Lately, everyone in the media is blaming the sub prime market for the recent problems throughout the mortgage industry. Yet, I might argue that the biggest problem in the mortgage industry is most people’s lack of patience in trying to obtain the American Dream.
What ever happened to working hard and saving your money over time so that you can purchase a home? Instead, in today’s fast paced world everyone wants the American Dream right now, complete with a little house and white picket fence.

Historically, people tried to save for years to purchase their first home. There was never any thought to buying a home with no money down, or some creative financing you hear about in some infomercial starring Carelton Sheets. Rather, trying to get a piece of the American Dream now has led to the commingling of sub prime borrowers (i.e. high credit risk) with nontraditional mortgages (i.e. higher risk products). As a result, you have to wonder if obtaining the American Dream through the use of nontraditional mortgages is only specific to the sub prime market. I would say no.

Instead, I will tell you that the crux of the problem centers around most peoples’ impatience in wanting everything now, combined with nontraditional mortgages and lenient underwriting standards. Unfortunately, since more sub prime borrowers are susceptible to default, the first problems we are seeing in the mortgage industry are only coming to light in this sector, which the media claims is problematic. However, in the near future, I will predict that light will also be shed on the other aspects of the mortgage industry beside just the supposedly notorious sub prime sector.

Can this problem be solved? I would say yes. However, before we try and solve the problem let me take a step backward and show you what has transpired over the last several years. My point here is not to blame Public Policy or Wall Street’s demands for ever increasing revenue and profit or the industry itself or even you. Rather my motivation is to suggest that the blame for what is currently transpiring is shared between you, policy makers, lenders, and investors.

During the past few years, lenders, like any company, tend to be bottom line oriented. As such, in order to appease all parties (i.e. borrowers, lenders, investors), maintaining the housing boom was imperative. To do this, there was an easy solution … more nontraditional mortgages. In my opinion, what will be seen to you in the future as the most notorious of the nontraditional mortgage product is the Pay Option Arm (aka Neg Am Loan), a loan that is really unsuitable for many of you.

Even worse, when you parlay this unorthodox loan, with mortgage solicitors (loan officers) and mortgage brokers pushing you into interest only loans and no document or low document required loans where certain financial information is either not obtained or not verified you are creating a recipe for disaster. Additionally, I have found that in general the non traditional mortgage products are being sold to you by people who barely understand the products.

For instance, consider the following example: You go to a lender to obtain financing for a new home. Normally, you want the cheapest loan possible and you also want the best rate possible, which generally means doing a full document loan (i.e. verifying income, assets and employment). You agree to a full document loan and submit your documentation to your lender

Here is what might happen: You find out that you do not qualify for the loan because maybe your income is too low. Now what do you do? Well, often lenders tell you that we cannot do the loan we first discussed, but we can do the loan differently. You ask, “what do you mean?” In response, you are told that the lender can do the loan as something known as a stated income loan because your bank statements show enough assets for you to qualify. You, upon hearing a solution that will allow you to still buy your house would often agree. Your lender is happy because they make money and you do the loan. In fact, most lenders do not service their own loans and that means that they plan to sell your loan to an investor. Therefore, in order for the lender to make money they just need to make sure that you make your first three (3) or four (4) payments on time.

In the next example: You go to a lender to obtain financing for a new home. You cannot afford a new home, but believe that your earning power is going to increase. You figure, I will make more money in the future so why should I wait to buy what I want now? In fact, you may have heard on the radio, t.v., or internet about Pay Option Arms and believe that based on that limited information you can actually afford the house when in reality in most cases you cannot.

The rest of the story is often self-explanatory. You qualify for a loan (but not at fully indexed rate), but do not understand the product because your mortgage solicitor (loan officer) does not explain or really does not understand the non traditional mortgage product and what will happen in years to come. You are happy to be in your new home and can only afford to make minimum payments and without realizing it, negative amortization occurs (loan balance increases). Your loan balance increases to max neg am amount (110% to 115% depending on state). Once that occurs, you are then required to make payments toward principal and also interest. Yet, the problem is that the actual interest rate is so high you cannot afford to pay principal and interest together because you did not understand the product at the time. Lastly, to add insult to injury, as you are currently seeing, the real estate market is going down and the possibility of refinancing your home is no longer available.

As the casualties mount, the biggest losers will be all of you who truly live pay check to pay check. Therefore, I would strongly recommend that you take a closer look at nontraditional mortgages, and stop blaming the easy scapegoat, the sub prime borrower. Instead, why not make sure you are getting the right mortgage and not worry about fitting into a nontraditional product that might not fit your needs, but rather the needs of the lenders bottom line.

(originally posted March 18, 2007)

Did you know that according to Bankrate.com, New York, for the second year in a row, was the state with the most exorbitant mortgage-related fees and/or closing costs? Ironically, this estimate did not even take into consideration the dreaded New York State mortgage recording tax.

Sadly, if you are a New York state resident then you know exactly what I am talking about when I mention the state’s mortgage tax. There are other states that have similar fees such as documentary stamps for recording a mortgage, but as a generality, no state’s fees for recording a mortgage are as egregious as New York. That being said, many New York state residents may have heard that there is some secret way of getting out of paying mortgage tax.

There is no secret to avoid paying mortgage tax in New York, but rather it is a process that is generally utilized for a refinance of your existing mortgage. This process is known as a consolidation, extension and modification or “CEMA”. In New York state, the mortgage tax is calculated as a percentage of the amount borrowed and normally ranges from less than one (1%) percent to over two (2%) of the loan amount depending on what county you live in, and in New York City or surrounding boroughs, it is additionally dependent on how much you borrow.

The real question any New York state resident should ask themselves is whether or not doing a CEMA is advantageous to me? Most people would jump at the opportunity and immediately respond in the affirmative because they think they are avoiding paying tax. However, that is not necessarily the case as in the end you might be paying more than you would be saving. Now how is that possible you might ask?

Well, let us explore in general terms how the process of a CEMA works. First, what happens during a CEMA is that your existing mortgage gets assigned from your existing lender to your new lender. This assignment is necessary under New York law to avoid paying some or all of your mortgage tax a second time. Theoretically, this may sound simple, but in reality the process of consummating a CEMA takes more time than people often realize and costs more money than expected and also requires cooperation from several different sources.

In reality, when refinancing and utilizing a CEMA, you are only paying mortgage tax on the difference between your remaining unpaid principal balance and the new loan amount. To understand what you are actual saving consider the following example: You live in New York City and have an existing mortgage in the amount of $100,000 on which mortgage tax was initially paid by you at a rate of 1.8%. You have been diligently making your monthly mortgage payments and your current unpaid principal balance on your mortgage is now $90,000.00. You notice that mortgage rates have declined and you want to refinance your home and even increase your mortgage loan amount to $125,000.00. In this scenario, you would only pay mortgage tax on the difference ($35,000.00) between the $125,000.00 and the $90,000.00 as opposed to paying mortgage tax on the entire $125,000.00.

Again, in considering this scenario, paying mortgage tax on only $35,000.00 as opposed to the entire $125,000.00 seems like an ideal situation. However, in the end, will you really save money when refinancing as a CEMA? You see to even start the CEMA process you must contact the holder of your existing mortgage and request the assignment. Even worse is that not all mortgage holders will honor your request to obtain an assignment. In fact, for those mortgage holders that do honor your request there is ordinarily a nonrefundable fee, which typically ranges from three-hundred and fifty ($350.00) dollars to a thousand ($1000.00) dollars, to start the process, which also normally takes between four (4) and eight (8) weeks.

Once the process is started, the assigning mortgage holding bank has more to do. More to do as you have learned in the mortgage industry also seems to translate as additional expenses. If that is what you were thinking then you would not be wrong. You see, in order to complete the process most assigning mortgage holding banks are represented by an attorney who has to prepare the assignment, ensure the assigned loan balance is paid and forwards the original notes (with allonges/endorsements) and recorded mortgage to the new mortgage lender that you selected. In fact, the assigning mortgage bank’s attorney’s fee for this process can range between as low as three-hundred and fifty ($350.00) dollars to as much as a thousand ($1000.00) dollars.

Unfortunately, beside doing everything to make sure that the CEMA was done properly, your new mortgage lender must also do more, including locking your loan for a longer timeframe, agreeing to accept the assignment, and preparing additional documents for your closing. Since the assignment process is not controlled by your new lender, the timeframe necessary to lock your loan is generally longer. As you have probably learned, when your mortgage is locked for a longer period of time there is a greater expense to you for that time. And of course there is the very distinct possibility that you still many not be able to close your mortgage loan within the extended lock in period and thus you might incur even more fees.

Finally, everything is ready and you can close, but wait a second, your closing is not as you might expect. First, when you close by undergoing a CEMA there will be two notes and two mortgages, one being a gap mortgage and the other being the consolidation, and a 255 affidavit. From our example above the gap money or “new money” would be $35,000.00 and the new or consolidated mortgage amount would still be $125,000.00. As you can probably assume, even though you are reducing the mortgage tax, you still need to pay to have your mortgage documents recorded and there will be more to record, which leads to more expense. In addition to the items mentioned above you will also need to record the assignment of mortgage to your new lender. Thus, when considering your total costs verse mortgage tax savings do not forget to include all the ancillary expenses, which when recording a mortgage ranges from one hundred ($100.00) dollars to three hundred ($300.00) dollars depending on the number of pages in your mortgage. Let us also not forget that we have to record the assignments of mortgage and 255 Affidavits, which typically cost about seventy-five ($75.00) dollars to record each.

In summation, although trying to avoid paying mortgage tax might sound great in theory, you should really consider your actual savings, if any, before spending the time, energy and additional resources. Once you have thought about everything and if it still makes fiscal sense then you can consider doing a CEMA and saving yourself money.

Originally posted March 15, 2007

After undergoing some server “issues” that we never bothered to address until now, we’re back, baby! Unfotunately, due to our failure to address the issues we lost several (exellent)posts written after August 16. Oh, well.

As before, we will offer our insight into the mortgage industry. The focus of our sight going forward will be foreclosure intervention, predatory lending and private and public sector responses. We hope you find this useful and will try our best to regain your readership after our long absence.

We look forward to restarting our journey together.

In keeping with our recent posts Is Countrywide telling the whole truth? and Is Countrywide telling the whole truth (Part II), we insinuated that there was more to the story than Countrywide is telling. We based our opinion on Countrywide delaying (or attempting to delay) the funding of loans that were ready for purchase by them. And we updated you on our opinion because Countrywide delayed posting rates that correspondent lenders would use to price loans and lock loans the other day.

To further the story, we heard that Countrywide had meetings yesterday evening to assure employs that nothing is wrong and everything is business as usual. In my experience, anytime a company has such a meeting everything IS DEFINITELY NOT FINE. So this morning when Countrywide announced that they were forced to tap an $11.5 billion credit facility to fund its operations as difficulty raising money in the credit markets threatened its business, I was not suprised.

The real questions are what would the effect of Countrywide filing for bankruptcy have on the economy, the likelihood that this would bring the economy into recession, and should the fed do more as their open market operations don’t directly effect companies like Countrywide.

Is the sky really falling? Maybe, when you consider a company like Thornburg is having trouble selling their jumbo loans on the secondary market and experiencing liquidity issues. Thornburg is actually a REIT that specializes in purchasing, originating, and securitizing adjustable rate jumbo mortgages with an average loan size of more than $800,000. Their borrowers tend to be affluent, and so far have been repaying loans on time at far better trends than the rest of the industry. Affluent borrowers tend to be less risky than the majority of the borrowing population as they generally have more reserves and access to capital.

However, the reality is that certain segments of the borrowering population and their ability to repay loans are being blurred by fear rather than relying on common sense and the facts. That is exactly what is happening with Jumbo loans, their pricing and their underwriting guidelines. The other effect of this irrational fear is leading originators and investors to a percieved flight to quality. But not a flight to quality in the truest sense because if that was the case Thornburg’s mortgage would be appear to be a safe haven. Rather the flight to qualilty is having an outlet for sale or what I consider a back stop. This backstop is Fannie Mae and the only thing keeping the entire mortgage industry from complete implosion. The fact is that Fannie Mae was established for this purpose. According to their website, Fannie Mae was established by the government in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home.

Thus, if that is the case, then why isn’t Fannie Mae utilized to stabalize the higher end of the market by increasing their loan limits or creating Fannie Mae Jumbo loans which may be purchased by them? Isn’t this their mission?

Have you heard the term “Marked to Market”? Over the last few weeks this phrase “Marked to Market” is being bantered about and has been labeled the cause of the market disruptions (liquidity crunch). But what really is “Marked to Market”, and why is this such a big deal?

Marked to Market is the system used to assign value to a security instument (i.e. mortgage backed security) based on the current market price for that security. The unfortunate truth about marking to market for most mortgage backed securities is that it is not actually done (because there is no real day-to-day market available). What is done is “Marking to Model” or using estimated valuations derived from financial modeling to determine the price of the security. Thus, if the model is flawed, as appears many of the models are, the price given the security (and used on the balance sheet) is not accurate (i.e. it is too high or too low).

What is happening is when these securities actually come to market, the price being given is far different than what the model predicted. This price differential (the difference between the price of the security on the open market and price in the model) is affecting the banks and hedge funds balance sheets. To make matters worse, as we are seeing, hedge funds and banks are having margin calls because the positions taken against the inflated “marked” values are highly leveraged (i.e. they need to come up with a lot of money to cover the shortfall … hence the liquidity crunch and the market for these products drying up)

Can anyone say, pyramid scheme?

In keeping with our recent Is Countrywide telling the whole truth?, we insinuated that there was more to the story than Countrywide is telling. We based our opinion on Countrywide delaying (or attempting to delay) the funding of loans that were ready for purchase by them. As further evidence of their liquidity issues, Countrywide is having problems updating their rates. What this means is there are no rates and therefore no commited loans to Countrywide for today. Just seems like more stall tactics by the company. However, the market corrections (i.e. the repricing of risk) will not be fixed overnight. Thus, how long can Countrywide forestall the liquidity crunch. I think big changes are on the horizon over there.

We recently posted an article Is Size Everything? Fannie Mae to Increase Portfolio Size which discussed Fannie Mae’s request to OFHEO to increase its portfolio size and the effect it would have on the financial markets. In that post we argued that the effect would be pyschological only, as the disruption in the credit markets has been for all things non Fannie and non Freddie. In the statement issued by OFHEO, rejecting Fannie Mae’s request, the OFHEO believed that such an increase was not necessary at this time, but that they would continue to monitor the situation. In my opinion, the decision not to act makes sense for two reasons; first, the Fed’s action and second, this action would have little impact beyond pyschological.

Statement issued by OFHEO.

STATEMENT OF OFHEO DIRECTOR JAMES B. LOCKHART

Fannie Mae and Freddie Mac are important players in the mortgage market as they hold or guarantee 40 percent of all mortgages in the U.S. and about two-thirds of the conventional, conforming (non-jumbo) loans. This year their share of the mortgage market has grown rapidly. For this reason their safety and soundness is of paramount importance. The Enterprises have been very active in meeting their mission by providing significant liquidity and stability to the prime markets that they serve. They have entered into an increasingly large volume of securitization business in the conforming loan market — more than $500 billion dollars in the first half of the year — and that market is liquid and actively trading. We are encouraging them to increase this securitization activity.

The problems in the mortgage markets are concentrated in product areas outside the authorized normal business of the Enterprises. These markets are adjusting to tightened underwriting standards aimed at reducing losses and protecting borrowers. However, we are exploring with each Enterprise ways for them to enhance their support for affordable housing, both multi-family and single-family.

The portfolio caps were put in place last year because of their serious safety and soundness issues in response to Fannie Mae’s request to increase the portfolio caps, we issued a letter today to Fannie Mae. We also issued a response to Senator Schumer’s recent letter on this topic, which is attached. The letters indicate that we will keep under active consideration requests for an increase in the portfolio caps, but we are not authorizing any significant changes at this time. We will continue to reassess that position, especially in the affordable housing area.

The marketplace should have confidence that Enterprise securities are trading efficiently. The Enterprises will remain active market participants and OFHEO will continue to closely monitor both the markets and the Enterprises’ safety and soundness. In addition, we will continue to consider changes as needed to ensure that the current liquidity in Enterprise securities remains. We also recognize the important role played by the Federal Reserve in providing liquidity to the market, as evidenced by its actions today.

 Email This Post  Print This Post

Yesterday, in lock step with other central banks, the Federal Reserve (Fed) injected massive amounts of liquidity into the financial markets by repurchasing 35 Billion dollars worth of mortgage backed securities from the money center banks. In the Fed’s statement (below), the injection was made to facilitate the orderly functioning of financial markets. What is different about this repurchase is that dealers only posted mortgage backed securities as collateral. Usually, the Fed does not solely accept mortgages as collateral for repurchase transactions.

Thus, I ask what is the real effect of the Fed repurchasing mortgage backed securities locally, and globally, what is the rationale for the central banks infusing massive liquidity worldwide into the financial markets?

The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.

The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee’s target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.

The infusion of liquidity locally should calm fears on Wall Street and Main Street. After this infusion, both groups should understand that the Fed is ready, willing and able to ensure money central banks originate and/or purchase mortgages. Nonetheless, irrespective of the influx of money into this segment of the financial markets, there is a tough road to travel because the appropriate risk models for mortgage backed securities still needs to be found before anything changes. Therefore, if the influx of money has the effect of buoying the market until this occurs, it is beneficial. However, be forewarned that the markets will continue to trade thinly in mortgage backed securities, mortgages will be more expensive for borrowers, and there will be more lender implosions until this is completed. Thus, don’t be surprised to see greater than normal repos by the Fed over the next few weeks.

With respect to the other central banks, do they know something we don’t? The infusion of liquidity globally may highlight that the rest of the worldwide has greater exposure to US mortgage backed securities than is being discussed or there are similiar problems with mortgages in other countries that are not being talked about yet. It may also signal that the other central banks believe the problem is bigger (not just limited to America) than anyone is discussing or may just be preventative medication if the rest of worldwide fears a US recession will lead to a worldwide recession.

Just thought we would repost this service announcement (article) from April 24 in these uncertain times. The article is the Power of Rescission.

Here’s another dirty little secret that many in the mortgage industry don’t know or won’t tell you when refinancing your primary residence: When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer shall not be liable for any amount, including any finance charge.

Here’s the scoop. Rescinding entitles you to get your money back for expenses outlayed to third parties and/or the lender! So before you walk away from the closing table without signing on a refinance of your primary residence (or canceling the closing all together), remember that the right to get your money back is dependent on you signing and rescinding.