Refinance Free Credit

The past few days have seen wide coverage of a groundbreaking settlement involving New York Attorney General Andrew Cuomo’s office and both Fannie Mae and Freddie Mac, that would see both of the GSEs retool their approach to appraisals by ditching the use of in-house appraisals and brokered appraisal networks.

The Wall Street Journal first reported on the potential deal Tuesday, and Fannie Mae CEO Daniel Mudd had gone so far as to fly to New York on Monday to appear side-by-side with the New York AG in announcing the changes — but the deal has temporarily hit some speed bumps, according to sources familiar with the matter and a report published at Reuters.

The proposal
The negotiations on changing appraisal practices came after Cuomo supoenaed both Fannie and Freddie in November regarding an ongoing lawsuit targeting First American and its subsidiary appraisal shop eAppraiseIT.

Negotiations had gone so far recently that Fannie Mae recent sent a letter to lenders warning them of the pending change; American Banker published a copy of the lender letter earlier this week.

Under the proposal, Fannie would help establish an independent national appraisal clearinghouse that would randomly assign appraisal orders out to any appraiser in the clearinghouse, without regard to lender affiliation or broker-based relationship. The new program was originally slated to go into effect September 1.

Snags in the deal
Reuters reported Thursday that the deal hit a snag when federal regulators, perhaps ticked off that they weren’t involved in the original Cuomo/GSE negotiations, raised a host of objections to the plan:

Federal bank regulators, who had a role in setting standards for home appraisers, warned OFHEO that a deal with the two mortgage finance giants could suddenly reshape the industry in unexpected ways. Some at the Office of Thrift Supervision, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp were annoyed that word of the deal reached them so late.

There were also concerns that Wall Street firms that had nurtured the housing finance sector during the recent boom would not be held to the same standards.

That being said, sources that spoke with HW said they still expect a deal to be reached — and to include both Fannie and Freddie — in the weeks ahead. No official press sources from Fannie, Freddie or OHFEO have commented on the record about the ongoing negotiations.

In a 10-K filing with the Securities and Exchange Commission filed on Thursday, ultra-prime mortgage lender Thornburg Mortgage Inc. said that it has been hit with margin calls on roughly $2.9 billion of Alt-A mortgage-backed securities held in its portfolio. The hit came as the company faced what it called a “sudden adverse change in mortgage market conditions” beginning on February 14.

The lender said it had met about $300 million of the margin calls since that time, leaving the company with “reduced readily available liquidity” for any future margin calls it faces.

Cue up the next round of the mortgage industry liquidity crisis, it seems. Thornburg, for its part, seems unsure about what lies ahead.

“Given the current uncertainty regarding these market conditions, we are unable to offer any additional factual information on the situation and how it will impact us other than to disclose what we are currently seeing in the mortgage market,” the company said it its regulatory filing.

Earlier this month, the Santa Fe, New Mexico-based lender said it returned to profitability during the fourth quarter of 2007, posting earnings of $64.8 million. The company had lost $1.1 billion during the quarter as it dealt with the crippling effects of the first wave of the mortgage credit crunch.

Disclosure: The author held no positions in Thornburg when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

President Bush urged Congress to reject a new bill that would allow bankruptcy judges to modify the terms of home loans included in bankruptcy cases.  From the Market Watch story on the bankruptcy bill to change mortgage terms:

President Bush urged Congress to reject a Senate bill that would change bankruptcy laws by allowing judges to modify the terms of a mortgage as part of the restructuring of a debt. Instead, Bush said at a White House press conference, lawmakers should approve reforms to mortgage-buyers Fannie Mae and Freddie Mac and the Federal Housing Administration.

The president has a point here.  While the government clearly isn’t done bailing out folks this change seems extremely dangerous to the stability of the secondary market.  If investors are worried that judges are modifying loans pell mell they are going to be extremely reluctant to purchase securities made up of individual mortgages.  Investor interest has to be protected in this process.  Remember - they are the ones with the money!  The government sure doesn’t have it, consumers sure don’t have it - it’s the investors.

If the investors take their money off the table, or, more likely, put greater costs associated with borrowing it, it hurts everyone.  We need investor confidence to return money to the system.  The secondary market only works when investors have confidence in it.  Letting judges make changes as they see fit is a quick way to send investors running.

It’s not official yet, but it looks like New York Attorney General Andrew Cuomo may be close to taking the first, in what will hopefully be a series of much needed steps, to fix the systemic issues plaguing the appraisal industry.

Ever since he announced that the state of New York was suing Washington Mutual and eAppraisal for what he described as a collusive effort to sign off on overvalued appraisals, the pressure to make changes to the appraisal process have been enormous.

When Cuomo’s office subpoenaed Fannie Mae and Freddie Mac records as part of an expanding inquiry into the practices of the industry last November, it was clear the AG was a man on a mission. He appears to be close to getting his way.

Under the terms of a deal in the final stages of negotiation, Fannie Mae and Freddie Mac would require their mortgage lending partners to not have formal ties with the home appraisers. This means no in-house appraisers and no ownership interest in an appraisal firm. The second half of this deal is squarely aimed at the back of Washington Mutual.

Although it’s difficult to blame the GSEs for the actions employed by individual lenders, Cuomo used his leverage as New York’s top law enforcement official to address the problem head on. Let me say for the record, nicely done.

To be certain, this in no way solves the wealth of issues that plague the appraisal industry. Having spent five years as the owner of a wholesale lender, one who relied on the in-house appraisal division of one of my largest investors to verify (e.g. appraisal reviews) the legitimacy of the original broker-ordered appraisals, there is no way for a lender/investor to remain completely subjective while owning or having an ownership interest in an appraisal company. We don’t let investment banks own a rating agency; why should a lender own the one piece of the lending equation that requires — no, demands — complete neutrality.

I know the argument from the lenders’ side. When used correctly and allowed to function autonomously, an in-house appraisal division can serve as a vital part of the diligence process. Well, given the mess we’ve gotten ourselves into, it’s pretty clear that didn’t work very well did it?

I don’t fault the GSEs on this particular issue. But I do applaud Cuomo for taking a step, albeit a small one, towards fixing the problem. It doesn’t do anything to address non-agency loans (which some day will make a comeback) but it’s a start. If the agreement is struck, it may very well become the gold standard for how the appraisal process is managed. In the sea of never-ending bad news accompanying our housing market, it’s nice to see somebody in the government take a positive step that a) actually makes sense and b) doesn’t cost the rest of us money.

The question is whether Congress has the stones to truly fix the appraisal industry by implementing a system that is modeled after the VA — place your order through a central agency or group and have the appraisal be randomly assigned. There’s no way to pick the appraiser and no way to influence them to jack up the value. It goes against the basic fundamental tenets of free enterprise, which, when last I checked, has never been high on the top of anyone’s list, but it’s the only way to fix the problem. No, I’m not holding my breath and since my oxygen tank is running low, I won’t start now. But alas, there’s always hope. New York has the chutzpah to at least take a swing at the problem. Let’s see if anybody else does.

There’s a reason over 10,000 appraisers recently signed a petition and sent it to Washington pleading for a solution to the pressure they face to hit targeted values. The system is broken and until the ability to influence appraisers is completely removed, it will stay that way.

Note: Richard Bitner is the author of Greed, Fraud and Ignorance: A Subprime Insider’s Look at the Mortgage Collapse. As a 14-year veteran of the mortgage industry, he spent five years as the President of Kellner Mortgage Investments, a subprime mortgage company. In addition, he was a Director for GMAC Residential Funding and the National Training Manager for GE Capital Mortgage Insurance (Genworth Financial).

Mortgage application activity continued to plunge this week as rising interest rates tanked refi application volume, according to data released Wednesday by the Mortgage Bankers Association.

The MBA’s seasonally-adjusted index, which tracks both purchase and refinance application activity, fell 19.2 percent for the week ended Feb. 22, to 665.1. One week earlier, the index stood at 822.8; in two weeks, the index has fallen 37.5 percent.

The application index is calibrated to March 16, 1990; a reading of 665.1 means that application activity was roughly 6.6 times greater than when the index was first established.

A continued steep drop in refinancing activity drove the overall drop in application volume, as the MBA said that refi applications decreased 30.4 percent from the previous week; purchase applications actually increased slightly, rising 0.2 percent. On a seasonally-adjusted basis, both conventional and government (FHA, VA) application activity fell as well, according to the report.

The rate picture
After touching lows earlier this year that sparked a mini-refinance boom for the industry, mortgage rates — particularly for fixed-rate loans — have been rising both quickly and steadily. Last week, mortgage rates posted their biggest weekly rise in 14 years, with the average conforming 30-year fixed rate mortgage jumping 41 basis points to 6.37 percent, according to a weekly survey conducted by Bankrate.com.

This week the same average rate on a 30-year fixed-rate mortgage reached 6.41 percent, while rates on adjustable rate mortgage products began to fall. Average rates on a 5-year ARM dropped 9 basis points to 5.68 percent, Bankrate.com reported Thursday morning.

The spread between conforming and jumbo loans remained high, with terms on a 30-year fixed-rate jumbo mortgage falling to 7.43 percent. That’s more than 100 basis points in rate spread, and an amount that many primary market participants say is hurting the ability of borrowers in higher-priced markets to qualify for either purchases or refinancing.

It’s too early to tell what sort of rate benefits will come for the ‘jumbo conforming’ mortgages recently passed by Congress, which temporarily raise the conforming loan limit to as much as $750,000 in certain high-cost areas. Most sources that have spoken with HW have said they expected the newly-conforming loans to be priced somewhere in between current jumbos and traditional conforming loan product.

In a move that may set a precendent elsewhere, Massachusetts Attorney General Martha Coakley’s Office said Wednesday that it had obtained a preliminary injunction in a case against California-based Fremont General and Fremont Investment and Loan. The order prohibits Fremont from initiating or advancing foreclosures on a wide range of loans, including loans financed at 100 percent LTV or 2 to 3-year hybrid adjustable-rate mortages.

At the very least, the order will instantly add to foreclosure timelines in the state a minimum of 30 days.

The injunction order will force Fremont to provide the AG’s office with at least a 30-day notice of all foreclosures it intends to initiate for the approximately 2,200 loans that Fremont still owns and services, and allow the AG an opportunity to object to the foreclosure going forward. If Fremont issued a loan considered “presumptively unfair” — which includes 100 percent LTV and 2- and 3-year ARMs — and the borrower occupies the property as his or her principal dwelling, the AG has 45 days to object to the foreclosure.

“We are pleased by the Court’s decision and the relief it will offer to homeowners and communities suffering from the effects of Fremont’s loans,” said Coakley.

“This decision shows again that in many cases, irresponsible and unlawful lending practices caused this foreclosure crisis. We intend to hold accountable those who allegedly engage in unlawful lending conduct.”

Other loans captured under the “presumtively unfair” umbrella established in the ruling include any mortgage where the teaser rate is 300 basis points below the fully-indexes rate, as well as loans where the borrowers debt-to-income ratio exceed 50 percent at the fully-indexed rate.

The Attorney General’s Office originally filed suit on October 5, 2007 against Fremont and its parent company, Fremont General Corporation, based on claims of “unfair and deceptive loan origination and sales conduct.” The complaint specifically alleges that the company was selling risky loan products that it knew was designed to fail, such as 100% financing loans and “no documentation” loans. In addition to the injunctive order awarded today, the AG is also seeking civil penalties and restitution.

Last July, Fremont agreed to a 90-day foreclosure moratorium in the state as part of negotiations with Coakley’s office prior to the lawsuit being filed.

Click here to download the full preliminary injunction.

So many people misunderstand what happens to mortgage rates when the Federal Reserve lowers or increases the fed funds rates. Our phones have been blowing up with homeowners who are looking to improve on their 5.00%-6.00% interest rate they obtained a couple of years ago...well here's the truth, when the FED speaks or changes rates, mortgage rates often move the other direction.

Bernanke(Fed Chairman) and Paulson(Treasury Secretary) spoke before congress today

http://money.cnn.com/2008/02/14/news/economy/bernanke_paulson/index.htm

and it was a bad day for mortgage backed securities...This was the 6th day in the last 7 that mortgage rates have crept up after the FED lowered the fed funds rate by a total of 1.25% in January.

If you've been holding out for rates to drop...don't bet on it. With the Fed Chairman saying today that the US economy is likely not to enter a recession, there's no real reason for rates to drop any further.

If you're looking to consolidate debt, lock in your adjustable rate mortgage into a fixed rate or get new financing for a new purchase...don't wait!

When you get a mortgage to purchase, build or refinance a home, most lenders prefer to set

up an escrow account so they can pay your property taxes and insurance premiums for you. 

A monthly payment is added to your mortgage bill and analyzed once a year to cover any increases in taxes or insurance premiums. Sounds simple, right? Actually, mortgage escrow is one of the most difficult aspects of loan servicing. Here's a guide to understanding what's going on. Buying or Building a Home Home buyers don't always consider the taxes and insurance carefully enough -- especially if they are moving to different state. Property taxes; In many states, property taxes are reassessed the year after a home is purchased or built. This means that your property taxes may go up significantly in the second year you own the home. When the lender sets up your initial escrow payment, the payment will be based on the property taxes of the previous owner. If you have had a house built, the initial escrow payment will be based on the taxes on the unimproved lot. Homeowner's insurance: The lender will have a much easier time figuring out how much to charge you monthly to cover homeowner's insurance, because you will be required to obtain an insurance policy before you purchase the home or at the time your home construction is completed. If you are moving to a new state, it is important to scope out homeowner's insurance rates before you decide on the home purchase or construction. If you move from the Northeast to a state around the Gulf Coast, for example, your insurance costs can increase several times over. In some areas, homeowner's insurance policies don't cover hurricane or earthquake damage, and you will need to buy an additional policy to cover those perils. Toward the end of the real estate run-up, I spoke with several troubled mortgage borrowers who had built investment homes in Florida, seeking to flip them for a quick profit. After several hurricanes, homeowner's insurance premiums for unoccupied homes were very high and policies were almost impossible to find in some areas. These borrowers were under tremendous pressure, as the insurance premiums were unaffordable and the homes were suddenly difficult to sell or rent out. Escrow Analysis and TroubleEach year, the lender or loan servicer sends an escrow-analysis letter. This letter lists the escrow payments collected from you over the past year and the tax and insurance payments made by the servicer. It is when you receive the first or maybe the second escrow analysis that trouble can begin. Consider the following scenario: You purchase a home in January 2006. The loan servicer pays your 2006 property taxes in November 2006. You receive your first escrow analysis letter in January 2007, and see that your payment is staying about the same. In November 2007, the loan servicer pays your reassessed property taxes, which have gone up by $2,400. When you receive your second escrow analysis letter in January 2008, be ready for a big surprise! The bank needs to collect an additional $2,400 for property taxes each year, so your monthly payment will increase by $200. But what about the $2,400 shortfall for last year? That's right, your payment is actually increasing by $400. What do you do now? For starters, call the loan servicer and ask to speak to a loan escrow specialist. You should be presented with a few options:

• If you can swing it, you might decide just to pay the extra $400 each month, knowing that shortage will be paid off over the next year, and your monthly escrow payment can be expected to go down roughly $200 the following year. 
   
• You could pay cash for last year's $2,400 shortage. This way, your monthly payment will increase by only $200.
• You can ask the loan servicer to spread last year's $2,400 shortage over 24 months. Your escrow payment will increase by $300.

Granted, all these solutions for escrow shortage are painful, but it is best to call the loan servicer who can walk you through your options. Increases in Homeowner's Insurance Premiums An acquaintance recently told me that his mortgage payment had gone up $400. He has a fixed-rate loan, so the increase had nothing to do with any loan-rate adjustment. I asked him if his homeowner's insurance premium had increased, and he said he had discarded the mail from his insurance company because "the bank handles that." Actually, his loan servicer, which happens to be his local bank, simply collects the escrow money and pays the homeowner's insurance bill no matter how much it increases. In many states, homeowner's insurance premiums can increase by huge amounts in just one year. Depending on the timing of the insurance premium payment and the loan servicer's annual escrow calculation, the loan servicer may not realize the insurance premium increased by so much, and may not adjust the payment until the next analysis. This causes another "double whammy" payment increase. Steps to Reduce Risk of Escrow Payment Shock

• Before you buy a house, contact the county property appraiser and tax collector and come up with your own estimate of how much the property taxes will be after taxes are fully assessed.

Also contact an insurance agent and get an estimate of how much your homeowner's insurance premium will be. Add these together, divide by 12, and add that to your projected loan principal and interest payment. (Assuming you have learned one of the painful lessons of the mortgage crisis and are getting a fixed-rate mortgage, you can use the BankingMyWay Fixed Mortgage Loan Calculator to calculate the loan payment.) Can you afford the combined principal, interest and escrow payment? Depending on whether you live in Hurricane Alley, can you afford it if your homeowner's insurance premium rises 50%?

• Find out how to contact your loan servicer.

Call your loan servicer and ask when your annual escrow analysis takes place. Depending on the time of year you take your mortgage loan, consider changing the annual escrow analysis date, so that your payments can reflect insurance premium and tax increase more quickly.

• If you know your property taxes are going to increase the year after your purchase or construction, make sure you save up the money you will need to make up the shortfall.

Remember, the lender or loan servicer probably won't be collecting enough monthly escrow during the first year of the loan.

• Even though the loan servicer will pay future premium bills, stay in contact with your insurance agent.

Know when your annual homeowner's insurance policy expires and find out how much the renewal premium will be. If the increase is too much, ask your agent to shop for a lower-priced policy, or visit some other agents yourself.  

Since I have a decent amount of experience in the real estate and mortgage industries, a number of friends have been asking me if it is time to refinance their ARM or fixed rate mortgage or if they should lock-in a rate on a house they are purchasing today.    Summary thoughts: Rates seem pretty good right now.  There is a chance that they will fall further by the end of the year, but the likelihood is 50/50.  Most experts seem to think that rates will actually rise due to tightening lending standards and a deteriorating US housing market / financial system.

Here are my thoughts:

1) Further cuts likely:  Based on Bernake's commentary today, further rate cuts are likely before the end of the year due to a slowing US economy.  My sense is that these rate cuts are on the mid-term horizon (maybe three mos or more).  If you are thinking that you want to refinance sooner, my sense is that rates are pretty compelling today.

2) Experts Feel Like Rates Will Rise:  I generally check out the BankRate mortgage expert index to get a sense of where the market is.  Since there was a sense that the Fed was going to cut rates, mortgage rates dropped pretty dramatically and experts have felt that rates were going to rise.  Since I have been watching this index, the experts have been right in that rates have gone up slightly over the past month or so.

3) Watch the Fees:  Terri Cullen of the Wall Street Journal has a good article this week here in Fiscally Fit - WSJ.com saying that banks and lenders are increasing their fees in light of financial weakness.  It's worth shopping around and then negotiating the fees with the bank or broker.   Pay closest attention to the lender fees as they are the ones that are most negotiable.

4) Personal Financial Decision:  Here is a good post from Active Rain on when you should think about refinancing your mortgage.  Lee Zacharczyk of Atlantic Home Loans in Freehold, NJ says that you should think about 1) How long do you expect to own your home? 2) Where are interest rates from an historical perspective? 3) How long do you expect to be in this mortgage, i.e. will you be able to pay it off early?   

Just like the stock market, experts have long said that it is impossible to time the market.  Home mortgages are the same way.  I would make sure you are comfortable with the long-term rates and the fees you will need to pay to refinance.  If you are getting a good rate with reasonable fees, locking in a lower rate for peace of mind is a worthy trade.  As always, it is important to shop around. 

If have questions or are interested in a recommendation, feel free to email me at nparekh00 `at` gmail