Dennis' Mortgage Blog

Question of the week:  If I have a loan payment with Washington Mutual what should I do?  Answer:  Continue to make your regular loan payment.  As you probably have heard the FDIC pushed WAMU into a deal with JP Morgan Chase last night, making WAMU the biggest bank failure in U.S. history.  Now all accounts that were with WAMU are accounts of Chase; checking, savings, CDs, auto loans and mortgages.  Until you are instructed differently by Chase continue to bank as normal with WAMU, including your loan payments.  As well be very aware of any mail you get from JP Morgan Chase, you may see an envelope from them and think that it is junk mail or another credit card solicitation—it probably concerns your account so open it!

If you have a question you would like answered send to me!

Another historic week for the United States and our economy; personally while I am a history buff I would not mind a non-historic week sometime soon.  As I write this Congress and officials from the Treasury, Federal Reserve and other Federal departments are working on a plan that is either a bail out or a recovery depending on your perspective.  As you know Treasury Secretary Paulson announced earlier this week a somewhat vague plan to put $700 Billion into the economy to purchase delinquent mortgages and housing debt to remove from the balance sheets of the financial sector assets that have become liabilities.  The theory being that freed from these bad investments the credit markets will loosen up and funds will once again flow between banks, brokerages and investors. 

I personally have mixed emotions about the proposal.  Until we know what the final plan will be, what oversight and controls are put in place by Congress and the Administration it is hard to judge the merits and detriments of the plan—not that lack of any specifics or final plan has stopped many from pre-judging the concept.  Conceptually I feel an extremely bold measure is required from the Federal government, unless anyone is willing for the teetering financial markets and housing sectors to collapse entirely.  Ideologically I am against significant government involvement in the markets.  Concept wins this issue.

The obvious upside is if this plan, or some semblance of it, is enacted it can definitely have a positive impact on the markets—specifically the housing and real estate markets as funds are needed to keep rates affordable and to make loans.  By removing the delinquent debts it will put confidence back into lending.

Another upside is that the government is getting something for the funds being spent:  real estate.  With the Plan (I will refrain from using “bail out” or “recovery”) the U.S. government will be the single largest owner of single family residences in the world.  While prices may be dropping, each of those properties does have value and when sold the funds will go into the Treasury.  Further, with the ownership of Fannie Mae and Freddie Mac the Treasury will be collecting the profits that accrued to Fannie and Freddie stockholders, and executives, will not accrue to the Treasury.  I am not saying that the full $700,000,000 will be repaid, I am saying that I do not think the full amount is lost to the government.  Who knows, if the resale of property is handled right we might see a net profit from the deal (my inherent optimism shining through).

My concerns are as follows. First, with the prospect of being able to unload their foreclosures and severe delinquencies banks and lenders may take their REOs (Real Estate Owned, i.e. homes they now own because they have been foreclosed) off the market and possibly out of escrow.  They may do this to see if they get a better offer from the government as part of the Plan.  As well homeowners who are currently in escrow having negotiated a short-pay may have those deals taken off the table for the same reason; same may happen for homeowners who are negotiating forbearances to lower their rates or fix their terms.  With a rather large check looming from Washington D.C. many lenders will probably determine their best course is to turn their REO over to the Feds, even those in escrow.

Another concern I have is what is the Federal government going to do with all the housing stock it is about to own?  If you peruse the HUD website for property it owns through FHA foreclosures you can see that HUD does not do a good job of upkeep on its property.  Further, currently each bank is working with local real estate professionals to market and sell their REOs.  Some banks are not putting all their REOs on the market at one time to avoid flooding the market and driving prices down further.  How will the Feds handle the REOs they will acquire because of the Plan?  If all, or a significant number, of the real estate acquired through the Plan is put on the market in a very short time the Feds can literally wipe out some housing markets by saturation of supply.  With careful and prudent maintenance of the supply, and cooperation with local real estate professionals and housing authorities properties can be released to the market and perhaps to the housing authorities in a responsible fashion that may actually benefit local markets.  Given that some Federal bureaucracy is involved however I am not very optimistic about a positive outcome in this regard.

Perhaps my main concern was best expressed by one of my co-workers earlier today who said, “The Plan looks to be undermining our legal system by saying contracts do not mean anything anymore.”  If part of the Plan is to prevent the foreclosure of homes and “cramming down” whereby lenders are forced to lower the amounts owed, the Federal government is telling the world that contracts in the United States of America are not necessarily enforceable.  Taking away all the hyperbole and rhetoric of the past year about borrowers being taken advantage of by lenders, and people signing contracts that they did not understand, and predatory lenders created this mess; take all that away and what I know is that every borrower had to sit down and sign loan documents that spelled out the terms of the loan they were getting.  A contract was made between the borrower and the lender.  If the government is severely altering mortgage notes to benefit delinquent homeowners it is telling responsible homeowners who are making their payments, and have been for decades in many instances, that they would be better off financially if they had not adhered to their mortgage contracts.

This statement will be difficult for many, but after twenty plus years in the industry I know it to be true:  not everyone deserves to be a home owner; not everyone should be a homeowner.  That is the crux of our problem.  Too many people who had no business buying a home bought a home.  And now there are politicians saying, “we must keep these Americans in their homes.”  Well a significant portion of those people never should have been in that home.  Many of them have nothing invested in the home, purchasing with no money down and making interest only payments.  A number of people who lost or are losing their homes to foreclosure never should have owned them in the first place; they had no money in down payment, and no money in the bank; they did not have sufficient income to qualify for the loan; they had bad credit histories or too much credit; yet they purchase a home with the hope of the market going up so they could sell it for profit at some point down the road.  Guess what?  If the Plan allows these homeowners to keep their homes at a cost to the government—i.e. you the taxpayer.  I know these comments are harsh but they come from spending several years talking to people who wanted to buy a home and telling them they could not afford to, only to hear that they ended up buying a home. 

That is perhaps my biggest problem with the Plan.  Are we spending taxpayer money on saving homes for people who never were qualified or financially capable of purchasing and owning a home.

We will see what is put together over the weekend.  After all is said and done I am optimistic about our economy and the future.  We are actively funding mortgages to put people into homes, albeit a bit more challenging that it was several weeks and months ago with the pipelines we are facing, and that is good news.  When a family decides it is time to purchase a home, they are ready to purchase a home and our job is to help them buy the home they can afford.  Through all of this a very bright light is that the mortgages being funded today are solid mortgages, well qualified homeowners with an initial down payment into their home are getting loans that they will make payments on for a long time—just as most Americans always have done.

Here are the rates as we finish off the week:

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR JUMBO LOANS AND 10% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.875%            é 0.125%

30 year conforming-jumbo at 1 point 5.875%            é 0.125%

30 year FHA at 1 point 5.75%                                    é 0.125%

30 year jumbo at         NO PRICE CALL FOR INFORMATION              

Have a great weekend.  We will be eschewing the debate tonight to maintain our Movie and Pizza Night with the girls—I hope the pick is Mary Poppins, after a week like this I can use a “Spoonful of Sugar”!

Dennis