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Sep
30.
now what.
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Category: General

So the bi-partisan housing ‘bail-out’ package didn’t sail through as some people expected, it belly-flopped in the middle of the pool….. The finger pointing started immediately.

At some point the American public either need to be disgusted with their politicians incessant bickering, or at their politicians uncanny ability to provide absolutely no solutions. While these public figures were hired to provide leadership, they and are showing their true colors. We have two sitting senators who are campaigning for the office of the president. They are being paid as Senators, but how many days of the past 12 months have they done the job they were hired to do? I recall Bob Dole getting pressured to leave office when he was running for president…. Not this go round. The credit crisis was coming to a head when congress decided to go on vacation as well… But book tours and other things were more important at the time.

So really, what do we do now? We have a crisis facing us down, politicians who still want to cram the bill full of special little things, and no solution.

There is a standing definition of insanity – trying to do the same thing repeatedly while expecting different results. It kind of sounds like what is going on during this credit crisis. The politicians are pointing fingers, the banks are continually writing things down, the American public really has no idea what to make of it, and so we spiral down and down. The only difference is we now to have more company in the predicament – other countries are having bank failures as well.

In my opinion, we have to face the reality of the situation. If we do nothing, we face worse ramifications than if we do act now. Forget special interests, there will be time for that later. Forget donations given to campaigns from banks that may be hurt by what needs to be enacted – they could easily be hurt worse if you don’t act. Let’s stand up, educate ourselves on what is wrong, and what has worked in the past and then move that direction. Only by acting can we make a difference.

What has made America great in the past is our ability to look at a situation, and as a country come together to create solutions. Whether it is started by a single entrepreneur, or as the company coming together after a disaster, we all recognize the greatness we CAN achieve, and in those defining moments, some have seized the opportunity, and others have recognized  and followed the opportunity.

The solution is there, not all of us have access to the right people to put it in play, but if everyone begins looking for a solution, and looks for a true solution, we can find a way to lead our country out of this mess, and help the other countries that we have impacted along the way to regain their footing, and their trust in us once again.

Yes, this is a little more idealistic than standard, but it needs to happen.

A couple of suggestions to get started with – The RTC worked well, granted on a smaller scale, but probably the right idea, and take a look at the FASB “Mark-to-Market” accounting practice. A couple of tweaks here could potentially go a long way to ease this mess. More on that later.


Sep
26.
So what do we really need for a market recovery?
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Category: Uncategorized

There was a good article today posted on Business Week, you can see it here: http://biz.yahoo.com/bizwk/080926/sep2008pi20080925049629.html. It details what they call the 4 variables of what we need to see a market recovery. I think they have it mostly right, but there is something that could be done sooner to help ensure a quicker recovery.

Part of what has caused this credit crunch is bad loans being written, but the biggest cause of the issue is the lack of trust that has been driven by massive losses, and the insecurity of what the future holds. No one really knows who has bad loans, who has good loans, and which loans in the mix are good and bad.

Think of it as a group of practical jokers…. When it first starts out, they think it is funny. Then they all start trying to ‘one-up’ each other. Case in point – 100% financing for a w-2 employee, with a credit score of 620, and it was ok if he had a recent bankruptcy…. He couldn’t get a credit card but he can buy a home with no money down??? Or how about a option arm purchase of a investment property – with no money out of pocket. Not only do they have nothing into it, but now they have a loan that will ADD to the balance every month….

Now how about the customer with 510 credit scores, with debts that require up to 55% of his monthly income, they have no track record of making payments on a home before, but that’s ok, we will give them a house with no money down….

All of these loans were done, and repeatedly. The issue is one was Subprime, one was Alt-A, and the other was FNMA (see prior posts for FHA). All of these loans are high risk loans, and these types of loans are spread out through the entire system.

To have a market recovery, we need to have access to credit, meaning investors will need to be willing to buy mortgage backed securities on Wall Street. To do this, we really need to dissect the current pools, extract the garbage from the performing loans, and show the investors the types of loans that are still performing. Sure we will still have delinquencies, but there are pools of loans that perform within a predictable range.

One market having trouble right now is Jumbo loans. If there is someone needing to finance a 75% Cash out Jumbo loan of say $800k, they will run into difficulty getting this done because it doesn’t fall within the loans that can be sold to Fannie Mae. But many of these loans carry less risk than the loans currently being closed by Fannie Mae and Freddie Mac, or FHA. This is the real issue, investors are so nervous that they don’t want to touch anything associated with mortgage. However as they gain confidence that underwriting standards have been corrected, and they see a track record of this performance, and as other investments (such as oil) looks less sure, they will re-enter the market.

This brings us back to what the Fed can do. Dissect the current mortgages and determine what types of loans are performing. Go back to past market down turns and do the same. Then put a fund in place that will buy these types of loans. Don’t do any favors, buy them on terms that can make money, season them for 6 months showing investors that these are performing loans, and then re-sell them.

This will enable investors to see that these loans do perform, and within short order the market will begin buying these loans themselves without the need for the Fed to continue doing so, and if they do it right, it won’t end up really costing the tax payers $700 Billion dollars!


Sep
24.
Is this really the right direction to go….
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Category: Uncategorized

People who have been in the mortgage lending business for a while, especially those who have had to collect on delinquent loans they have made, have always watched FHA lending and shook their heads.

Subprime lending has been given a HUGE black eye over the past few years, first in the early 2000′s Subprime was targeted by politicians and community groups as being predatory. (to digress for a minute, there were some people who took advantage of people’s situations, both banks and brokers, but the majority of lenders were trying to do fair loans)

Subprime lenders were targeted as charging high interest rates, and putting people in homes they couldn’t afford. The interesting thing was that the default rates on loans with >30 day delinquency averaged 3-4%. Prime loans averaged <1%. The lenders countered back that they had to charge these rates to offset the higher losses. At the time there weren’t a lot of other outlets, and competition was really the only regulator. Some states did try to pass laws to limit the rates that lenders could charge, and in the more extreme cases, all subprime lenders pulled out of the state restricting financing to the constituency of the politicians who then had to repeal the legislation.

I bring this up only because I have been keeping an eye on the governments alternative to subprime lending over the years. FHA is a “more flexible” source of funding than Fannie Mae and Freddie Mac, and has been running a higher delinquency rate over the past few years. Right now in the credit crisis, conventional loan defaults have been sitting at under 3% (if memory serves, I haven’t seen these stats for a while) but according to information that I can gather, FHA has been sitting at around 12%….. Why then are we trying to push more troublesome loans in their direction????

FHA for years has offered a unique type of financing. The maximum LTV allowed on an FHA loan was 97% meaning that the home buyer had to come up with 3% of their own funds. This 3% could come from a family member, the employer, or a non-profit organization. Someone came up with the idea a few years back that if they would create a ‘non-profit’ that the seller could gift the 3% to, that the non-profit could then give it to the buyer of their home. So basically, the seller is giving the buyer the down payment to buy their home…… Anyone confused yet?

FHA also would give loans to people that subprime companies would never dream of doing. For example people with low credit scores (<540) and doing the same type of financing thereby increasing the risk….

This creates a few issues. First, the bond traders were not all aware this was occurring. They thought it was a 97% loan.

History shows that people who have a financial interest in their home are less likely to walk away than those who have none. That could be why while only about 1/3 of the FHA loans were closed using this unique form of a down payment, over 60% of their defaults come from this.

Why is there no public outcry? This isn’t widely reported. It isn’t causing any institutional failures, it just keeps getting funding from our tax dollars! If you would like to see more details on this, visit http://whistleblower.ml-implode.com/?p=22.

Given this information, it sounds like the subprime lenders really weren’t too far off when charging higher interest rates, given that they knew they had to collect on those loans. The real issue on subprime came when they were able to offload the risk on to other entities, sell them off as bonds, and then have those bonds insured. This took the pressure to collect as the profit was already made!

Sounds like we need to get back to reality of finding lender who actually know their business, who lend money they will have to collect.


Sep
24.
Credit Crisis Bail Out – Huh?
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Category: General

 The NY Times had a pretty basic Q&A about the bailout plan now being hashed out on Capitol Hill. You can find the article here: http://finance.yahoo.com/banking-budgeting/article/105824/The-Wall-Street-Bailout-Plan-Explained.

There is a lot of debate as to whether this is needed or not, and even more debate as to whether the government will get it right.

Lets start with the last one first. If they really put partisan politics aside, they could get it right, and could make this something that could work. That is a big IF though. Given their recent track record and uncanny ability to turn everything around and place blame…..

The funny thing is that they don’t seem to realize though, when you point 1 finger at someone else, you still have 3 pointing back at you. I think the American people at this point want to see an end of blame, and some leadership for a change. I don’t really care what party fixes the problem, I just want it fixed.

 Now the second side of the problem. Will it work. For it to work, you need to know why the problem is as bad as it is.

There are too many sides to this story to cover here, but I will try to clarify in a nutshell.

The first issue is we have too many people that bought houses on silly programs that they shouldn’t have been given in the first place. Loans that people shouldn’t have or couldn’t have afforded were abundant. There has been a lot of finger pointing here as to who is to blame, but the bottom line right now is it doesn’t matter, it happened, let’s find a solution.

Second issue is there are a lot of people who are in loans that they could afford at the time, but they can’t now. This could be because the have lost their jobs, had medical issues, etc, or it could be due to an ARM loan that adjusted and they can’t afford the payment. It could also be because the type of program that they started with isn’t around any longer and they were on an ARM.

This is where many people are going down the wrong path. ARM’s in and of themselves are not bad. In many cases they are good loans, and in rational markets they make a lot of sense. In today’s world though, fixed financing is cheaper than ARMs (at least this week….) and is the preferred type of loan. However a few months ago, 5-7 year ARMs were available in the high 4′s or low 5% range. For someone who is financing a home but intending to move out in 5-7 years, this can be a substantial savings, and there is no reason for a higher priced fixed financing. To compare loan payments side by side to see this demonstrated, visit www.totalloan.net and see the loan calculator available.

Back to the issue at hand. There are a lot of loans out there that are being sold at a huge loss to the initial investor. Many of these loans are paying on time, but due to accounting practices, if they fall within certain categories, they have to be marked down to ‘current market value’ regardless of whether they are paying on time or not. In some cases the investor will dump these loans at that value rather than trying to set aside the cash reserves necessary to cover the potential losses. When this happens the bank shows a huge loss, but that loss may not actually be incurred. BUT because they show the losses, the perception becomes that these are a terrible type of loan, the programs go away completely, and then the people who are in those loans that need them to refinance out of their ARMs are stuck with an interest rate that skyrockets, making the perception of a ‘bad product’ a self fulfilling prophecy…. Make sense?!?!?!?

One last issue I’ll address is declining markets. Most if not all markets have seen some sort of a decline in value. This has led to borrowers not being able to qualify for a new, lower interest rate that has been provided by the Fed rate cuts, or they can’t sell the home on the market to get out from under a bad loan, and that could lead to an increase in loan defaults.

So with so many problems (and these are only a few of the issues, don’t get started with the confusing generated by another good but misused tool – securitization) facing the housing market, we need good people in the mix who have handled declining markets, who have collected on loans, who know how to work with people to get them back on track. If anyone wants my opinion, I could recommend a few….. :-)

As for the question of do we need this bail out – if the big banks could establish a value for the loans they are holding, then not necessarily. But as of yet, they have been unable to do so. If we can’t determine a value of the current loans, then the credit market begins to freeze up tightening up credit and then financing becomes unavailable for even those who do qualify for the loans meaning more inventory will hit the market, more declines in value, more foreclosures due to lack of credit, etc. It starts to spiral.

Bottom line, There are some good market indicators, but the bottom is not here yet. I believe the economy will recover, the doom and gloom pushers out there are having their hey-day right now, but we just need to keep in mind the old saying – “this too shall pass”

In the meantime, perhaps it would be good for us ‘little people’ to take a lesson from this. Protect ourselves by reading our loan paperwork Looking through the details of what we are signing off on before we get our first payment. Running a budget before we buy a house to really see what the total expense will be. Develop equity in our houses so that a 20% down turn won’t affect our ability to obtain financing if needed.

By being smart, we can help prevent our ‘biggest investment’ from becoming our most worrisome liability!


Sep
20.
Where to get your loan
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Category: General

It still amazes me to see people still debating over where the best place is to get a loan. The reality is it depends on what kind of loan you need. Some people and media outlets are bent on blaming mortgage brokers for what happened on Wall Street when the reality is there is plenty of blame to go around. From the people who offered the product to the people who signed the loan docs, everyone takes a share.

So what we really need to focus on is recovering from the housing crisis, and the best way to do that is to focus on helping those who need loans to get the best loans for their situation.

If you are looking for a simple refinance or purchase loan, then either a bank or a broker can do that loan for you. In many cases, I usually see brokers do these less expensively but if you negotiate, the banks can do them well also.

If you are looking for a construction loan, these are more difficult to find, and many times they are easier to get at a bank. Same thing goes for a rehab loan, the FHA 203k loan is available mostly from banks although there are some other groups that can offer them, but beware, they are expensive. Check with your smaller banks that do construction loans and you may be able to get a non-FHA loan from them, this will typically carry a higher interest rate during the construction phase, but you should be able to refinance into a normal loan at the end of about 6 months, and the net costs will be lower.

For lines of credit tied to your home, credit unions have been the best source that I have seen. Some of the banks will be close, but check with your local credit union before you close. As a non-profit entity, if they chose to be competitive in this arena, they will typically be the best!

Also, use all tools available to you to compare costs. No one is going to work for free, but you should be treated fairly. The web designers at www.CheckMyFees.com have rolled out a beta version of their site. It allows you to compare your rate and closing costs with others in your area. This will show you if you are being treated fairly. It isn’t perfect and won’t cover all loans, but it should cover the majority of them!


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