Mortgage Loan Outlet

In a recent article, James Sterngold considers the impact many consumers aren’t seeing in mortgage relief from TARP.  As the new owner of $172.5 billion of preferred shares and warrants in 208 U.S. financial institutions, the Treasury Department hasn’t succeeded in thawing frozen credit markets, leaving taxpayers propping up an industry that won’t lend to them.

While inter-bank lending rates have fallen since Congress approved the $700 billion Troubled Asset Relief Program on Oct. 3, most bank lending to consumers remains tight and mortgage rates were high. The average credit-card rate was 14.33% on Dec. 16, according to IndexCreditCards.com in Cleveland, almost unchanged from 14.41% in October 2007.   That’s prompted criticism from Alan S. Blinder, a professor of economics at Princeton University in New Jersey and a former Federal Reserve vice chairman, who says the government should take a more active role as a stakeholder in the nation’s banks.   “With the banks in a state of catatonic fear now, they’re just sitting on the capital,” Blinder said in an interview. “I don’t fault the banks one bit, since this shows Wall Street they’re safer, but then this doesn’t get you much improvement. If you’re taking money from the public purse, we should get something in return, and we’re really not.”

Jeffrey Garten, a professor of international trade and finance at the Yale School of Management in New Haven, Connecticut, and a Commerce Department undersecretary during the Clinton administration, says banks should be forced to increase their lending or risk having taxpayer money taken away. “The government isn’t acting aggressively enough to demand a quid pro quo,” Garten said. “The public good is the key to the private good in this case. It’s not the other way around.”

$8.5 Trillion

Although the government has committed more than $8.5 trillion to energizing the economy, and the Fed cut a key lending rate almost to zero, banks haven’t made it easier to borrow. The Fed said consumer credit fell by $6.4 billion in August, the largest drop in 65 years, and then by $3.5 billion in October, the first time since 1992 that there were two months of declines in a year.

In its most recent quarterly Senior Loan Officer Opinion Survey in October, the Fed reported that about 85% of U.S. banks said they had tightened standards on commercial and industrial loans to companies with more than $50 million in annual sales, up from 60% in July. 95% said they increased the cost of those home loans. About 70% said they made it more difficult to obtain prime mortgage loans, and almost 65% said they did the same for consumer loans.

Mortgage Rates

While mortgage rates have declined, they haven’t fallen as fast as bank borrowing rates, meaning financial institutions are demanding more profit for every dollar they lend. Average rates on thirty-year home mortgages fell to 5.14 % last month, according to data compiled by McLean, Virginia-based Freddie Mac. That’s down from 6.67% in June 2007, before the worst turmoil in the housing market. At the same time, the spread of mortgage rates over the 10-year Treasury bond yield rose to 2.958 percentage points from 1.567. 

The spread of rates on so-called jumbo mortgage loans, those of more than $729,750, is close to a record at 1.6 percentage points above the rate for smaller mortgage loans that conform to terms of ones Freddie Mac and Fannie Mae will purchase, according to financial data firm BanxQuote in White Plains, New York. A year ago the difference was 0.23 percentage points.

High interest rates have angered consumers. The Fed has offered relief in the form of rule changes that allow banks to raise interest rates only on new credit cards and future purchases, not on existing balances. Banks will also have to give cardholders 45 days notice of changes in terms, up from 15 days. Those changes aren’t scheduled to take effect until July 2010.   Read the complete article online >  

Despite complaints that mortgage lenders and banks are not financing enough of new home mortgages, bankers say there’s plenty of money to borrow if banks agree that you are worthy of credit.  In the case of business clients, that means banks are happy to lend to growing companies that can handle the payments.  The Fed cut interest rates, but how many borrowers are being approved for mortgage loans?  Can borrowers with bad credit refinance into an affordable payment or will they lose their home to foreclosure?

But even where banks are lending to sound businesses, they are tightening standards on new mortgage loan programs. In a distressed economy, they say, and with the example of so many failed mortgages around them, it makes sense to demand more security from borrowers.  In a recent article, Bill Williamson, division president for Bank of the West’s Portland said, “When times were better, we were willing to make some exceptions off our guidelines and policies for well-run, growing companies.” 

A bad credit score often leads to a mortgage lender denial of credit. So, if you have poor credit, and your fico scores are too low to qualify for FHA or non prime mortgages, you’ll need to find a  lender that works with hard money.

The approval process for bad credit mortgages is a lot simpler than that of other home loans. The lender considers the property being used as collateral to determine whether it holds sufficient value for the investor/lender to be willing to take the risk of granting the loan. Most hard money lenders require the LTV to be less than 65%. The borrower’s current financial status and future potential is reviewed to calculate the debt to income ratio. And, because we recommend hard money loans only for a short-term solution of 6-18 months, so make sure there is no pre-payment penalty.

Many people in California are using Hard money mortgage loans for foreclosure bailout loans. But, they are not a good idea for mortgage refinancing unless you’re refinancing to help for foreclosure prevention. If possible, try to work out your financial issues with your creditors before trying for home refinance loans or home equity debt consolidation loans. Once you get to the point where your scores are high enough for a sub-prime loan (typically 540-619), then secured debt consolidation loans for consolidating revolving debt to pay off credit card debt will lower your payments and save money.

According to a report in the Wall Street Journal, the Treasury Department is considering a plan to reduce mortgage rates on loans for home financing to 4.5%. On Thursday, Federal Reserve Chairman Ben Bernanke urged the government to consider sweeping steps to prevent foreclosures, including buying risky home loans and mortgage refinancing them under more favorable terms to homeowners.  Prices on mortgage loan securities, which would most feel the impact of any such moves, barely budged on either development. Many mortgage insiders are concerned because the newly released financing plans are simply considered to be another temporary fix that likely would not be the solution to the housing and foreclosure crisis.

Last week, the Fed agreed to buy $600 billion worth of mortgage loan securities, guaranteed by Fannie Mae and Freddie Mac, and agency debt in an effort to prop up the home loan market. That helped bring mortgage rates down nearly one-half of a percentage point.  The latest plans lack crucial details on how they would actually work. For example, it’s not clear in a slowing economy if there will be enough qualified buyers who will actually risk buying a home when they are uncertain about their jobs and the value of the home they buy.  “People are confused about the plans,” said Kevin Cavin, mortgage strategist at FTN Financial. 

Another issue, he said, is that Treasury’s plan would only help new home buyers, not those who need to refinance existing home loans. That could be impractical to implement, as well as unfair, to those homeowners stuck with mortgage loans at higher rates.  “How can you separate purchase borrowers from refinance borrowers in terms of mortgage rates?” Mr. Cavin said.  If the government directly buys loans extended for home purchases, it will create a two-tier market, said Mahesh Swaminathan, mortgage strategist at Credit Suisse. Refinancings “will occur in the regular market and possibly at higher rates,” he said.  FHA mortgage refinancing has been supporting most of the loan programs designed to stem the foreclosure crisis.  Steve Park of Mortgage Brokers Network said, “FHA home loan programs have become Main Street for brokers and lenders nationally.  Park continued, “The good news is that any bit of lower rates will help everyone.”

Even though government intervention is clearly necessary, some market participants are worried that if it is prolonged it could have a disruptive impact on markets, since they would no longer be establishing fair value.  “While reducing mortgage rates is a key goal, it should not destroy the market’s ability to function on its own,” said Mr. Swaminathan. “Government purchases cannot be the permanent solution.”  Yet another twist is that it is unclear whether these proposals will be altered or even suspended when the Obama administration takes over in January.  But the urgency to address the housing situation is clear.

Mr. Bernanke, speaking earlier Thursday, cited estimates showing as many as 15% to 20% mortgage loans may be “under water,” meaning more is owed on the house than it is worth.  The chairman estimated that mortgage lenders are on track to initiate 2.25 million foreclosure proceedings this year, more than double the rate before the crisis.  Housing weakness has been a drag on the overall economy, Bernanke said, adding that “a slowing economy has in turn reduced the demand for houses, implying a further weakening in the mortgage and housing markets.”

With home foreclosures soaring at record rates, the economic picture dimming and job losses ramping up, all the elements were in place to push prices lower.  “The turmoil in the financial and mortgage markets are placing further downward pressure on a housing market already weakened by its own fundamentals.” said David Blitzer, Standard & Poor’s spokesman for the indexes, in a press release. “All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. . . . Prices are back to where they were in early 2004.”  Mortgage rates are higher than 2004 levels, but historically they are still at low levels.  Mortgage lending guidelines are much tighter than 2004 and this is one of the driving forces for declining home values. Homebuyers and borrowers seeking refinance loans simply can’t find many options with mortgage loans.

The 10-city index is now 23.4% off its peak price, which came in June 2006; the 20-city index is down 21.8% from its July 2006 high and the national index has fallen 21% since the third quarter of 2006.  Home prices in the 10-city index have fallen for 26 consecutive months. The decline has broadened over the past 12 months, with prices dropping in every city of the 20-city index during September.  In the weakest market, Phoenix, the 12-month loss came to 31.9%. Las Vegas prices plummeted 31.3% and San Francisco recorded a 29.5% decline. The best performing markets, Dallas and Charlotte, N.C., still posted drops - 2.7% in Dallas and 3.5% in Charlotte.  With San Francisco and Las Vegas, the other members of the 10-city index are: Miami, down 28.4% year-over-year; Los Angeles, down 27.6%; San Diego, down 26.3%; Washington, down 17%; Chicago, down 10.1%; New York, down 7.3%; Boston, down 5.7%; and Denver, down 5.4%.  In addition to Phoenix, Dallas, Charlotte and the cities in the 10-city index, the 20-city index is made up of: Detroit, down 18.6%; Tampa, Fla., down 18.5%; Minneapolis, down 14%; Seattle, down 9.8%; Atlanta, down 9.5%; Portland, Ore., down 8.6%; and Cleveland, down 6.4%.

Foreclosures continue to take a heavy toll, with sales in some cities dominated by properties repossessed by banks and then put back on the market, often at bargain prices. In Las Vegas and Cleveland, for example, about half of all homes for sale are bank-owned properties, according to the real estate website, Trulia.com.  “Foreclosures are clearly a part of the market now,” said Blitzer.  He added that the national index price trends tend to be more moderate because they encompass many more exurban and rural areas, where, in many cases, home prices never skyrocketed as they did in some of the hotter, urban markets.  From the foreclosure prevention efforts, many mortgage lenders are providing loan modifications plans to delinquent homeowners.  Read Complete article at CNNMoney.com

In a recent article written by Bryan Dornan, he reflects on the subprime mortgage problems starting in 2006 and brings us up to speed with FHA and the foreclosure crisis.  Dornan points out how the media is giving the mortgage lending banks like Countrywide, Chase and Wamu a pass with the FHA loan guidelines that have been tightened to the point of strangulation. 

The FHA mortgages were reborn in 2007 with new cash out requirements that enabled borrowers to qualify for cash out refinancing up to 95%.  In an effort to curb foreclosures HUD introduced the FHA Secure refinance that enabled borrowers who were paralyzed with a high rate adjustable mortgage to lock into a fixed rate loan that they could afford.  The homeowners that had enough equity began utilizing FHA home loans for debt consolidation and home improvement funding.  In 2008, Congress finally passed an economic bill that mandated FHA mortgage loan amounts to increase nationally.  

FHA recently introduced the H4H that is considered a “short refinance” because it is a mortgage loan modification endorsed by FHA.  

Read the complete article Loan modifications, FHA Refinancing and No Hope for Homeowners.

According to National Association of Realtors, existing-home sales including single-family, townhomes, condominiums and co-ops increased 5.5 percent to a seasonally adjusted annual rate of 5.18 million units in September, up from a level of 4.91 million in August.  Home sales volume was 1.4 percent higher than the 5.11 million-unit pace in Sept. 2007, the first year-over-year gain posted in existing home sales since November 2005.

“The sales turnaround which began in California several months ago is broadening now to Colorado, Kansas, Minnesota, Missouri and Rhode Island,” said NAR chief economist Lawrence Yun. Much of the sales activity was in foreclosed homes. “Compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35 to 40 percent of transactions. These are pulling the median price down because many are being sold at discounted prices,” Yun said.

Housing areas that saw a lot of foreclosures are starting to see more sales. Some prices are actually being bid up, as demand increases for foreclosed homes in California. In Sacramento and Riverside counties in California as well as in Prince William County in Virginia, sales have been up for the last six months. Home sales have also picked up in the third quarter in the Kalamazoo area. “If you’re looking for some good news, inventory is down and pendings (pending sales) are up. People are buying,” said Tom Seelbinder, a real-estate agent with Re/Max Advantage in Portage.

Total housing inventory at the end of September fell 1.6 percent to 4.27 million existing homes available for sale, the NAR reported, which represents a 9.9-month supply at the current sales pace, down from a 10.6-month supply in August. The drop marks two consecutive monthly declines since inventories peaked in July.

According to Mortgage Rates Pulse, interest rates are forecasted to remain low in 2009, but that doesn’t mean that home loan rates might rise slightly.

While mortgage loans are still hard to get, people are still getting loans especially since homes are now more affordable. “The credit markets are not settled yet, although the mortgage market stabilized with the government takeover of Fannie Mae and Freddie Mac. Inventory remains high, and price declines are pressuring owners,” said Yun.

The NAR is now actively pushing for additional stimulus in the form of higher tax credits for home buyers as well as a removal of the repayment feature tied to the original first-time buyer tax credit passed by Congress earlier this year.

“Additional housing stimulus would stabilize prices more quickly, which in turn would bring faster stability to Wall Street. Removing the repayment feature on the first-time buyer tax credit and permanently raising FHA home loan limits would bring more buyers into the market and further reduce inventory,” says Yun.

Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings. This differs from the U.S. Census Bureau’s series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Existing home sales generally account for 85 percent of total home sales and more than 40 percent of multiple listing service data each month.

The Homeownership Preservation Initiative (HOPI) is a partnership between the City of Chicago, Neighborhood Housing Services of Chicago, and key lending, investment and servicing institutions doing business in Chicago. The partnership seeks to preserve homeownership whenever possible and keep families in their homes through counseling, loss mitigation and loan modifications. When foreclosure is unavoidable, the partners seek to preserve the vacant properties as neighborhood assets.

Three-Year Goals:

Homeownership Preservation: Help 1,500 homeowners avoid foreclosure.  Help 500 homeowners per year avoid foreclosure through loss mitigation efforts, including loan workouts, refinancing, loan modifications, repayment plans and small loans to bring homeowners current on mortgage payments.  Property Preservation: Reclaim 300 vacant, foreclosed properties

NHS, through cooperation with lender partners and the Department of Housing, will acquire 100 foreclosed single family buildings per year over three years, rehab them to safe and habitable condition, and sell the homes to low and moderate income families.

311 Homeownership Preservation Campaign

To expand efforts to reach homeowners at risk of foreclosure, the City of Chicago has developed the 311 Homeownership Preservation Campaign. The 311 Campaign will encourage homeowners to call 311 at the first sign of mortgage delinquency. Callers will be connected with one of three credit counseling agencies affiliated with the Credit Counseling Resource Center for a free one-hour counseling session. The counseling agency will:

Provide an in-depth assessment of the homeowner’s financial situation and an individual action plan: Serve as a liaison between the homeowner and the mortgage company, where appropriate, to advocate for a repayment plan, loan modification or other loss mitigation strategy that will help the homeowner avoid foreclosure.   Provide referrals to local resources, where appropriate, for job training, tax assistance, emergency grants, and foreclosure prevention classes.

Questions about the Program:

How does the counseling session work?   The 311 Operator will connect you with a not-for-profit, accredited housing counselor. The counseling session will take place over the phone and is completely confidential. The counselor will gather information from you about your financial obligations and work through your options for avoiding foreclosure. If appropriate, the counselor will help you contact your mortgage lender and negotiate a repayment plan.

How long does the counseling session take?  You should be prepared to spend at least 45 minutes on the phone with the counselor. If you are not able to participate in a counseling session right now, you should call back as soon as you have time available. I’m not in foreclosure now, but I lost my job and am afraid I won’t be able to make my mortgage payment.

Can I participate?   Yes! The counselor can help you establish a budget to get through the next few months.

Are there grants available?   Depending on your particular financial and family situation, there may be low interest loans or emergency funds available. The only way you can determine the best options available to you is by speaking with a housing counselor.

Is there a cost for this counseling? The counseling is being provided free of charge to callers. The City of Chicago and participating lenders are funding the program.

IndyMac Federal Bank, FSB (“Indymac Federal”) will implement a new program to systematically modify troubled mortgages. The program is designed to achieve affordable and sustainable mortgage payments for borrowers and increase the value of distressed mortgages by rehabilitating them into performing loans. This in turn will maximize value for the FDIC, as well as improve returns to the creditors of the former IndyMac Bank and to investors in those mortgages. The new loan modification program will help IndyMac Federal improve its mortgage portfolio and servicing by modifying troubled mortgages, where appropriate, into performing mortgages.

What mortgage loans are eligible?

The streamlined loan modifications will be available for most borrowers who have a first mortgage owned or securitized and serviced by IndyMac Federal where the borrower is seriously delinquent or in default. IndyMac Federal also will seek to work with others who are unable to pay their mortgages due to payment resets or changes in the borrowers’ repayment capacities. This streamlined approach applies only to mortgages for the borrower’s primary residence. As with all mortgage loan modifications, borrowers will have to demonstrate their financial hardship by documenting their income.

The goal of this streamlined loan modification program is to achieve improved value for IndyMac Federal by turning troubled loans into performing loans and, thereby, avoiding unnecessary and costly foreclosures. Accomplishing this goal will reduce the costs to the FDIC of the failure of IndyMac Bank and provide improved returns to investors in securitized mortgages.

Some mortgages serviced by IndyMac Federal are subject to additional contractual terms governing loan modifications. While additional steps are necessary to comply with those contracts, IndyMac Federal will work to expedite approvals for modifications to help eligible homeowners keep their homes.

IndyMac Federal will only make modification offers to borrowers where doing so will achieve an improved value for IndyMac Federal or for investors in securitized or whole loans. Modification offers will be provided consistent with agreements governing servicing for loans serviced by IndyMac Federal for others. The modification program does not guarantee a modification offer for IndyMac Federal borrowers.

The U.S. Treasury will purchase as much as $250 billion in preferred shares of financial institutions, insure all non-interest bearing deposits and guarantee senior bank debt.  The announcement came Tuesday in a joint statement from the Treasury, Federal Reserve and FDIC, in which officials said they are taking “decisive action to protect the U.S. economy.”

“These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses and protecting savings and investments in a manner that promotes strong economic growth in the U.S. and around the world,” the statement said.  The plan involves buying senior preferred shares that are non-voting and callable after three years. The government will receive warrants to cover any losses, 5% dividends for the first 5 years and 9% dividends afterwards.

The Treasury so far plans to take stakes in nine “major financial institutions” but expects “thousands more.” The banks who participate will be subject to executive compensation limits. “By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent foreclosures and preserve homeownership,” the statement said.

A second part of the plan involves the FDIC temporarily guaranteeing the debt of all insured institutions and their holding companies as well as deposits in all non-interest bearing deposit transaction accounts.  In a separate announcement, the Fed announced it would begin funding purchases of commercial paper on October 27, 2008. The Board authorized the Commercial Paper Funding Facility on Oct. 7 as a way to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF, which will finance only highly rated, U.S. dollar-denominated, three-month commercial paper, is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households.

According to the Mortgage Bankers Association, mortgage loan applications in the United States rose the first week of October based on the data released on Wednesday, which reported a 2.2% week over week rise in applications.

Last week, applications fell by 23.0%.  The portion of fixed rate mortgage loans rose 2.4%, after declining 22.5%, previously, while those opting for variable rates contracted 3.6% after the previous week’s 52.5% decrease.  Compared to last year, the market composite index fell 28.6%.

The average mortgage loan size was $223,400, compared to previous week’s $237.0k.  The average interest rate for a thirty-year fixed rate home loan decreased to 5.99% from 6.07%.

The Federal Reserve’s board of governors on Sunday approved Wells Fargo’s $11.7 billion purchase of Wachovia, removing the last key regulatory hurdle for the deal.  On Friday, federal antitrust regulators backed the acquisition by San Francisco-based Wells Fargo of Wachovia.

Citigroup had initially offered to buy the Charlotte, North Carolina-based bank for $2.1 billion in a deal brokered by the Federal Deposit Insurance Corp. Days later, the board of Wells Fargo agreed to an all-stock offer worth $11.7 billion.  Citigroup walked away from the deal on Thursday, but is still seeking $60 billion in damages for breach of contract.

The Federal Reserve released a statement announcing the approval of the deal, which includes Wachovia’s banking business and all other units. Wachovia shareholders must now approve the deal.  Wells Fargo provides stability and liquidity that is needed for these difficult economic times.  The popular Wells Fargo mortgage products include the FHA mortgage, conventional home loans, VA loans and home equity loans.  Refinancing and purchase mortgage loans are available for qualified borrowers.

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