Regardless here is a snapshot of how rates have fallen in the past few weeks (source: Freddie Mac Weekly Rates):

For reference Freddie Mac reported a weekly average mortgage rate of 6.100% on the first week of October. This week rates are averaging in the 5.500% range.

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Question: Well, we just received a notice that IndyMac, who we have a second mortgage with, closed it’s doors. They kindly sent us a notice that they are working with Wells Fargo to offer help refinancing our loan. My concern is this, if we have to go through a “regular” refinance, there is no way we would qualify with our credit being in the dumps. It’s obvious they aren’t transferring our loan to Wells Fargo, but just offering help to refinance. So I’m concerned. I don’t see how they can do that. When calling the Wells Fargo number they provided, I couldn’t get through to anyone. I’ll try again tomorrow. I would appreciate any advice.

Thanks,

Jen

–

Dear Jen,

Sorry to hear of the difficult situation you’re facing. Hang in there. Each bank has different rules to an extent on how they are dealing with the current troubles so I can’t comment on exactly what you’re facing. However,  here is what I know:

1. A bank can not force you to refinance in the sense that they can not call back a loan unless you’ve violated some very serious terms. Even then it would have to be pretty bad. This is a rule dating back to the aftermath of the Great Depression. If banks could call back mortgages – in today’s climate – 50-60% of folks would lose their homes – since the vast majority are not in a position to pay back their home loans on short notice without selling the house.

2. Banks can sell the servicing rights – in which case the terms of the loans remain unchanged but only the loan is transferred to a different lender. This doesn’t require you to refinance.

So, with that – I am not sure what exactly Indy is trying to do. I would try to reach someone there and ask them exactly what they are talking about.

I don’t know what else to say really.

Hope that helps. Good luck Jen!

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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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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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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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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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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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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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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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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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