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Posted by Tim Burrell.  Many articles are appearing that analyze the Bush Administrations proposal to stimulate the economy.  Virtually all of the articles miss the most important point, which is the same point that the stimulus package misses.  It is claimed that the biggest problem in the economy is the sub-prime loan fall out, and its effect on limiting the availability of financing, which in turn effects the real estate market.  Without financing, would be buyers cannot buy the homes that are increasing the inventory of homes for sale,  particularly in areas other than the Triangle.  When the inventory is too large, the real estate market is out of balance and prices decline.  These other areas have an indirect effect on sales in the Triangle, as people trying to move here from depressed areas have a hard time selling their homes, so they cannot buy homes here.
 
Since the problem is a lack of financing, the solution is to provide more financing.  New regulations proposed by Congress restrict the type of financing that can be sold easily, basically eliminating sub-prime loans, so that most lenders and brokers favor loans associated with FHA and similar organizations.  The loan limit for these conforming loans is $417,000, which is too low to help the markets like California where foreclosures are high and the inventories have dramatically increased.  So, raise the loan limits for these loans at least to $625,000,  as suggested by the National Association of Realtors.  This will allow more loans to be available, which will allow more people to qualify for financing, and allow more homes to be sold.  It will cost the taxpayers nothing, instead of the $150 Billion proposed by the Bush Administration.
 
The House of Representatives has passed legislation that would allow this to happen.  The Bush Administration indicates it will only support this legislation if it includes a change in the way the FHA is run, and provide for more oversight.  The Senate is so opposed to this idea that the legislation needed to finish what the House of Representatives started has not even been introduced.  This ideological dispute over a theoretical problem is preventing a no cost solution from going forward.  So, people lose their homes to foreclosure, homeowners watch their equity erode, banks get into financial trouble as their inventory of Real Estate Owned (REO), as the administration and the Senate debate over this unimportant issue.  This reminds me of the debate in the 1960's over the shape of the table at the negotiations to end the Vietnam War.  While the politicians debated whether the table should be round or square (and they would not start negotiating until they agreed on the shape of the table), soldiers and civilians died in continued fighting.   Similarly, while the Bush Administration tries to force its agenda of FHA oversight on the Senate, the housing market in many areas of the United States suffers. 
 
It is hard to see how you can stimulate the real estate market using the indirect approach of giving consumers a tax rebate, which is a small amounts of money to millions of consumers, expecting they will spend it immediately.  Consumers will spend these little amounts on little things, for which WalMart and Best Buy will be thankful.  If there is a boom in Big Box stores, there may be more sales clerks hired, and maybe some of the new hires will make enough money to buy a house, but not in California or other high cost areas that are in the most need of assistance.
 
The best approach is to Keep It Simple.  If you want to help the real estate markets that are out of balance, do something that costs nothing which directly aids those markets by correcting the shortage of financing.  If you are a politician you might like the Administration's proposal as it may get you the vote of the consumer who just bought a big screen TV.  But it would be wiser to do a great deal more to solve the problem by providing more financing, and the most acceptable financing is FHA loans.  
 
We are fortunate in the Triangle that most of the homes can be purchased with a loan of $417,000 or less.  We are also fortunate that the real estate market in the Triangle is good, particularly for homes priced under $417,000.  But, it would be nice if the politicians stopped their petty squabbles to help the rest of the United States.
 

Legislative Over Reaction will Hurt Buyers

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Posted by Tim Burrell - One of the most important factors to allow liquidity in the mortgage market is to allow the mortgage to be sold. To raise the cash to make more loans, the notes from the loans that have been made are sold, particularly by mortgage brokers.  There is a provision in a North Carolina State law recently passed that will effectively eliminate Mortgage Brokers that are not part of a Federally chartered institution. It says that any defense that a borrower has against the originator of the loan, can also be asserted against anyone who purchased the loan. You are talking about defenses that do not appear in the document or the loan application, i.e. but he told me that ...., things that are hard to prove, and rely on statements not written facts. These are things that the mortgage broker is claimed to have done wrong, but has nothing to do with the loan itself.  It sounds logical, if there was something wrong in the process shouldn't that follow the loan? 

For decades this has not been the law, the doctrine is called "Holder In Due Course". Anyone who bought a financial instrument, paid fair value and did not have notice of any defect has a limited number of defenses to deal with. This keeps the price for the financial instrument up, and allows them to be readily traded.  Yes, it is less fair for those few situations where something that cannot be proved is asserted as a defense, but it creates a system where loans can be readily sold.  In other words, it is less perfect in a few situations, but it makes much more money available to many more people who want to buy a home.  In the past, our society made a decision that it was more important to benefit millions or mortgage borrowers, and hamper a few that dealt with immoral mortgage brokers.  This balance just shifted, but only for some of the players.

The North Carolina State Law changes this, but it does not apply to Federally Chartered Institutions, like National Banks. So, the loans originated by mortgage brokers are subject to this, while the bank loans are not. The result, it is hard to sell a mortgage broker's loan or a loan by any institution charted only by the State in North Carolina, but not a national bank's loan. This is a huge change in the competition to originate loans.  One result I have seen is that one of my favorite mortgage brokers went out of business, then found a new place to do business with a national bank.

A Federal law proposed by legislators from North Carolina and supported by Barney Frank, the Chairman of the House Committee on Financial Services, an important voice on financial legislation.  It is being debated in Congress under the title of HR 3915. While it is being amended frequently, one of the provisions that I hope will not be included is this factor that will kill competition in the mortgage industry.   I see nothing wrong with licensing mortgage brokers and requiring certain standards to be in the industry, as regulating those who want to be in an important business is not objectionable.  I object to Congress trying to tell every borrower which loan can be made and which ones cannot.  The market place can determine if a product is sound or not.  First of all, Congress does not understand banking as well as bankers do, and secondly when things change, the banking industry can change, but the laws will lag behind.

The national banks could not have found a better way to eliminate their competition. With less competition, there are less choices for buyers, and less people will be able to buy homes. When my Grandfather was a banker in the 1920's, if you wanted a home, you went to a bank and you played by their strict rules. We are going back to that time. While there are some loans that never should have been made, the vast majority of sub-prime loans are being paid on time and those houses will not be foreclosed. So, all those people got to live the American Dream. Now, only those the bankers like will be able to live the American Dream, a change that will hit "blue collar" workers and minorities harder than the average person, from what I have seen in 28 years as a Realtor.

The Federal laws in HR 3915 will push the lending industry into making only loans that banks like, such as full documentation loans where you cannot finance the cost of originating the loan.  People who do not have substantial funds available and who do not fit into a banker's checklist will not get a home.  Those who buy mortgages will only be protected from additional liability if they buy Qualified Mortgages or Qualified Safe Harbor Mortgages.  If they buy anything else, they will have more problems than they do now under current law, with additional defenses to collecting the loan or foreclosing on the loan.  If the loan is a Qualified Mortgage or Qualified Safe Harbor mortgage, no court can listen to a challenge to that loan.  If it is not, there are new challenges allowed, so very few buyers will exist for those loans.  In short, the banks get richer, the poor get poorer.

The factor that hurt the sale of mortgage backed securities the most is mixing lousy loans with good ones in a pool, and polluting the pool. Jumbo loans are now hard to sell, not because they are a big risk, but because they were mixed with garbage. Jumbo loans are at nearly all time lows as far as defaults are concerned, but they are priced much higher than conforming loans, not because of the risk, but because they need a higher yield in order to be sold.  In other words, the lenders are taking advantage of the jumbo borrowers to make more money without any justification based on the risk.

HR 3915 known as "The Mortgage Reform and Anti-Predatory Lending Act of 2007” should be retitled "No Banker Left Behind" with a subtitle of "No Blue Collar Workers Get a Home".   If you want to read more about his legislation, visit Barney Frank's review at http://www.house.gov/apps/list/press/financialsvcs_dem/press110607.shtml .

Problem with your Adjustable Rate Mortgage? FHA to the rescue!

by Team for YOUr Dreams

Submitted by Tim Burrell:  There are a number of homeowners who have gotten into financial trouble by taking out Adjustable Rate Mortgages, frequently called ARMs, where the amount of the monthly payment has just changed dramatically.  These loans start with low rates, called Teaser Rates, that last for a limited amount of time.  Then, they adjust to be closer to the market rate.  The new rate is determined by an Index, frequently the cost of funds for the lender, plus a margin, which is the lender's profit. 

Once the period for the Teaser Rate is up, the monthly payments can jump dramatically.  Some homeowners are having trouble making the payments at the new rate.  This problem has been helped by the recent action by the Federal Reserve Board, as their lowering of a key interest rate has decreased the lender's cost of funds, which decreases the index rate on the ARM mortgage, and decrease the monthly payment.  If the homeowner cannot make the new mortgage payments, it frequently starts a financial "death spiral"  that leads to the foreclosure of the home.  This program is a great way to avoid foreclosure.

FHA has implemented the FHASecure Initiative to rescue homeowners in trouble from the jump in their monthly payments.  Basically, if you are having trouble making the payments now, but you were current on your payments before your mortgage payment jumped, the Initiative allows you to refinance with FHA, even if you have late payments on your mortgage.  In other words, if you were financially responsible before the mortgage payment jumped, but got into trouble after it jumped, you can refinance. 

Why is this amazing?  Because a late payment on a mortgage is the "kiss of death" for refinancing.   The refinance lenders look at late mortgage payments as a clear sign that the borrower is in trouble, and a prime candidate for foreclosure, so they do not want to be the one with the loan on the house when it goes into foreclosure.  In order to get top quality loans, any late payments on a mortgage have to be more than a year old i.e. you have to be on time for a year after you have been late.  Since many sub-prime loans are no longer available, many borrowers have to qualify for the top quality loans, or get no loan.  So, getting out of a bad ARM into a conventional 30 year fixed rate mortgage is an amazing opportunity for a borrower who has been late on recent payments.

To get detailed information direct from FHA, go to this website http://tinyurl.com/2p9s2c .  Notice the short URL, that you never get from a governmental agency.   I shrunk it. 

What is happening in the Mortgage Market?

by Team for YOUr Dreams

Submitted by Tim Burrell - Wall Street's Dow Jones Averages lost 387 points yesterday, primarily due to worries about mortgage backed securities.  What is happening?

A French Bank suspended a fund that was made up of mortgage backed securities, because it could not figure out what the value of the fund was.  The fund had a significant amount of sub prime mortgages in it, and they were worried about the increase in default of the sub prime mortgages.  This lack of confidence quickly spread, and the financial communities became worried about investing in funds that are made up of sub prime mortgages.  For example, the value of the stock of Countrywide Financial fell 8.2% in Friday morning trading.

What does all this mean?  Many lenders need to sell the loans they make in order to get cash to make new loans.  One place they sell them is to funds that purchase large quantities of loans, then sell investments in the fund, primarily to insurance companies and those firms that have to provide for the payments on pensions.  When investors do not want to buy into these funds, it is harder to sell the mortgages, and the lenders have a hard time raising cash, particularly small lenders.

This is why American Home Mortgage filed for Bankruptcy protection and laid off all its employees, after they could not raise cash for new loans.  Their stock lost 97% of its value.  Two leveraged hedge funds from Bear Stearns "went bust" and a third has run up big losses.  In order to give banks enough liquidity, the Federal Reserve has been pumping billions of dollars into the banking system.

While this is a disaster for small lenders, the larger banks are able to just keep more of the loans they make as they do not need to sell as high a percentage of the loans.  Some buyers have had the miserable experience of having a loan approved with a small lender who could not fund the loan when it was time to close the sale.

How does this change the market?  The investors want security, so they are focusing on buying only loans that are backed by the guarantees of Freddie Mac and Fannie Mae, quasi-governmental agencies that insure certain mortgages.  Since the limit for these loans is $417,000, it is harder to sell Jumbo Loans that are over this limit.  As a result, the interest rates on Jumbo Loans have changed dramatically, with the market still being in a state of flux.  What makes no sense is that the default rate on Jumbo Loans is at near record lows, according to the Wall Street Journal.  So, the Jumbo Loans are not a risky investment, as there are few defaults, but they are being penalized because you cannot get Freddie or Fannie to guarantee them.

How did this happen?  There is a huge demand for investment grade debt, as the pension funds have to make payments to a world that is getting older and living longer after retirement.   The pension funds used to invest in Bonds from corporations.  In 1992, over 70% of debt earned a rating of investment grade, and the pension funds could just invest in those debts.  But, the quantity of investment grade debt has decreased, so that Standard and Poor's found  that 49% of new debt issues in 2006 was below investment grade, commonly called Junk Bonds.  So, the pension funds had to find other investments.  Wall Street packaged mortgage back securities featuring sub prime loans and other debt that were put into the fund in layers, called tranches.  The logic was that by bundling together large numbers of investment, there is little risk of a major loss if any one loan defaults.  The first layer was comprised of the riskiest loans, and the last layer were the most secure.  Since the last layers were supposed to default only after the first layers, these last layers were considered investment grade.  The pension funds bought the idea, as they had to put all their money to work.

What will happen next?  I predict that the large banks will get stronger, and swallow those small ones that do not go out of business.  I hope the loan limits for Freddie and Fannie guarantees are raised, so there is more liquidity in the lending market if more loans qualify for their guarantees.  Some Senators looking for re-election coverage will hold a hearing to further hurt the mortgage market, as the threat of restrictions on sub prime loans was a major impetus to this problem.  It was going to be a little problem for sub prime borrowers as interest rates rose and property values did not continue to soar.  It became a big problem when these borrowers could not find new loans to re-finance out of their bad ones.  So, they defaulted, and the defaults have caused this loss of confidence, leading to an increase in difficulty in getting financing.  Next time you see Senators grandstanding with threats of regulations in an industry they do not understand, run for cover.

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