Tuesday, December 11, 2007
Fed rate reduction
Well, the Fed reduced both the fed funds and discount rates the much anticipated quarter percent.
Will Blemished Borrowers Be Blindsided by Congress?
by Jack M. Guttentag The Mortgage Professor (Posted on Monday, December 10, 2007)
In the wake of the subprime crisis, the mortgage market has turned against all but the "cream-puff borrowers" -- those with no weaknesses. The cream puffs can borrow today on pretty much the same terms as they could before the crisis, but borrowers with blemishes on their applications are paying much higher rates, and they face a far greater risk of being turned down altogether.
As if that isn't bad enough, The Mortgage Reform and Anti-Predatory Lending Act of 2007 (HR 3915), now winding its way through Congress, would worsen their plight. That is not the intention, of course, but the law of unintended consequences has a home in the home-loan market.
Blemished borrowers have one or more of the following risk factors: they can only make a very small down payment or none at all; they cannot fully document their income and assets; their property is something other than a single-family home; their loan is intended to raise cash or to purchase an investment property; they have low credit scores; their income is low relative to their expected total obligations; and their mortgage carries an adjustable rate that will result in substantially higher payments in a few years.
The Chickens Come Home to Roost: Defaults
During the go-go years of 2000 to 2005, the mortgage market was extraordinarily tolerant of risk factors. It was not unusual to see five of these factors present in an accepted mortgage, a phenomenon termed risk layering. Lending to a borrower who had no money for a down payment, who could not document adequate income, and who had a poor credit history was a kind of market insanity associated with the rapid run-up in house prices. Inflation of house prices converts even the worst loans into good loans. When the housing bubble burst in 2006, the chickens came home to roost in the form of mortgage defaults, which are rising to levels not seen since the Great Depression.
Markets tend to overreact. Just as the housing bubble was accommodated by insanely liberal lending terms, the pendulum has now swung toward Scrooge-like stringency. The price increments associated with risk factors are now two to three times as high as they were a year ago, and risk layering has gone way down. Roughly speaking, if you have two risk factors, the price is substantially higher, and if you have three, the deal is probably rejected.
A major provision of HR 3915 establishes "minimum standards for mortgages," which include requirements that borrowers have an "ability to repay" and that they receive a "tangible net benefit" from refinancing. What these rules have in common, in addition to their discriminatory impact on borrowers already victimized by misfortune, is their lack of specific operational guidelines. In an article I wrote recently on the tangible net benefit rule, I gave several examples in which the ultimate determinant of whether there was a net benefit to the borrower could not be known by the lender without reading the mind of the borrower.
Offering a "Safe Harbor"
The inability to know whether or not they are in compliance creates risk for lenders, which translates into higher costs for borrowers, but HR 3915 also provides a way to avoid this risk. It offers a "safe harbor," which is a presumption that the standards have been met provided that the loan at issue is a "qualified mortgage" or a "qualified safe harbor mortgage."
A "qualified mortgage" is one with an interest rate that does not exceed the rate on Treasury securities or an average mortgage rate by more than 3 percent or 1.75 percent, respectively. On second mortgages, the maximum spreads are 5 percent and 3.75 percent.
A "qualified safe harbor mortgage" is a loan that is fully documented, is not a negative amortization ARM (adjustable-rate mortgage), and either meets an income adequacy test, has a fixed payment for at least five years, or is an ARM with a margin of less than 3 percent. The overlap between a qualified mortgage and a qualified safe harbor mortgage will be very high.
The combination of vague standards and a safe harbor means that lenders will classify loans with regard to whether or not they belong to the safe harbor. The safe harbor removes some of the sting from the imposition of vague standards, because many loans will qualify, but some will not qualify, and they will be priced at a higher rate than they are now -- or they will disappear. Already clobbered by the market, they will get the deathblow from Congress.
In the wake of the subprime crisis, the mortgage market has turned against all but the "cream-puff borrowers" -- those with no weaknesses. The cream puffs can borrow today on pretty much the same terms as they could before the crisis, but borrowers with blemishes on their applications are paying much higher rates, and they face a far greater risk of being turned down altogether.
As if that isn't bad enough, The Mortgage Reform and Anti-Predatory Lending Act of 2007 (HR 3915), now winding its way through Congress, would worsen their plight. That is not the intention, of course, but the law of unintended consequences has a home in the home-loan market.
Blemished borrowers have one or more of the following risk factors: they can only make a very small down payment or none at all; they cannot fully document their income and assets; their property is something other than a single-family home; their loan is intended to raise cash or to purchase an investment property; they have low credit scores; their income is low relative to their expected total obligations; and their mortgage carries an adjustable rate that will result in substantially higher payments in a few years.
The Chickens Come Home to Roost: Defaults
During the go-go years of 2000 to 2005, the mortgage market was extraordinarily tolerant of risk factors. It was not unusual to see five of these factors present in an accepted mortgage, a phenomenon termed risk layering. Lending to a borrower who had no money for a down payment, who could not document adequate income, and who had a poor credit history was a kind of market insanity associated with the rapid run-up in house prices. Inflation of house prices converts even the worst loans into good loans. When the housing bubble burst in 2006, the chickens came home to roost in the form of mortgage defaults, which are rising to levels not seen since the Great Depression.
Markets tend to overreact. Just as the housing bubble was accommodated by insanely liberal lending terms, the pendulum has now swung toward Scrooge-like stringency. The price increments associated with risk factors are now two to three times as high as they were a year ago, and risk layering has gone way down. Roughly speaking, if you have two risk factors, the price is substantially higher, and if you have three, the deal is probably rejected.
A major provision of HR 3915 establishes "minimum standards for mortgages," which include requirements that borrowers have an "ability to repay" and that they receive a "tangible net benefit" from refinancing. What these rules have in common, in addition to their discriminatory impact on borrowers already victimized by misfortune, is their lack of specific operational guidelines. In an article I wrote recently on the tangible net benefit rule, I gave several examples in which the ultimate determinant of whether there was a net benefit to the borrower could not be known by the lender without reading the mind of the borrower.
Offering a "Safe Harbor"
The inability to know whether or not they are in compliance creates risk for lenders, which translates into higher costs for borrowers, but HR 3915 also provides a way to avoid this risk. It offers a "safe harbor," which is a presumption that the standards have been met provided that the loan at issue is a "qualified mortgage" or a "qualified safe harbor mortgage."
A "qualified mortgage" is one with an interest rate that does not exceed the rate on Treasury securities or an average mortgage rate by more than 3 percent or 1.75 percent, respectively. On second mortgages, the maximum spreads are 5 percent and 3.75 percent.
A "qualified safe harbor mortgage" is a loan that is fully documented, is not a negative amortization ARM (adjustable-rate mortgage), and either meets an income adequacy test, has a fixed payment for at least five years, or is an ARM with a margin of less than 3 percent. The overlap between a qualified mortgage and a qualified safe harbor mortgage will be very high.
The combination of vague standards and a safe harbor means that lenders will classify loans with regard to whether or not they belong to the safe harbor. The safe harbor removes some of the sting from the imposition of vague standards, because many loans will qualify, but some will not qualify, and they will be priced at a higher rate than they are now -- or they will disappear. Already clobbered by the market, they will get the deathblow from Congress.
Monday, December 10, 2007
Daily Rate Lock
This subject will be recurring to give you current information upon which to make an informed decision as to whether or not to lock in an interest rate for any home mortgage loan you might be considering. This is only my opinion of what I would do if I were financing/refinancing a home and cannot be guaranteed to be in the best interest of any and all borrowers.
The first piece of big news this week (12/10-12/14) will come out of Tuesday's final 2007 meeting of the Federal Open Market Committee (FOMC). Their decision on what to do with interest rates will be reported in their post meeting statement. There is no clear consensus on what they will do, but, if I were a betting man, I'd wager a quarter point reduction in the fed funds rate.
Thursday sees the release of two important pieces of data -- November's Retail Sales report and the Producer Price Index (PPI). In both cases, weaker than expected results typically result in decreasing mortgage rates while stronger than expected numbers put pressure on mortgage rates to increase.
Friday also sees the release of two pieces of data -- November's Consumer Price Index (CPI) and the Industrial Production report. In both the CPI and Industrial Production report, if inflationary pressures are greater than expected (numbers are stronger than anticipated), this typically results in rising interest rates.
This week stands to be a rather volatile one, therefore, I would lock in my rate if I were considering financing/refinancing a home and my anticipated closing date was anytime within the next three months.
The first piece of big news this week (12/10-12/14) will come out of Tuesday's final 2007 meeting of the Federal Open Market Committee (FOMC). Their decision on what to do with interest rates will be reported in their post meeting statement. There is no clear consensus on what they will do, but, if I were a betting man, I'd wager a quarter point reduction in the fed funds rate.
Thursday sees the release of two important pieces of data -- November's Retail Sales report and the Producer Price Index (PPI). In both cases, weaker than expected results typically result in decreasing mortgage rates while stronger than expected numbers put pressure on mortgage rates to increase.
Friday also sees the release of two pieces of data -- November's Consumer Price Index (CPI) and the Industrial Production report. In both the CPI and Industrial Production report, if inflationary pressures are greater than expected (numbers are stronger than anticipated), this typically results in rising interest rates.
This week stands to be a rather volatile one, therefore, I would lock in my rate if I were considering financing/refinancing a home and my anticipated closing date was anytime within the next three months.
Sunday, December 9, 2007
Interest rates
When the Federal Open Market Committee (commonly referred to as the "Fed") meets on December 11th, it appears poised to cut interest rates for the third time since summer. In an attempt to keep the economy growing and inflation low and to add some much-needed stability to the financial and real estate markets, it is expected to reduce the fed funds rate another quarter point.
Government subprime (mortgage) plan "fix."
Well, "big brother" has now stepped directly into the mortgage mess of 2007 by unveiling a "foreclosure relief plan" that will help...so very few homeowners. The plan is to freeze interest rates for five years for those who qualify, but, while it is "a start in the right direction," it is widely regarded as being too limited (depending on who you wish to believe, the program could help anywhere from a hundred thousand to 1.2 million distressed homeowners) due to qualifying constraints.
In order to possibly qualify, you must:
For those who do not qualify under the government's proposal, relief may still be available through FHASecure and other, lender-initiated refinancing efforts. The mortgage industry has a strong (financial) incentive to work things out with borrowers, if at all possible.
In order to possibly qualify, you must:
- have an adjustable rate mortgage (ARM) originated between January 1, 2005 and July 31, 2007 that has a reset date of between January 1, 2008 and July 31, 2010.
- live in the home.
- NOT be more than 30 days late at the time your loan would be modified.
- NOT have been more than 60 days late at any time during the previous 12 months.
- NOT be judged capable of continuing to make your mortgage payment at the higher reset rate.
- NOT be judged incapable of affording the loan even at the current low introductory rate.
For those who do not qualify under the government's proposal, relief may still be available through FHASecure and other, lender-initiated refinancing efforts. The mortgage industry has a strong (financial) incentive to work things out with borrowers, if at all possible.
Subscribe to:
Posts (Atom)