real/diaBlog - because real estate needs to change

Underwater Mortgages - An Interview on Nightly Business Report

A  story that has been getting alot of media attention lately is the impact on homeowners of owing more on there homes than the home is worth.  Usually referred to as being "underwater", this financial situation is becoming a serious problem throughout the country. 

It has led directly to the explosion of short sales and voluntary foreclosures and indirectly to the drop in consumer sentiment and a pull back in the American consumer's appetite for spending.  

I was lucky enough to interviewed by Stephanie Dhue of Nightly Business Report yesterday and the segment ran yesterday on PBS nationwide.  It is the second segment in this video.

Here are several stories regarding underwater mortgages.

The report from Deutsche Bank thatunderwater mortgages will hit 48%.  This was quoted in the NBR report.

An in depth report on the effect of underwater mortgages and foreclosures by CoreLogic.

Report that currently 1 out of every 4 mortgages in America is underwater.

Fannie Mae Bailout, Mortgage Meltdown Predicted in 1999

This article in the NY Times in 1999 talks about the loosening of lending standards at Fannie Mae and then goes on to describe what could happen if the increased risk of sub-prime lending went wrong. 

It is almost scary how accurate the predictions are.

Click here for a full screen view of the article.
Fannie Mae Loosens Standards - 1999 - Free Legal Forms

Fannie Mae and Freddie Mac Headed for Nationalization

First Fannie Mae and Freddie Mac were seized by the US Government. 

Then Fannie Mae reports $29 Billion in third quarter losses. 

Now Freddie Mac is tapping into some of the $200 Billion set aside to keep these companies liquid because they reported a loss of $25 Billion. 

And reports are that the $200 Billion was just a number that the government thought sounded big enough to create confidence in the two GSEs.  Turns out that number might be too small.

With a recession looming (I think we have been in a recession since the first quarter of 2008) and unemployment rates spiking, it doesn't look like the housing crisis is going to be over anytime soon.  And that is why the $200 Bilion is not enough.

The only step the government will have once they have pumped billions in and the horrific quarterly reports continue to show signs of massive bleeding will be to nationalize both Fannie Mae and Freddie Mac.  We as tax payers are going to completely fund them, we might as well have some hope of return on our investment.

Same goes for AIG.  And the automakers.  Or any of the other endangered US industries that we end up financing.  Management of these companies has proven that they are greedy, incompetant and unfit to manage through economic downturns.  The management teams and boards of these companies should be removed.

Only One US Bank Among the World's Safest

And that bank is Wells Fargo.

Safest_Banks_2008 - Get more Business Documents

Make Sure You Have A Wells Fargo Loan Officer in Your Rolodex

With the turmoil that has been tearing through the capital markets and the impending merger between Bank of America and Merrill Lynch, the one resource a good real estate agent should have for their clients is a stable lender to turn to. And the marketplace is telling us that one of the best if not the best lender is Wells Fargo. And if you don't have a loan officer from Wells Fargo to refer clients to, you should seriously consider adding one.

The recent merger activity by Bank of America says that they are more interested in acquiring assets and diversifying their financial businesses. Management will be focused on avoiding huge liabilities that came with the Countrywide acquisition and trying to sell new products to their client base with the "thundering herd of stockbrokers" that comes with the Merrill Lynch purchase. Their strategy does not include growing the mortgage loan business and their loan officers will be hamstrung by this lack of interest by management.

Mortgage brokers have had most of their wholesale products discontinued and it just doesn't make sense to add a middleman into the loan transaction when the only value the middleman had (product choices) no longer exists.

Four of the biggest names in retail lending during the boom times are either gone or mere shells of their former selves. Countrywide was gobbled up by Bank of America, Indymac went bankrupt and the government took over, Washington Mutual was at $36 last October and now trades for $2.20 and National City was at $27 last October and now trades at $4.50 with quarterly losses of $1.8Billion.

Wells Fargo seems to be the only company that has avoided the massive losses and whose strategy is to grab market share in the residential lending arena. They continue to offer incentives to home buyers in the form of one-year buy-downs.  Here is an example of an email I received from a loan officeer at Wells Fargo:

Our previous offer involved a free buy down on government loans locked in August. Now we have a free ONE YEAR buy down available on HIGH balance Conforming loans locked BEFORE September 30 (government loans not eligible in this one). Details as follows:

High balance conforming loans between $417,100 and $729,750
Loans locked before September 30 at midnight (not closing, just locked before Sept 30)
Free 1 year buy down with rate bought down 1% below the locked 30 year fixed rate. Example - loan locked at 6.25% on 30 year fixed, first full year payment based upon rate of 5.25%. No cost to your customer.

Please call for details.

Thank you,

Michael Pfeffer
Home Mortgage Consultant
Wells Fargo Home Mortgage
703.967.0709 (mobile)
866.682.0654 (fax)
7620 Little River Turnpike, Suite 300
Annandale, VA 22003
[email protected]

Their rates are competitive, their product line is comprehensive and they are reaching out to consumers and agents while other lenders are busy ramping up their loss mitigation departments.

Is Washington Mutual Next?

Three of the biggest lenders in the subprime marketplace were Countrywide, Indymac and Washington Mutual.  In a post written 11 months ago, we reported that all three institutions had cut back dramatically on these types of loans as well as on 2nd mortgages and other more risky loans. 

Within the last 2 weeks, 2 of these institutions are no longer around as stand alone companies.  Countrywide was spared the disgrace of going under by being acquired by Bank of America in a deal that was completed on July 1st.  Bank of America immediately transfered the assets to its parent company and moved the debt to a subsidiary, leaving open the possibility it will not back any of the former Countrywide debt obligations.

On Friday, Indymac became illiquid and was taken over by the government.  A run on the banks deposits made the company unable to meet financial obligations.

And in an article written by Jane Wells at CNBC, she points to several banks that are set to fail.  And not surprisingly Washington Mutual is the biggest name in the bunch. 

Fannie Mae and Freddie Mac Crisis Potential Disaster for Real Estate

By far the biggest story this year regarding real estate is the potential implosion of Freddie Mac and Fannie Mae and/or the potential government takeover of these two companies. 

It is the biggest story because if something bad happens to either or both of these Government Sponsored Enterprises the impact on real estate would be devastating.  These two GSEs provide so much liquidity and foundation to the nations mortgage industry that lending would come to a virtual stop if they could no longer provide that liquidity.  And without liquidity the price of loans would rise dramatically and return to rates seen many, many years ago.  10% and 12% 30 year-fixed mortgage would be the average. 

And with higher interest rates comes lower demand.  And with lower demand comes lower prices,etc. etc.  You get the picture and it is not pretty.

Both Freddie and Fannie need to survive in order for the real estate market to keep from getting even worse in the next year or so.

HUD Proposes Changes To RESPA, But Misses Key Points

The Department of Housing and Urban Development (HUD) rolled out proposed changes to RESPA including changes to Good Faith Estimates (see the proposed changes). HUD claims that the proposed changes will make it easier for borrowers to see the true costs associated with getting a loan and will allow them to do a better job "shopping around." HUD estimates that "shopping around" will save each buyer an average of $668 at settlement.

But they don't address some key points. Currently, there is no law that protects consumers from lenders that "bait and switch" by showing "X" dollar amount on the Good Faith Estimate, but end up charging "Y" (aka higher) amount come settlement, much to the dismay of the borrower.

Since the financing contingency has typically been removed well before settlement date, the buyer has the choice of either paying the higher amount or not settling. If the buyer doesn't want to move forward with settlement, they will most likely be in default and lose their earnest money deposit, etc. Therefore, they really don't have a choice and just end up paying the higher fees.

Personally, I don't understand how mechanics are required to contact people when the repairs deviate from the initial estimate by more than 10 percent, but there is no such rule for lenders. Saving consumers $668 is a drop in the bucket compared to the amount that some lenders increase their closing costs by at the last minute.

HUD has also proposed changes to the HUD-1 Settlement Statement (see proposed changes). But the HUD-1 Settlement Statement repeats much of the same information listed on the Good Faith Estimate. They should worry about changing the laws surrounding holding lenders accountable to their Good Faith Estimates rather than spending time changing the HUD-1.

Plus, the HUD-1 Settlement Statement is not ready until the day before or the day of settlement. By that time, there's very little a buyer/borrower can do to make changes to their loan or "shop around" for better terms or a new lender.

Though consumers surely appreciate what HUD is trying to do, they will not be protected much, if any more than they are today. Personally, I'd rather pay the $668 and have a guarantee that the loan will close on time and that the lender fees will be the same as listed on the Good Faith Estimate.

Countrywide Under FBI Investigation

It doesn't surprise me at all.  The Wall Street Journal has reported that Countrywide is being investigated by the FBI for fraudulent lending practices.  I think maybe they will find that Angelo Mozilo created an entirely new class of fraudulent lending practices just so he could cash out his stock options.  

They are also saying that BofA is trying to accelerate their purchase of Countrywide.   Probably trying to save the $2Billion they invested in the company last summer.  If BofA pulls out of the deal, Countrywide would go under in a day.  I think they need to just cut their losses.

New FHA Mortgage Limits Announced

The Department of Housing and Urban Development (HUD) released the new FHA mortgage limits. This is part of the economic stimulus bill signed on February 13, 2008.

To find out what they are in your area, click here and select your state and type in your county.

Note that the new limits are only for loans obtained on July 1, 2008 or later and that the loans must be funded (you must close) no later than December 31, 2008.

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