Dennis' Mortgage Blog

Everyone in my industry knows a couple of people that have skirted, or broken, laws in doing loans—some habitually so.  When they get caught, or someone has to do something about it (their manager or broker or the owner of their company) they get fired and just move to another broker or lender.  Get fired from Wamu go to work at Wells Fargo, then BofA, then Countrywide.  There is not tracking or consequences for these individuals.  They rack up a career of bad loans, complaints and foreclosed clients but just keep getting a job somewhere else.  With a national license this practice comes to a screeching halt.

I am one of the first people in line when it comes to states’ rights and keeping the federal government far away from local issues.  Our nation is so large, so diverse with so many regional customs and cultures that many issues and policies should be the purview of the local and state governments.  Policies that make sense in West Virginia make little sense here in Long Beach, and vice-versa.  Across the country our schools, our police forces, our hospitals are adversely impacted by federal legislation and judicial decree because of occurrences in other parts of the country as the legislation and decrees keep adding up and piling on year after year, decade after decade.  Generally I say, “enough, let us fix our problems with our people, our ideas and our taxes.”

For lending legislation however I am all for a Federal mandate and taking much of the power to determine who can and cannot engage in mortgage origination away from the states.  Currently every state has their own licensing requirements, or lack thereof, for individuals and companies wanting to originate and fund mortgages or home loans.  Some states require that you post a bond, some require that you have “bricks and mortar” in the state not just a phone number, some require that you take continuing education, some just require that you pay a fee.  In most states you only need to be licensed if you are brokering mortgages and there is no license required for individuals working for banks, credit unions or direct lenders—California is this way. 

As a mortgage broker I must be licenses as a company by either the Department of Real Estate or the Department of Corporations.  If licensed by the DOC then there is no requirement for individual licenses for each originator.  The loan officer you speak to at Countrywide or Bank of America?  They do not need any licensing to handle your mortgage, just a familiarity of the company products.

As a licensee of the Department of Real Estate our company must have one person with a Broker’s License—that would be me for Stratis Financial—and this individual is responsible for all the activity under the license.  Everyone in the company who originates mortgages must have either a broker’s license or a salesperson’s license from the DRE.  This means that with a DRE broker’s license I can sell real estate and originate and fund mortgages, oh and I can also run an escrow company to handle the transaction.  Not too much of a set up for those with criminal minds is it?  One license can handle the buyer, the seller, the mortgage and the proceeds of the transaction.  And it is not that difficult for anyone to get this license.

Because of the one license for multiple activities in California and most other states you can see which major industry group would be against a national license for mortgage and home loan origination.  The state real estate associations and the national organization would most likely fight like crazy to retain the right in most states to allow their licensees to continue originating and funding mortgages.  Restricting this license from this activity would severely impact their revenues and profits as now the part-time real estate agent whose cousin wants to buy a home could no longer generate the commission on the sale and on the loan to purchase the property—but that is exactly why the licensing laws need to be stricter.

I handle your most important asset: your home.  I am dealing with your life savings, your equity and the most important investment you make.  The shelter for your family is in my control.  And it is very easy to get the license to be in this position.  While there are some national lending rules we must follow, every state has their own and frankly unless we are audited (which by the way we—Stratis Financial—are annually due to our funding of FHA loans) the rules are easy to break.  The threat of the audit is supposed to keep me honest—just like with the IRS.  But the states do not have the finances to audit the hundreds of thousands of mortgage brokers and unless there is criminal charges the Feds do not either.  Therefore it is easy for the bad guys to go from broker to broker, lender to lender with no repercussions. 

One would think that Fannie Mae and Freddie Mac and the major investors and FHA would demand a national license so they can track the bad originators as they move from place to place and prevent them from continuing their criminal and/or unethical practices.  If they want to see a tremendous reduction in fraudulent activity and losses they should demand that Congress and/or the Office of Thrift Supervision or the Department of Housing and Urban Development mandate a national license for mortgage and home loan originators similar to the license that stock brokers and traders must obtain before handling stock trades.  Require a license that requires time and effort to obtain and results in full time, professional and accountable individuals working with families to finance their homes and assist with their debt and equity management.

If states want to require further licensing for mortgage originators so they can continue to collect licensing fees great let them.  But also make sure those individuals have their National Lending License as well.  Enroll Fannie and Freddie in the process to establish a national database and website so consumers can lookup the license of an individual prior to engaging in business with them.  Have an easy process for complaints to be filed by consumers and also by lenders against their own people they have fired or let go for unethical activities.  Put some accountability into the industry that has some consequences.

Until this happens those out there who prey on others, who habitually break the laws and scam people just to make more for themselves will find ways to continue doing so.  My proposal will not get rid of all the bad guys or all the fraud, but it will severely restrict the amount of it and will prevent it from moving from one company to the next to the next…. To those in the industry, think of this as having the same effect IRS form 4506 had on reducing fraud when it was imposed by lenders. 

Dennis

Wednesday February 27, 2008

I am using a new contact/database management program so my formatting is a bit off and I hope I am able to get it to everyone okay.  Remember you can always get this update every Friday on the web at my Mortgage Blog.    This will also serve as premature notice of the availability of the Financial Wire which is new on the first of each month—tomorrow so if you click on it today (2/29/08) you will get February’s wire.  Since I am still learning my new program I do not know that I will have knowledge by tomorrow on how to send out that email.  Thank you for your patience and understanding!       

Please keep in mind layered risk pricing for all loan products for credit score and loan to value mixes. Call for quotes.

On this Leap Year Day we continue to experience a positive effect from bonds bouncing off the bottom on Wednesday.  After several days of a downward run bond prices hit the 200-day moving average and bounced right up—yeah!  There was some fear/speculation that after crashing through the 50-day and 100-day moving averages with plenty of momentum combined with the run of economic news with an inflation bias that we would see rates continue to climb.  Thankfully that 200-day average held and we are seeing rates drift down the past few days.

Rates for conforming and jumbo mortgages have dropped 0.375% since last Friday and momentum and economic news and FedSpeak may keep this trend going into next week….or may not.  Just because rates have turned does not mean we can let our guard down!  I remain vigilant with my clients in watching the rates and timing our locks to try to get them the most benefit during volatile times. 

NOTE PRICING BELOW IS BASED ON 15% DOWN FOR JUMBO LOANS AND 10% DOWN FOR CONFORMING, FULL DOC, AND FICOS OF 720 AND ABOVE:

30 year conventional at 1 point 5.75%

30 year jumbo at 1 point 6.75%

This week we have a lot of political and industry news that will indicate the timing of the new loan limits, what the pricing may be and slowly what effect they will have on rates.  As well Congress debates what more they can do to interfere in the real estate and mortgage industries to get the most political capital for the individual members and respective parties.  I comment on the various proposals being bandied about frequently on Mortgage Blog so check in.

I would appreciate it if you could pass my name on to someone who needs mortgage information this week, or send me their name and contact information and I am happy to see how I can be of service. Thank you!

Please feel free to forward this email to your co-workers and clients--or send them to my Mortgage Blog where it is posted weekly.

Have a great weekend,

Dennis

Friday, February 29, 2008 

The "stimulus package" passed by Congress that is to increase loan limits for FHA and conforming loans is intended to open up what are now jumbo loan amounts to conforming underwriting guidelines and pricing with the utilizaiton of the Fannie Mae and Freddie Mac secondary markets.  Start your stopwatches (why do we "start" a "stop"watch?), actually start your calendar--and not your desktop Word of the Day or Fun Fact calendar.  Start your Month-At-A-Glance calendar as it will be at least that long until we see any adjusted loan limits in the market place.

As I mentioned on my Mortgage Blog a couple of weeks ago, while the higher loan limits will assist many borrowers, those expecting loans above $417,000 to replicate existing conforming loans in terms, guidelines and price will be disappointed.  There is every indication that once Fannie and Freddie announce the new loan limits for different regions they will also announce different pricing layers and guidelines for the “new conforming” loans; i.e. those between $417,001 and the max limit of $729,750.  The earliest estimate for the new loan limits is early March—my guestimate is after Easter (3/23/08).  On your mark, get set, go!

On a more discouraging note that will kill any positive direction and momentum (i.e. stimulus) in the mortgage market from the loan limit increases is news that Fannie Mae is strongly considering drastic changes to their appraisal policy.  This is the result of a major lawsuit that has been going on in New York where their self-anointed savior of the people Attorney General Eliot Spitzer has been going after Fannie Mae trying to extract major policy changes from the number one purchaser of home mortgages in the country.  Anything Spitzer causes to happen in New York will be felt right here in Southern California—and Modesto, and Fargo, and Tulsa, and… And as is typical when politicians try to legislate private markets to “protect” you and me because of a small majority of idiots who created a problem, everyone else will be adversely affected.

Rumors, and memos, have it that Fannie Mae will no longer allow mortgage bankers, and banks selling loans to Fannie Mae, to have in-house appraisal staffs.  This in response to a certain major national bank who in the past year laid off their entire appraisal operations after it was discovered several branches were cooking appraisals to meet values needed for mortgage applications.  This is illegal and violates many federal laws—and results in lawsuits where people like Eliot Spitzer get to play Napoleon.  Further, Fannie Mae will evidently no longer allow mortgage brokers such as myself to directly order appraisals on loans warranted for sale to Fannie Mae.  Because a certain number of mortgage brokers, and bankers, across the country illegally pressured appraisers to bring values in at certain amounts to support loans; and because a certain number of appraisers acted in conjunction with these mortgage originators; Fannie Mae is creating a policy that will have the result of slower mortgage processes and increased costs for consumers.

Currently once we have your mortgage application I send an order form to an appraiser with whom I have had a long working relationship.  If the transaction is for a purchase I indicate the price agreed to by buyer and seller.  If the transaction is for a refinance I indicate the estimate of value as obtained through cursory look through Multiple Listing Service, title company website and/or owner opinion.  Less than a week later I have a complete appraisal of value.  Let it be known that it is not uncommon for me to receive an appraisal that is lower than the estimated value for a refinance transaction and in the current market a heads up and possibly low value for a purchase transaction.  Because the appraiser is honest and because I am honest we proceed with what we have and work with the clients to explore options.

Under the proposed changes by Fannie Mae—who assume that both the appraiser with whom I have a long term relationship and myself are corrupt cheats looking to engage in illegal activity—I will now need to order my appraisal through one of several lenders where I intend to place the loan for funding.  This will require the lender to create a new staff position to handle all the appraisal requests, which will in turn generate an additional fee for the borrower.  The lender will order the appraisal from an approved list, but most likely will order the appraisal from someone who I have selected off the list—the same guy I would order from directly without the order fee.  Then the appraisal will be done in the lenders name and sent directly to the lender.  Same appraisal, same value, slower process and a bit more expensive; who benefits?

Here is where the process can and will cost the consumer money.  While the industry does not like to advertise the fact, it is common practice for “standard” loans to be locked with Lender A for say a $400,000 30 year fixed rate mortgage; i.e. a Fannie Mae loan; for the length of the escrow at let us say 5.5% and 1 point.  A few weeks into the transaction if rates have dropped then the client is re-locked at Lender B for the same loan at 5.25% and 1 point.  The borrower has benefited from the drop in rates prior to the close of his mortgage.

Under the proposed changes by Fannie Mae, now to change lenders and lock the client into a lower rate we will need to get a new appraisal—and it will cost the consumer a new appraisal fee, and a new appraisal order fee.  The other option is to wait to order the appraisal until the last minute—which can and will delay many closings costing borrowers lost loan locks, sellers their loan locks on the homes they may be buying and up the ladder.  Some of the primary benefits for using a mortgage broker—control of the loan process, ability to adapt quickly to a following rate environment—are taken away.

Mortgage brokers have originated approximately 80% of the mortgages funded in California for the past five or more years.  Statistics dictates that there will be more bad transactions, more illegal activities by the segment of the market that is doing the vast majority of the business.  But this does not mean that 80% of the brokers are engaged in this activity—but we will all be penalized because Fannie Mae, the State of California and every other state including Mr. Spitzer’s New York, and the Federal Government continue to miss the boat on how best to reduce the amount of fraud and deceit in the industry.  They will not do it by changing how we order appraisals, they can only do it by changing who gets to work in the industry.

As I have said time and time again: require me and every person in the country who originates home loans and mortgages to hold a national license that is difficult to obtain.  Every mortgage broker at Stratis Financial, every loan officer at Bank of America, every originator at IndyMac Bank, or Countrywide, or DiTech, or Quicken, anyone who takes loan applications from consumers for home loans, who quotes interest rates, must have the same license in Long Beach or Long Island, in Salem, Mass or Salem, Oregon.  Make it national, make it difficult and make it mandatory. 

More on this in my next post.

Dennis

Monday, February 25, 2008

I am using a new contact/database management program so my formatting is a bit off and I hope I am able to get it to everyone okay.  Remember you can always get this update every Friday on the web at my Mortgage Blog.           

Please keep in mind layered risk pricing for all loan products for credit score and loan to value mixes. Call for quotes.

Another week of the rates getting pummeled has passed.  Folks we are in an up rate environment.  Here are some pointers with how to handle this to protect clients and escrows:

1) Lock, lock, lock.   Location, location, location may be the mantra for the industry, but if the rate jumps on a client a client and they no longer qualify then it the location will not matter, the deal is done.

2) Make sure all borrowers are prequalified at one-quarter of one percent over the current market rate.  If you had someone prequalified last week at 5.75% and wrote an offer today on that prequalified amount you may have an unqualified buyer.

3) Make sure that the lock is at least to the close of escrow--if possible slightly beyond as we do know that not all escrows close on their scheduled closing date.

4) Find out what is needed to get the loan submitted, approved, to docs and for funding--keep open communication about the status of these items with the borrower so you are aware of timing issues for the critical final steps.

Look at the chart below, if you client was locked on January 15th and had to re-lock today could they qualify?  This is why we want to make sure we have a sufficient lock period and a bit of a cushion in qualifying and in closing.      

Both Jumbo and Conventional got hit this week, although the increase in conventional is higher with an increase of 0.25% from last Friday presenting a rather unusual curve in the chart below.

NOTE PRICING BELOW IS BASED ON 15% DOWN FOR JUMBO LOANS AND 10% DOWN FOR CONFORMING, FULL DOC, AND FICOS OF 720 AND ABOVE:

30 year conventional at 1 point 6.125%

30 year jumbo at 1 point 7.125%

The market is still volatile, we are still seeing lenders with fungible guidelines and products, so make sure you and your clients are very diligent in communicating to everyone in the transaction.

I would appreciate it if you could pass my name on to someone who needs mortgage information this week, or send me their name and contact information and I am happy to see how I can be of service. Thank you!

Please feel free to forward this email to your co-workers and clients--or send them to my Mortgage Blog where it is posted weekly.

Have a great weekend,

Dennis

Dennis C. Smith
Stratis Financial
Direct (562) 472-1118

Mobile (562) 243-6912

Fax (562) 684-4316

My Mortgage Blog
 

www.DennisCSmith.com : apply on-line, check rates, check loan status and much more

The bond markets started the short week today in free-fall as mortgage backed securities finally stopped their decline (in price) resting on the 200 day moving average--putting us on the verge of more rate increases in the coming days.  Remember the teeter-totter for interest rates, on one side is the price of bonds and on the other the yield or interest rate; as the price falls the rate increases.  (This analogy can also be used for points vs. rates when locking in a loan, the higher the points the lower the rate, the lower the points the higher the rate.)

With the release of January CPI tomorrow we could see a crazy day in the markets.  If the number comes in "hot", meaning inflationary, expect bonds to plummet and rates to increase significantly, if it comes in medium we may see a slight dip in rates and if we CPI come in validating the media spin and politicians seeking office that we are in a recession already we will see a slight improvement in rates.

The problem with a strong inflation number tomorrow is that it will signify that the Fed was premature in the 1.25% cut in rates in January, as well that Congress and the White House were a bit overzealous on much of the economic stimulus package.  Thankfully much of the package, the tax rebates, will have little to know economic impact but at least they felt good about themselves for passing it.

What should help us in the mortgage industry, and those of you with mortgages, is the loan limit increases--even with the bump up in rates we should be able to assist many homeowners with high limits for conventional and FHA mortgages.

Keep checking this site for economic and rate information.  Or call to see how I can assist you.

Dennis

Tuesday, February 19, 2008

Below is copy of email I send every Friday to real estate agents in my database, check this page every Friday for updates. Click on the Contact button to email me so I can help you with your mortgage needs.  Dennis

Last week the stimulus package finally got through the Senate and it appears to be headed to President Bush’s desk for signature sometime next week. While the stimulant part of the package is very debatable as to its effectiveness, what is not debatable is that the markets—such as Southern California—that will benefit from the higher loan limits will see an increase in activity. The maximum limits for FannieMae/FreddieMac and FHA are now $729,750 or 125% of an area’s median home sales price—whichever is lower. (For areas with median home prices below $325,000 do not worry your Fannie limit is still $417,000.) Before getting excited that you may be positively affected read on to some of the limitations. Keep in mind as well that after President Bush signs off on the bill several government agencies, plus Fannie and Freddie, have to implement the limits, pricing and determine the formula for median price calculations. Those who read my Financial Wire learned here (click on “Battle of the Warring Price Indexes) how the prices are calculated. So a lot of work will have to be done before we see actual changes in our markets and programs.

What’s in it for Me? From the analysis I have read so far from various sources most of the country will not be benefiting from the higher loan limits. Only about twenty markets across the country will see their loan limits increase through the new plan, and only six will see the maximum loan limits applied to their area—of the six that are predicted to max out at the $729,750 five of the areas are in California (yeah!). Here is a chart from the National Association of Realtors for the highest median areas:

So if you are in one of the areas where the median price is above $320,000 you should see an increase in the conforming loan limits. Since my client base is California practically all of my client base will see an increase to the new maximum loan amount—as currently presented.

The new loan limits only apply to 15 and 30 year fixed fully amortized products for owner occupied single family housing (although there is some speculation that perhaps a 5/1ARM may be included.) What loans will not be available to the new limits: no interest only financing, no multi-unit (current limits which are all above the $417,000 single family unit apply), no adjustable products and no investment properties. By some calculations only about 15% of the existing non-agency (i.e. not Fannie Mae or Freddie Mac) mortgages will be eligible for refinancing.

The cap on the mortgages is most likely to be 90% combined loan to value—which will be a boost of 5% for most of California that is currently capped by most lenders at 85%.

What Cost?

As I mentioned in previous posts on this site there is very strong sentiment that there will be “add-ons” or “overlays” or “tiered pricing” for the new product. These price adjustments can be something on the order of adding 0.25% for loans between $417,000 and $600,000 and add 0.50% to loans over $600,000 to the maximum loan amount; add 0.500 points to the fee (about 0.125% in rate) for loan to values over 80%, add various prices to FICO scores below certain levels, etc. By the way Fannie and Freddie have been having these add-ons to pricing for loan to values and FICOs for several months now.

Why? Because initially there is great uncertainty if there is a secondary market for the new mortgages. If they lend the money will anyone buy the paper? Our current difficulty with Jumbo financing and why the rates are so high relative to conforming loans is because there is little interest on Wall Street to purchase Jumbo mortgage bonds or securities. Just because the Federal Government says, “in certain circumstances treat $700,000 mortgages the same as you would $400,000 conforming loans…” does not mean investors have to back the plan by investing their millions and billions. The new loans will have a higher risk factor for investors due to the higher investment per borrower they are financing (i.e. they can lose $700,000 in one loan as opposed to $400,000 in one loan today if borrower has difficulty and goes into foreclosure) and as such will need a higher rate of return. While the spread today is about 1% between Jumbo and Conforming mortgage rates, the new loan limits should cut that spread in half for those that qualify.

So while the loan limits will increase, so should the price compared to what is the current conforming loan limits; however any increase should be significantly below the current jumbo rates and differential to conforming loans.

Who Benefits?

Those looking to borrow between $417,000 and $729,750 who have the appropriate amount of equity to refinance or cash for down payment who qualify for a fully amortized 15 or 30 year fixed rate mortgage at a rate higher than the current conforming rate and lower than the current jumbo rates—a somewhat narrow base for most areas of the country, but higher than many people think in many parts of California. You currently have a $675,000 mortgage on your $1,000,000 home with a loan you took out in 2006 that was fixed for 3 years at 6.25%; have solid FICO scores and income over say $100-120,000 per year? You probably stand to benefit by refinancing to 6% or below depending on how the market goes. If you are self-employed and your income taxes show you make only $50,000 per year after all your write-offs and expenses (wink, wink, nudge, nudge) you probably will not benefit as you will run into the qualifying issue. Case by case tens of thousands of Californians could benefit from this portion of the stimulus package depending on what layers are added onto it as it becomes implemented.

When Will I Be Able To Take Advantage Of The New Limits?

The timing is predicted to take about a month before we are able to take applications and lock in rates and terms for borrowers. Many of our lenders will give us timing factors in the next week or so as to when they expect to be able to start funding the new loan limits. Since they have no idea as to the overlays charged by Fannie and Freddie they cannot price the loans yet so there is no way to lock in borrowers applications.

So if you are in the segment of the population that may benefit from the expanded loan limits give me a call and let’s start working on your package---but hurry because the limits are set to expire and revert to the current limits on December 31, 2008!

Dennis

Monday, February 11, 2008