Dennis' Mortgage Blog

Searching through an extensive amount of news articles, blogs, websites and other sources it was very difficult to find any “high profile” individuals speaking out against a so called “Federal bailout” of homeowners facing foreclosure of their home mortgages. Given the amount of coverage that the rise in foreclosure filings, decline in property values, closing of mortgage companies and other news has generated, one would think there would be some commentary on the role of the Federal government—and commentary usually comes from both sides of an issue. Not on this one. There is a significant void in argument against any Federal assistance to homeowners and lenders. Below I will point out some issues that would argue against extensive government intervention in the mortgage industry and homeowner foreclosures. Note that the professional associations to which I belong for mortgage brokers and also the mortgage bankers associations and the realtor associations are all lobbying for a “bailout” or intervention; but because of the lack of commentary and analysis available against a bailout I will provide my opinion from that viewpoint.

On Tuesday the House of Representatives passed H.R. 1852 The Expanding American Homeownership Act of 2007 by a vote of 348-72, all of the votes against were Republicans. The primary provisions of the act that could have a positive impact on the mortgage industry are a) considerably higher loan limits (almost double the current limits in California and other high cost areas) and b) eliminating requirement for any down payment or equity in the property to qualify for an FHA mortgage. H.R. 1852 is now in the Senate where modifications may be made to the lower the maximum loan amounts and require some down payment/equity stake in the property (currently FHA requires 3% equity).

The purpose of this is to allow those with mortgages not currently in the FHA qualification range, either because of loan amount or equity in the property, to qualify and fund an FHA mortgage. Under this proposal the limits in California for FHA may exceed $700,000---with no down payment. Aren’t these the types of loans that are causing so many of the current foreclosures?

What I see as a very bad portion of this legislation is the relaxation of the requirements to be an FHA approved lender or mortgage broker. FHA has a history of fraudulent transactions and individuals who abuse the FHA system for personal gain. In the mid to late 1990’s the “605 Corridor” in Southern California was filled with brokers, agents, appraisers, tax preparers and others creating straw buyers for transactions and selling over inflated properties to each other and literally stealing millions of dollars using FHA insured mortgages. Further, FHA carries a very high mortgage insurance premium on every loan, but still not enough to cover defaulted loans in a high foreclosure market, even under the current regulations requiring 3% down payment or equity. With 100% mortgages to homeowners who previously exhibited poor credit histories or inability to verify income or assets suddenly FHA will become solvent and save the housing markets? In my local market the FHA, and Fannie/Freddie, loan limits need to be raised as the current limits do not allow entry level buyers access to median priced homes, however raising the limits to well over the median market price and not requiring any equity in the property is asking for future defaults and eventually a tax payer bailout of FHA as its insurance pools do not cover the losses.

Combined with the Fed rate cut on Tuesday there was a lot of news and a commentary on the movement by Federal agencies that appears to be focused on homeowners who are in or may face foreclosure. As stated above however, few prominent individuals have spoken out against a Federal bailout. This could be for many reasons, primarily however is the political and public relations danger an individual would face in light of the overwhelming press and media coverage on current foreclosure markets and extensive use of individual homeowner’s situations that portray them in very sympathetic terms. In the end who wants to go on record saying a family of five in Georgia deserves to lose their home?

On dedicated and subscriber websites within the mortgage industry many individual brokers are speaking against any bailout and adding commentary such as, “Like you for the past two to three years most of my clients wanted 100% interest only financing—if I said “no” I would lose the deal to the guy across the street. Now they are upside down and calling me telling me it is my fault.” The underlying tone in the mortgage blogs and bulletin boards is one of resentment and anger at being attacked and portrayed as greedy brokers purposefully putting families in “bad” loans to make more money. Virtually none of the major media sources have included statements from mortgage brokers that are in any way similar to what is being said on the dedicated subscriber sites.

The primary national story on someone against any Federal intervention or bailout was an AP story by J.W. Elphinstone that was picked up by most major newspapers last week (week of 9/10/07) such as the Orlando Sentinel. The article’s headlines throughout the country indicated there are people against any Federal action to “solve” the mortgage foreclosure situation, the article’s main “against” is Thomas Roach who has created an on-line petition “Tax Payers Against a Wall Street and Mortgage Bailout” (http://www.petitiononline.com/bailout/petition.html) that has almost 5400 signatures as of the morning of 9/20/07. Also in this article are comments by Jim Gaines, research economist at the Real Estate Center at Texas A&M and a few other private individuals.

That is pretty much it, no politicians, major Wall Street executives or CEOs, the usual Sunday morning talking heads or radio talk shows. It is silent on this issue.

Picked up by a lot of websites and some print media were comments by Bill Gross, Managing Director of PIMCO on his monthly commentary . Gross advocates the Federal government involvement to assist homeowners; says in recent history government has bailed out the S&Ls and Chrysler, “why shouldn’t it bailout 2 million homeowners?”

**It should be noted that after Gross’ comments, which as stated were widely circulated, PIMCO created a “Distressed Debt Fund” of $2 Billion. PIMCO intends to buy “distressed” mortgage paper. Lacking from the coverage of the new fund was relation to Gross’ comments about the need for government intervention in the mortgage markets—which of course would also help anyone holding distressed mortgages by reducing the number that would go into default and/or foreclosure.

The moves by the Fed to cut rates and Congress to raise the FHA limits and relax some of the qualifying guidelines may assist a small percentage of homeowners who otherwise may face foreclosure on their mortgages. The overwhelming majority however will not be helped for several reasons. One, I have had many clients over the past several years during the housing boom and price run up with poor credit, no money for down payment and knowing the only way they could get a loan was with interest only mortgages fixed for only two or three years. A lot of these clients I turned down explaining they could not afford the mortgage—they went to someone who would provide the loan and bought the home anyway. Almost everyone felt their property would go up in value and they would either be able to refinance—provided they changed their habits and made payments on time—or be able to sell their property and make tens if not hundreds of thousands of dollars. I wonder if they are now or soon will be in default? Bad credit habits are like bad eating habits, smoking or substance use: they are habits and they are extremely difficult to break and change. Someone with very low credit scores due to habitual inability to pay credit on time put into a home with no investment and an adjustable rate mortgage is a poor risk and as we say in the office “tomorrow’s foreclosure today.” Meaning anyone who makes that loan today will be facing a foreclosure tomorrow—which has come to pass.

Two, in the current environment lenders have tightened lending criteria severely, affecting even extremely well qualified borrowers. Take the family with very high FICO scores, qualifying income that supports a mortgage payment and in a home they thought they would be in for five years, but now that the five years is up they are unable to afford their new home because home prices today are higher than they were in 2002, and need to get out of their mortgage. Given the current lending guidelines they may not be able to afford a new fixed rate jumbo mortgage—so they must let their 5/1 ARM adjust and face much higher payments. Situations change for families, some beyond their control. In many cases families will be caught in the middle of needing to refinance their home and tighter lending criteria preventing them from doing so.

Three, with the tighter lending criteria comes a shrinking pool of qualified buyers, fewer qualified buyers means less demand, less demand means….over supply and a decline in market prices. This evaporates equity for current homeowners who may need that equity to qualify for a refinance of their existing mortgage under the new criteria. A circular problem that the government cannot solve unless they are will to treat housing like dairy farmers and offer price supports.

In the end the free markets will have to work this problem out. Supply and demand will rectify the situation and eventually the cycle of upward prices will start again—the question is “when?” In the meantime elected officials, local, state and federal, will impose requirements tighten lending criteria—artificially shrinking the number of qualified borrowers—and spend perhaps billions of tax payers money to assist those in or facing foreclosure on loans they entered and agreed to pay.

Let me close with this, I know there are fraudulent brokers and lenders in my industry, I know there are those who use deceit and lies to get applicants and fund mortgages. I also know that every single mortgage has a Note that must be signed by the borrower that spells out the terms of the loan. These are lengthy documents, seven to eight pages, that are in the company of about one hundred other pages of documents in the closing package (most of the documents I might add are because of government regulations that end up adding more and more pages of confusing paperwork to the borrowers), but they are the most important pieces of paper an individual will sign in their lifetime. They are pledging to pay back a very large amount of money, and the terms of the repayment. Every loan that is in foreclosure has a Note signed by the borrower, it was their responsibility to read the Note and if they did not understand to get advice and understanding. Hire an attorney, consult with someone not party to the transaction, but get advice. Because they did not we are in the situation we are in today with the overwhelming majority of those in foreclosure—and now you will probably have to pay for it.

Dennis

 Friday, September 21, 2007