. Albeit a great emotional issue appealing to the media and voters during campaign season, “I worked to save your home.”

Unfortunately what Congresswoman Sanchez and other politicians are doing is the same thing the mortgage broker who helped George get his condo did: playing to emotion and ignoring the facts.

• Fact: every loan in foreclosure had a note that spells out the terms of the loan.

• Fact: a significant number of the loans in foreclosure were used to pull cash out of the property for consumption purposes.

• Fact: the current “solutions” being enacted or proposed will hurt those homeowners who took care of their homes and their equity and also those remaining mortgage brokers and lenders who scrupulously followed a code of ethics in determining whether to assist clients in pursuing homeownership or refinance.

I, and thousands of brokers now expressing frustration and disgust on the bulletin boards and blogs across the country, passed on many potential clients who did not honestly qualify for a loan. Those clients eventually found brokers willing to secure them a loan. Because of that, we also missed a lot of money.

Many of the unscrupulous mortgage brokers and lenders who preyed on the greed and consumption of the American consumer are no longer in business. Thank goodness! Many are still in business, however, and eagerly await government intervention with new mortgage programs that they can use on their past clients they assisted into foreclosure. And, they will make more money once again.

Take a closer look at the numbers being used to tell the story. By comparing current foreclosure and default numbers to those of 2006 is disingenuous as the housing boom created a market with almost no foreclosures in 2006. This gives the appearance of a compounded problem. Congress also needs to consider how many of the foreclosures are on cash-out refinances compared to home purchases.

Before struggling to find solutions, Congresswoman Sanchez and her colleagues need to understand the problem and why most of the homeowners calling their offices are in foreclosure. Not atypically, however, they will act on bills that in the end will reward unscrupulous acts and unfortunately, those acting ethically in America will pay the dearer price.

Dennis

 Monday, October 29, 2007

What’s Worth Fixing?

It is universally accepted that the current economics of the Social Security Administration are flawed and in the coming years and decades will implode from lack of revenue and ever growing expenses to an aging population. This being somewhat universally accepted, at the start of his second term President Bush initiated Social Security reform. Part of his proposal was the partial privatization of Social Security, oops that let the fur fly!

Instead of engaging in productive meetings and talks to explore a range of possible solutions to the national crisis that will affect every American, Congressional Democrats and many Republicans reacted with emotion and sound bites to their constituents. Despite already have government supported private retirement accounts (deductions to 401k and IRA are deductible), the proposal to take potential future money from the Social Security Administration—i.e. government control and access—and placing it directly in the accounts of Wall Street investment banks caused their heads to spin and more importantly the messages to the constituents back home.

The result was no progress on much needed Social Security reform and a problem that is only bigger today than it was in January 2005. Rather than solving the pending crisis of no retirement funds or better yet refunds of our contributions when mine and future generations get to retirement age, many politicians are now adding to the problem by suggesting illegal immigrants working in the U.S. be social security eligible. A shining example of why Congress has such low approval ratings: big problem and no solutions or discussions. Another opportunity to work together to solve a real crisis missed.

Instead of taking up the heavy lifting of issues such as Social Security, Congress is falling over itself to find “solutions” for the mortgage and housing market problems facing the country. Looking for was to legislate relief for homeowners in or facing foreclosure on their adjustable rate mortgages, Congress is asking all Americans to help shoulder the burden of a few Americans who got themselves into the financial hardship they are currently in. Homeowners who prudently purchased homes they could afford, qualifying on the income they actually make and obtaining mortgages they knew they could afford for several years, are being asked by Congress to help out their neighbors who over-stated income, purchased homes above their financial ability to qualify or pulled tens of thousands (in some cases hundreds) of equity out of their homes using adjustable rate mortgages and now face default or foreclosure.

The numbers of American families whose homes are at risk are increasing as the two and three year fixed rate mortgages they used to purchase their homes or pull out equity are entering their initial adjustments to rates and payments they cannot afford. Nationally this is a very small percentage of home owners, some estimates are less than 1% of all homes are affected. Yet despite the low number of those actually affected, politics and sound bites dictate elected officials react.

Rather than work to solve a real problem affecting all Americans for generations, Congress wants to involve all Americans in financing solutions to a relative few homeowners who face foreclosures due to bad decisions on their part—or in some cases deception by mortgage professionals. One problem affects all Americans and they refuse to address it, the other problem affects a small percentage of Americans and they treat the problem as a national crisis. Time for Congress to let the markets and consumers correct the current housing problems and instead work together on solutions to problems that will harm all Americans. Quit avoiding issues that affect all of America to ineffectually intervene in issues that affect a small percentage.

FHASecure…For Whom?

At the end of August President Bush in conjunction with the Federal Housing Administration announced the new FHASecure program that would help “nearly one quarter of a million homeowners.” Uh-huh, sure it will. And it will also help several thousand mortgage originators churn their past clients and make some sweet profits on FHA-funded mortgages—oh and do not think the program is designed just to help struggling homeowners facing foreclosure.

The intent of FHA mortgages is to assist families purchasing homes—increase homeownership and expand the opportunity of homeownership across the socioeconomic spectrum. It is a mortgage product that has looser qualifying guidelines than Fannie Mae and Freddie Mac. Such as, higher tolerance of poor credit, allowance of non-occupant co-borrowers (meaning co-signers are not required to live in the property being purchased or refinanced), liberal use of “gifts” to assist with down payments and closing costs and low down payment requirements. FHA borrowers need not be first-time homeowners, nor must they represent the lower end of the financial spectrum to qualify; i.e. there are no income or asset limitations for FHA applicants.

This last point is important. There are many “first-time buyer” programs in the market that assist in obtaining homeownership, in California one such program is the CalFHA program. These programs generally have maximum income requirements tied to the median income of the county or region where the applicant may be purchasing a home. While there are no asset limitations, meaning an applicant using the program to purchase a $300,000 home may have $400,000 in the bank, there are income limits which the applicants may not exceed. These programs are insured similarly to FHA mortgages, but are designed to only assist first-time homebuyers who represent the lower end of the income range needed to purchase homes in their area.

While President Bush and Congress are working to expand the limits and number of eligible borrowers for FHA loans, they are not necessarily doing so to assist those on the bottom of the economic chain of homeowners, i.e. those working their tails off to pay for their mortgage and other monthly expenses. Because of the lack of income and asset limitations millionaires and waitresses have equal access to FHASecure and other FHA programs—as long as they make enough to qualify for the program.

Of great importance to this program is it appears the only credit qualification required is that the homeowners made their mortgage payments in a timely fashion up to the point their mortgages adjust. There is no guideline in regards to how they pay their other bills. Has their car been repossessed? Do they have credit cards gone to charge off or collection? Has their cellular carrier taken them to small claims court and received a judgment? Essentially those who are still serious credit risks are eligible for the program—putting the insurance pool at risk.

Finally, in touting the program, officials have said that taxpayer money is not at risk. To which I say “phooey.” Between the increase latitude of the FHASecure to lend to riskier borrowers and the proposals in Congress to increase FHA lending limits, reduce qualifying standards and possibly the equity requirement, FHA could very likely cost the American taxpayer millions of dollars. The response is that “FHA borrowers pay insurance into a pool that reimburses lenders for losses due to foreclosure,” sure they do but not enough money is paid into the pool if there is a significant increase in foreclosures of FHA loans.

Some over simplified math:

FHA loan of $200,000 has initial premium of 1.5% upfront (financed) and 0.5% per month.

Total insurance paid first year =

(200,000 x 0.015) + (200,000 x 0.005)/12 = 3,000 + 1000 = $4000.00

The $200,000 would be on the purchase of a home for about $205,000. Let’s assume the property value stayed the same and after 2 years the property went into default and foreclosure. The process takes about six to seven months, incurs legal fees, back taxes, interest. Assume the bank loses about 15% on the transaction.

200,000 x .15 = $30,000

Borrower paid about $5000 in insurance on this loan and cost the lender at least $30,000. The bank needs six other FHA loans to cover the loss on one FHA loan. If this is true across the board FHA breaks even with foreclosure rate of 15-20%.

Of the subprime loans that were made in 2005-2006 that are targets of the FHA targeted loans, approximately 10% are in foreclosure today—and growing. The majority of these borrowers were credit risks to begin with, which is why they were sub-prime, now FHA wants to put them in a taxpayer guaranteed mortgage product. That 15-20% number looks increasingly achievable as the quality of the credit risk in the pool declines and the number of insured loans goes up—oh and property values decline, most precipitously, by the way, in heavy FHA areas. Throw in the incredible fraud prevalent in the FHA origination market, the abuse of minority buyers by FHA originators, and a disaster is waiting to happen.

If the politicians and bureaucrats truly wanted to use the tool of FHA mortgages to assist those in a position to lose their home they should follow the models of CalFHA and also MediCare/Medicaid. Whereas CalFHA and other programs have income limitations, those applying for the new FHASecure to avoid default or foreclosure on their current adjustable rate mortgages should also have such restrictions—otherwise they can qualify for “normal” programs and free up the FHA money for those more in need. As well, why should the government guarantee a mortgage for a homeowner with significant assets in the bank that are not at risk should the homeowner walk away and get foreclosed on after he converts to an FHA-insured mortgage? It makes more sense to me to use the FHASecure money to assist a homeowner with little to no assets in reserves than one who has perhaps 5, 10 or even 20% of the value of the property in his bank account. But making cents (and dollars) rather than sense is what the FHA loans are for apparently.

If the government really wants to help do a few simple things: 1) raise the FHA limit for high cost areas such as California 2) raise the Fannie Mae and Freddie Mac limits nationwide 3) create standardized licensing that is national for all mortgage originators—brokers, bankers, everyone that does what I do. Make the ability to help someone with a mortgage as difficult as the SEC makes it for someone to help someone with their stocks and investments; i.e. create a Series 7 type license for mortgage originators nationwide.

There are a lot of families facing difficult times with their mortgages, for many of them I have empathy, for many others I do not. As I have stated, before any of those mortgages were funded, the borrowers had to sign a stack of paperwork, foremost among the documents was the Note that spelled out the terms of the mortgage. It is the obligation of the signer to understand what he is signing, if you trust the wrong person to tell you what you are signing then that is a shame but it still is your responsibility.

By the end of the current session of Congress we should know if FHASecure and other changes to the FHA programs are going to be in effect. In the meantime keep making your payments on time and if you are having difficulty call a trustworthy mortgage broker who will treat you with honesty and integrity (and can be reached at 562-472-1118!).

Dennis

 Thursday, October 04, 2007

October 1, 2007 Monthly Financial Wire

Welcome to October, the start to the 4^th and final quarter of 2007. Click the Financial Wire link to read this month’s edition, there are a couple of very interesting and thought provoking articles I will comment on below.

September was an interesting month in the economy. We saw the Federal Reserve drop the rates that affect consumers via the Prime Rate for the first time since July 2003—when Prime dropped to 4.00% --and we saw Prime drop 0.50% to 7.75%. The impetus of course was to encourage more lending and borrowing and generally try to get the credit markets working again—the result was a bit of a yawn and everyone expected the Fed to lower the rate.

Economic data was a bit of a mixed bag indicating a slowing in the economic growth cycle we have been experiencing since 2002. Week to week the data would show downturns followed the next day but more growth, fewer jobs created one day and the next increased wages and consumer spending. With the mixed bag comes uncertainty as to the future direction of the economy and that is typically not too good for investment markets.

Overall the month of September was positive for interest rates as we saw both jumbo and conforming loans drop a bit, jumbo a bit more so decreasing the gap that widened so dramatically in August. Too early to tell if this is a trend or temporary reaction to the Fed and other investment markets, but a good sign for those needing mortgages.

We start October with rates for 30 year fixed rate mortgages, fully documented income, at least 10% down and FICO scores over 720 at a cost of 1 point (plus additional fees per good faith estimates) of 6.00% for conforming and 7.125% for Jumbo loans. Here is your visual:

Of great interest to us in September was legislation passed by the House and sent to the Senate to revise the loan limits and qualification requirements for FHA mortgages. The House version would have a dramatic impact on lending in Southern California as it would greatly increase the loan limit for FHA loans, as well the House version eliminated any down payment or equity requirement. We are still waiting to see the Senate version, and then of course, if you remember your “School House Rock” from Saturday cartoons on how a bill becomes a law, the House and Senate committees meet to iron the differences in their versions, vote on one piece of legislation and send to the White House for signature. Given the commentary and political opportunity provided by the housing market situation, I am surprised it has taken this long with no bill produced—the cynic in me says the politicians are working on what pork to add to the bill.

The lead article in the Financial Wire is excellent and I highly recommend it. It shows two different surveys on housing prices in the United States, one survey shows prices decreased and another survey shows prices increased during the same period. Why? Each of the surveys was for a different customer with a specific purpose for the survey. As a result the surveys each required different data. The article explains each survey, what was included and what was excluded in the data and because of the data used the different conclusions that resulted. A great lesson for us to read beyond the headlines and opening paragraphs of stories that are based on polls and surveys—what is being asked, to whom and for what purpose, these questions will let us know how to interpret the numbers we are reading. An excellent example of this is in the reporting of monthly foreclosures. The media is providing percentage increases in foreclosures, or total filings, from the same period last year, say August 2006 to August 2007. I am yet to see a story that informs the reader of the actual number of foreclosure filings in August 2006. Why? Providing the percentages allows the story to be sensationalized if they can say filings increased 100%, instead of saying filings increased from 50 to 100. As well these stories omit the percentage of households the filings represent, the average length of homeownership and other data that would allow the reader to know a more complete story. Read the facts!

In the side bar of the Financial Wire is a story covering pre-approval letters—the staple of our business. I have provided hundreds of such letters over the years and they all require the same thing: an extensive conversation with the client covering income, assets, goals and objectives, comfort level with payments and a credit report. Until I can present you with mortgage options that would a) allow you to purchase the home you want to write an offer on b) be within my ability to get the mortgage approved and funded and c) be within your comfort level of monthly payment and funds to close, I will not provide a letter. When we meet all of those factors, a mortgage product that you qualify for that would cover the purchase price of the home and you are able to qualify for the mortgage and you feel comfortable with the mortgage product, its features and the payment, then I will write a letter saying you have pre-approval to purchase the property. If someone just asks you what your income is, how much money you have in the bank and if you have good credit, they cannot write you a bona fide pre-approval letter. What they can write is a “I wish that these folks qualify so I can get a loan application” letter.

Enjoy October! Give me your questions and feedback.

Dennis

 Monday, October 01, 2007