The US House passed the Mortgage Reform and Anti-Predatory Lending Act (HR 3915). It’s being called as the “anti-predatory” bill, but I’m going to call it the “no loan for you” bill.

For those not familiar with the bill’s key provisions, below is a summary from MSNBC :

The bill would create a licensing system for residential mortgage loan originators, and establish a minimum standard requiring that borrowers have a “reasonable ability” to repay a loan.

It also contains an “anti-steering” provision that would prohibit mortgage originators from steering consumers to a loan that the consumer lacked “a reasonable ability to repay” or had “predatory characteristics”.

The bill also attempts to bring thousands of largely unregulated mortgage brokers - responsible for more than half of the mortgages sold in the US in the past two years - under a nationwide system of licensing and registration.

Lets review:

Licensing: Maybe it will help, but I’m not so sure. Currently brokers have to be licensed even though the individual loan officer do not have to be.

Reasonable ability to re-pay: Has Congress ever heard of the debt to income ratio (DTI)? This is one of the fundamental metrics used to qualify a borrower. The reason why the DTI is so important is because it tells you exactly whether the borrower can repay the debt or not.

Anti-steering: I do agree that the current system is wide open and vulnerable to abuse. However, I wouldn’t ban the compensation which wholesale lenders provide brokers. I would cap it at 1% or 2%. In case you are wondering this compensation is required already disclosed on the settlement statement.

Predatory characteristics - This is too hard to define but I think we need to limit the use of stated income loans.  Also I’d start with cracking down on those insanely crazy ads you hear on the radio. You know the one where the guy claims you can have a $200 payment on a $500,000 loan.  And you must be stoooopid to pay closing costs! So, here’s a radical thought, how about we enforce current laws first?

My disagreement on this bill is philosophical:

1. It makes the lender responsible for the borrowers actions. It treats every borrower as a victim and personal responsibility is substituted for lender responsibility

2. With lenders subjected to greater liability I am pretty sure obtaining a mortgage in the future will be more difficult. Get used to additional documentation, longer processing time and a greater stack of paperwork to sign.

3. It interferes with the free flow of credit and the consequence will be a smaller pool of lenders with a narrower set of loan programs. It will be harder for lower income and lower credit families to buy a home. Homeownership will suffer.

Your comments are welcome.

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Categories: Mortgage Backed Securities, Subprime Mortgages
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Mortgage rates fell last week and that trend puts us in favorable territory this week. Rates fell last week reversing a rising trend over the prior two consecutive weeks. With lackluster corporate earnings, renewed credit concerns and rising oil prices investors are spooked about stocks. This makes bonds more favorable. Hence, the rise in bond prices and fall in yields (interest rate).  Mortgage loans are benefiting from this flight to safety.

There are no significant economic reports coming out this week so the market should remain favorable towards mortgage interest rates.

Chart from Bankrate.Com

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Tags: home loans, interest rates, Mortgages
Categories: Interest Rate, Mortgage Backed Securities
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There is a lot of confusion regarding interest rates. I received a few e-mails and some phone calls asking if it was now a good time to buy real estate since the Fed cut interest rates. I replied that the Fed rate doesn’t affect home mortgage rates. The two are completely different animals. In fact this week home mortgage rates went up after last weeks rate cut.

To make my point I have plotted the 30 year mortgage rate and the federal funds rate on the same graph. (Red = Federal Funds Rate, Blue = 30 Y Mortgage Rate)

The only way the federal funds rate affects home mortgage rates is via the general economy. There is no one-to-one effect, neither is there an implied effect. Any effect you may see on this graph is the result of economic factors rippling through the market as the Fed changes the federal funds rate.

As you can see (on graph) there is no direct relationship. It’s not like you can increase one and the other automatically goes up or down. In the early 1970s there is a lot of back and forth movement. You may say that recently there is more of a relationship, but if you were to dig deeper you would see that no statistical relationship exists. We may see some kind of broad pattern but that is a function of overall economic conditions (which effects both rates) than the federal funds rate directly influencing home mortgage rates.

Just so you are aware, home mortgage rates are determined by Mortgage Backed Securities.

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Tags: federal funds rate, home financing, mortgage rates
Categories: Interest Rate, Mortgage Backed Securities, Mortgages
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Between First Magnus (Great Southwest Mortgage) closing shop and Countrywide going through some serious turbulencethings are very unpredictable right now. To calm markets the Federal Reserve just lowered the discount rate by 0.5% to 5.75%. The discount rate is what the Fed charges banks for short term loans.

What is a consumer to do? If you have any loans in process right now it’s a good time to check with your lender to make sure everything is on track. As long as the loan is locked it should be okay. However, moving forward that may not always hold. In fact Brian Brady, a veteran mortgage professional in California is advising mortgage brokers to lock with two lenders - just in case. As a broker we can do this even though it may not be fair to the good lenders, as Brian points out.

Countrywide is the nations number one home mortgage lender. So, anything bad on that ship sends waves that could even rock Fannie and Freddie. The market knows that both Fannie and Freddie will not crash because they have the full faith and commitment of the Federal government behind them.  However, this is not to say that loan guidelines can not change over night and become more restrictive. From what I know they are not thinking of any changes but the way the market changes you never know.

Below are some notable market news from MarketWatch and LA Times:

• Fed cuts discount rate to 5.75%
• Moody’s downgrades 691 mortgage-backed securities
• NovaStar Financial to cut 37% of workforce
• A rush to pull out cash (LA Times)

Stay tuned. I’ll have some more information and analysis on the mortgage market as it becomes available.

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Categories: Banker, Broker, Economics, Mortgage Backed Securities, Subprime Mortgages
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I didn’t see this one coming. National City is a very conservative lender. Even back in 2005 they didn’ t offer a lot of aggressive loan programs as others did, so I am very surprised this is happening now. Wow. This really makes you wonder who will survive this liquidity crunch.

According to Marketwatch:

National City Corporation said on Monday that its National City Home Equity unit has suspended approvals of addition loans or lines of credit in response to market conditions. “This is one of a number of steps National City has taken in recent weeks to help ensure that originations are in line with existing and anticipated market conditions,” the bank said in a statement that was e-mailed to MarketWatch. “We are continuing to closely monitor the market and take the appropriate steps to best navigate market conditions.”

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Categories: Mortgage Backed Securities, Mortgages
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If you’re in the process of buying a home or if you’re a real estate agent working with a buyer then there are a few things you need to know about the imploding loan marketplace. Basically, the stated income party is over. In fact the party has been over for a while for a great number of folks but things just turned nasty for those still hanging around. I’ll leave the explanation of why and how to others.

All I can say is a lot of the stated income, no ratio, and no documentation loans will be gone by the end of the week. If you’re pre-qualified on any of these doc types with anything over 90% loan to value then you need to call your lender immediately. Ask them if the loan is still available. This is especially true if the loan has not been locked.

If you have sufficiently good credit then ask your lender if any of the agency loans (Fannie, Freddie) would work. Otherwise your only choice is to go full documentation with complete income verification or save up 10% for a down payment. Dad and mom just came home and we’re back to old school.

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Categories: Mortgage Backed Securities, Mortgages
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I had heard about this video a while back but I never had the time to watch. I finally got around to it and I must say it is brilliant. It explains the whole subprime mess in very simple English.

The more I look at this mess the more I see greedy investors and crafty businessmen at their finest! They knew what they were doing, I feel no sympathy for them at all. I feel sorry for the consumers losing their dreams and fellow workers without jobs.

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Categories: Economics, Mortgage Backed Securities, Mortgages
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It’s Saturday morning. I’m drinking coffee and surfing the net reading economic commentary, looking at some really cool economic data and charts. What does that make me? (Not a real question!)

I want to share some cool things I’ve uncovered:

1. Calculated Risk has a chart demonstrating the historical rise in mortgage debt. It goes back to 1992 and quite frankly I see an astounding increase. I’m not an economist  but I’d like to see a chart of annual household income and population growth over the same period to make a fair reading of this increased debt. Hat Tip: Behind The Mortgage
2. The Big Picture has a really good break down of the entire mortgage backed securitization process. It shows where all the mortgage debt is being held and highlights the problem areas. It does a very good job demonstrating the actual scale of the problem (not the media version).

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Categories: Debt, Economics, Mortgage Backed Securities
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Japan’s GDP grew at a 3.3% annualized rate, which is much stronger than expected. As the Financial Times is reporting today there is a high probability that the Japanese Central Bank will raise interest rates in August to cool the hot economy.

Why the panic here in the US? Well, the Japanese are the most enthusiastic buyers of US Mortgage Bonds. There has been a phenomenon lately called the “Yen carry-trade” where investors borrow money in Japan at very low interest rates and buy US Mortgage bonds paying much higher returns. In recent years these investors have made a comfortable return on their money with very little risk.

The first shock in the carry-trade came earlier this year with the continuing weakness of the dollar. A weak dollar ate directly into the spread. If the Japanese central bank raises rates in August, it will further eat into the spread and slow Japanese purchase of bonds. This weakening in demand will translate into higher interest rates.

Not everything happens so neatly, but there is a clear possibility and my hunch is rates will rise a bit more yet before peaking. Here is some more detailed analysis.

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Categories: Banker, Broker, Interest Rate, Mortgage Backed Securities, Mortgages
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As you know mortgage rates have been rising. In a global economy everyone affects everyone else. Here is a roundup of key events this past week influencing our rates:

1. European Union: The European Central Bank (ECB) raised key interest rates by 0.25% to 4.0%
2. New Zealand: Their Central Bank raised rates on Thursday June 7th
3. Australia – Everyone expects their central bank to raise rates
4. UK -  The Bank of England kept rates at 5.5%. Most economists believe they will raise rates in August.

The international conspiracy has caused US home rates to rise by as much as 0.625% in a very short period of time! Wow.

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Categories: Economics, Interest Rate, Mortgage Backed Securities
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