MORTGAGE INDUSTRY UPDATE

[fisherdog19]

I'd just like to give everyone a quick synopsis of the recent (but not over) changes in the mortgage industry. The current market is seeing a lot of changes, especially in the Alternative A (Alt-A) paper, and subprime markets. In case some of you may not have heard, many wholesale Alt-A, and subprime lenders have gone under due to high numbers of default loans. The days of using reduced documentation (not fully documenting income and assets), and having below average credit to buy or refinance a house while borrowing against 100% of its value will soon be reserved for those that have an above average credit history. For a few years now, the decrease in rates, and increase in wholesale lenders competing for business and almost giving away money are nearing an end.

What does this mean? Those consumers that have purchased or refinanced homes with interest only and/or adjustable rate mortgages (ARM's), and that have lived above their means using the equity in their homes to payoff debt, may find themselves in some trouble. My biggest worries go out to those that have been talked into taking one of those loans you see advertised that have extremely low payments. If one chooses the lowest payment option on what is called an Option ARM or Pay Option ARM, your original principal amount will increase. The fear is that the projected decline of home values in many markets due to the increasing amount of forclosed upon homes to hit the market, will put many people in these type loans upside down. For example, I currently have been trying to help a client get out of one of these. Three years ago he got into one of these, his loan amount was $480,000 and his appraised value was $625,000. He now owes $500,000 on that same loan, his house will only appraise for about $550,000, the rate is 8.25% when it started at 5.25%, and he also has a second mortgage for $75,000. You are all smart enough to see what the problem in the equation is.

Current conforming rates on the 30 year fixed have dipped of late down to the 5.75% range, with Jumbo loans dipping to 6%. If any of you out there are in an ARM of any type, and plan on being in the home past the time the ARM will start adjusting, now is the time to refinance. The spread between the ARM and fixed is near a historic low, and the indices these ARM's are following have increased enough that when they do adjust, the rates will most likely be higher than what you could get on a fixed rate right now. If any of you out there have accumulated debt to the point that it is becoming hard to make the minimum payments, and that debt combined with your current mortgage balance is reaching 90% or greater of your homes value, you may want to think about consolidating before investor loan guidelines become so stringent that it may become hard to do this in the near future.

Give me a call anytime for a free, no obligation mortgage consultation to see if a refinance may be a good option for you. On another note, if any of you out there are looking to purchase a home, I would be happy to help as well. At Valesco Mortgage we offer some of the lowest rates and closing costs available anywhere, and no matter where you live I can help as we are a nationwide lender.

[Black_Bay]

My fiance is in a similar situation as your client. She was scammed by one of these predatory lenders just out to make a buck. We have her place on the market and hopefully she'll sell the place soon. I can't belive these types of loans are actually legal. I haven't heard of one person who has one that can now afford it.

Then there is the issue of not fully documenting income, assets, and borrowing 100% of a homes value. I'm sorry but that is about the most irresponsible thing a lender could do. If that is the only way a person could afford a house then they can't afford one on my book. This rash of forclosures is, IMO, caused in many ways because of these types of lending practices. I think it's time that mortgage lenders have some sort of licence just like realtors.

Now the stock market is taking huge hits because of this.

When I bought my house in '94 my lender poured over my paperwork and made durn tootin' that I could afford the house I was interested in. Today I can say I have great credit, a low mortgage payment, and am finacially secure with a lot of equity in my house. Thanks Keith.

[MuskieJunkie]

Take a drive through north Minneapolis and check out all the homes boarded and for sale. Those predatory origination brokers that made a quick $2,000 on these ill educated, low income families that just wanted to own a home should be ashamed of themselves.

[minndonn]

And now the government will have to bail out the lenders as it did in 80's Savings and Loan crashes.

[upnorth]

The way they allow that to happen also causes a false rise in real estate values. If you allow hokey practices like that it allows people to buy homes at prices they normally can't but them at. If you can't sell a home for a certain price you either sell it cheaper or you don't sell it at all. Wait a while and those that bought houses at the inflated pricest that try to sell, they will not get what they paid for them and then they are really gonna be hurtin.

[fisherdog19]

Carful boys, we cannot point the blame to one sector of the market. Not all mortgage brokers are out to make a quick buck, and when wholesale lenders offer products in which a client fits in, they are just doing their job and trying to help people get into a home. Reduced documentation programs have a lot of merit in situations where fully documenting everything can be a big hassle, such as self employed borrowers that try to hide as much income as possible, but still have enough cash flow to cover a mortgage. Another situation that does not call for or require full documentation is when a borrower has an extrememly high credit score, low LTV (loan to value), high liquid assets, and a low DTI (debt to income ratio). There is no reason this type of client should have to, and currently there are programs that don't, and are conforming loans with rates just like the full doc loans.

I agree the pay option arms should be done away with, or left for only certain situations where they would be of benefit. The biggest reason why some brokers pushed it is because their thought was that if you can put away the money you save in monthly payments and earn 8% on it, and your home appreciates, then you will come out ahead. The only problem is that it is very risky and you cannot control the housing market or the rate of return you may get on your investment. We also cannot blame the decrease in the stock market on the real estate market, sure it has some effect but overall it is small. Another thing to consider before jumping the gun is that no on took advantage of low income families and put them into homes they could not afford. When rates hit a low, many people got into the investment property business, and most of these properties you see in the MSP market that have been forclosed upon are investment properties. Keep in mind Black Bay that 13 years ago, none of these programs were available and most every loan was a full doc loan. If at the time you had great credit, money down, low DTI, and high assets wouldn't you have liked a program in which you didn't have to deal with gathering all the information especially if you were self employed? Just put yourself in the other shoe for a second.

As far as the government bailing these companies out is concerned, it shouldn't happen they are not banks or FDIC insured, they will just file BK and go out of business just like the many that already have.

If all goes as planned, Minnesota will make their mortgage broker license harder to get. Currently you only need 1 year of experience as a loan originator and $850 and you can get your brokers license. Many states require some sort of individual licensing and continuing education for originators and hopefully MN will follow suit. You can blame the influx on brokers in MN, on the fact that during the recent refi boom, many originators just opened their own shop, hired more originators and so on and so on. It is still happening, one of our originators left about 2 years ago, opened his own shop and now 2 more businesses have been opened by two of his previous employees. So what was one, now is four.

Valesco Mortgage is an idependently owned and operated net branch of a Federally chartered and regulated bank so we do adhere to and follow all federal lending laws, and have our own in house anti-predatory lending regulations. You can be assured that you will not be taken advantage of or get a raw deal with us. We have had clients recently that wanted to do cash out refinances to 100% of their property value, and we would not do it even though we could.

By the way Black Bay, do you still have the same rate from 1994 or have you refinanced to a lower rate since then? I would assume you have, but we have had clients over the last couple years that hadn't.

[311Hemi]

I just talked with my mortgage guy today. Here is my situation......

I am in the 3rd year of my arm. Currenly at 4.5%. I can increase 1% per year. So that means I could go another 4 years after the end of my third year here at 4.5%. After 8 years the average would still be less than 6%.....so from that aspect this should be ok...correct.

The issue that comes into play is that cost of my mortgage when I am at the 8.5%.......right?

[fisherdog19]

How many years is your fixed period for on your Arm? Another question would be is: What is the first adjustment cap? Many arms have 5/2/5 or 5/1/5 caps which means the first number is that the first adjustment can increase no more than 5%, after the initial adjustment the middle number is the maximum yearly increase, and the final number is the maximum lifetime increase to rate allowed under the program. So, you should find out what your maximum initial rate increase is, and you already know that your maximum yearly increase after that is 1%. I have never seen an arm with a 1/1/5 or 1/1/6 adjustment formula, but that doesn't mean one wasn't out there 3 years ago.

311Hemi, I would not try to look at things on a 7 year rate average of less than 6% because your current income to debt is budgeted for actual cost, not average cost over 7 years, if you get my drift. If you are on a 3 year arm, and your rate increases 1% every year until you are 8 years into the loan, then you will be at 9.5% if your arm allows a lifetime adjustment max of 6%, most allow a 5 or 6% max increase. If you are on a 5 year arm, then your rate would be at 7.5% after 8 years. You may want to consider going to a fixed rate because your rate would be at 6.5% when you're just 5 years into the loan assuming the rate increases by a max of 1% in the 4th and 5th years. I would recommend refinancing into a fixed if you plan on staying in the home for 7 years total or more, assuming you're on a 3year arm. Right now on approved credit I could get you 5.75% on a 30 year fixed. If you'd like some help, I'd be more than happy to become your new mortgage guy .

[blue_healer_guy]

So in a nutshell, does this mean lower interest rates and lower property values in th e near future?

[Black_Bay]

Sorry about my rant and the generalizations Fisherdog. It's just a touchy subject with me right now and a situation of one bad apple spoiled the bunch. I know home buyers need to be responsible, but it seems that some of these new programs were used when they shouldn't have been. We'll have to disagree on people being taken advantage of though. There have been news stories in the Cities of less than ethical lenders really hurting people.

As far as me using reduced documentation yes that may be nice, but I don't have anything to hide. I have friends who are self employed and I know they hide income. I don't agree with it but that's another topic. Anyway I think it's still beneficial for someone unbias to look at your finances and show you what you really can afford. Most people think they can handle more than they really can.

I have refinanced since 1994. I dropped over 2% which allowed me to reduce my term from 30 years to 15 years while only raising my payment $100. At this point I'll be 52 years old and have my house payed off. That's of course if we stay there.

[MuskieJunkie]

Quote:

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So in a nutshell, does this mean lower interest rates and lower property values in th e near future?

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Don't worry about property values dropping. Real Estate is one of the best investments out there. It ALWAYS out performs other investments in the long run. Am I saying the values can never drop, NO. Niche markets have seen decreases lately, low income neighborhoods, like North Minneapolis has taken a hit lately (the main reason being these exotic loans we have been talking about). Condos, the downtown high end ones have taken huge hits lately. I think people were overpaying for townhomes for a while too. A guy at my work bought one in Shakopee 3 years ago and today it's worth what he paid for it.

[fisherdog19]

Not sure, if I could answer that question, I'd be very, very rich but here are my thoughts. In some markets values have declined, some have still appreciated, but in general we are seeing a flattening out of value (little to no appreciation). I feel that in markets that have seen high levels of appreciation, will have the same period of flat values, while those that have had normal appreciation will remain stable like they were. I don't see too much more in the line of rate decline, the economy strength will have a lot to do with that. A lot of the recent increase in value was due in part to the low rates we have seen over the last 5 years which created a sellers market, so some false appreciation has probably happened in many markets. Rates have been pretty stable over the last year or two, so I think rates may stay low, but if the economy sees a push, we may see an increase in them, but nothing crazy.

Yes, there ary TOO many unethical brokers out there and hopefully they get thier due, but you usually don't see them in the banking side because of heavy regulation. That's what puts me in a unique situation, I am a Mortgage Banker, but I can broker when I need a niche product. You can't go to many brick and mortar banks and get a niche loan, let alone have them broker one out. Most every bank now a days, except for the BIG ones, sell their loans to pre-determined investors which happen to be the BIG ones I just referred to. You rarely see small town or even regional banks hold what we call conforming/secondary market loans anymore, most all sell the loan but may retain the servicing aspect (collecting payments, helping clients).

[fisherdog19]

Another quick update, I get multiple emails from wholesale lenders and my bank on a daily basis about program updates. Many non agency/conforming programs are dropping their loan to value (LTV) and combined loan to value (CLTV- 1st and 2nd mortgages combined)to 95% or below. Many of them are getting rid of the 100% programs all together.

[FWA]

Excellent information.... Reminds me of the time when I used to work for Bank of America Mortgage (before they left).