Why Housing Isn’t Better – A Lender’s Perspective
Category : Laguna Beach Real Estate
I’m frustrated! I was thinking and reading about the real estate and mortgage markets over the long weekend. Ordinarily I would have worked all weekend but I didn’t have enough to do. Interests Rates are back to their near all-time lows yet housing sales are way down too. Why is that?
There are a few big reasons why and I’ll state the obvious here. But, then I’ll go a little deeper. The main reasons:
- A lot of negative press about home values declining
- The jobs/employment market is not improving
- Underwriting guidelines are too tight
- The Government is doing nothing to help the homeowner/home buyer despite the control that they could exert.
Having been in the mortgage business for 35 years I’ll focus on what’s wrong with the tight underwriting guidelines and what the Government could/should do, at least in my opinion.
The majority of home sales are short sales and foreclosures. But, so many of these transactions fall out and the reason is that the Lender that services the present owners mortgage takes much too long to respond to an offer. While the buyer waits and waits they become nervous, new listings appear that may be more attractive, additional offers appear on the same property and the buyer loses interest for any or all of these reasons. Shouldn’t there be a time limit in which the Lender must respond or be penalized?
Lack of Government Enforcement:
Despite all the complaining about tighter underwriting, Fannie Mae & Freddie Mae – the two Government-owned enterprises responsible for making the lending guidelines for all lenders – has actually created a few programs that can help homeowners and buyers. But, they allow Lenders to create their own guidelines that are often stricter than the Fannie/Freddie Guidelines. In the industry we call these tighter restrictions “Overlays”.
As an example, one of the best programs that benefit many homeowners is the one that allows homeowners that are under water to refinance up to 125% of the present value of their home if Fannie Mae or Freddie Mac already owns their mortgage. But, they allow individual lenders to modify the program and most lenders restrict the maximum loan amount to only 105% of the present value. Couldn’t the Government require Lenders to refinance to 125% in order to help millions of homeowners? Fannie and Freddie will buy the loans thereby leaving the Lenders with less risk than they currently have due to the lower/more affordable payments that the homeowner now has. What does the servicing lender have to lose?
There are numerous other overlays that Lenders are free to impose that are too numerous to mention here. The most common ones require higher FICO scores and lower Debt-to-Income limits than Fannie Mae or Freddie Mac require.
While I think everyone agrees that underwriting guidelines are too tight, the Government is spending their time right now trying to define QRM – the “Qualified Residential Mortgage” – that may require even tighter guidelines. The QRM proposal may require 20% down payments; maximum Debt-to-Income ratios of 36% (currently 50%), etc. Loans that don’t meet the definition of QRM will require lenders to set aside 5% of every loan that doesn’t meet the QRM definition. If a lender can’t sell a loan to Fannie or Freddie and has to deposit 5% of the loan balance in a reserve account, you know that Lenders will be forced to raise the cost of all non-QRM loans to offset their expense. Once again, the home buyer/homeowner bears the cost.
Can someone explain to me how this is going to help our economy? I welcome your comments.
We simply have to get back to sound, common-sense lending standards to provide mortgages to creditworthy borrowers who are buying homes well within their means. And, if programs exist to help solve the housing and economic problems of our country, why not require Lenders to offer these programs. Otherwise the big banks will only do what’s best for themselves, not the millions of homeowners that are suffering.
As a mortgage broker with multiple resources I know which lenders to use for each loan thereby avoiding the unnecessary overlays that so many lenders impose for their own benefit. The big banks can’t do this and they are the ones guiltiest of manipulating the programs that were designed to help the people.
I must mention that there are some very positive improvements too:
- Jumbo Loans Are Back! Offered by many lenders with loan amounts to $2M and more at very competitive rates. A year ago there was virtually no jumbo product available.
- Expanded Loan Limits to $729,750 for Fannie Mae, Freddie Mac & FHA loans
- FHA program was expanded with only 3.5% Down and loan amounts to $729,750
- 95% PMI up to $417,000. Private Mortgage Insurance is available again for Fannie/Freddie loans with down payments less than 20%.
Mortgage Rates This Week:
Mortgage rates continued their downward trend this week. The biggest catalyst was the ADP report that indicated that Unemployment claims were much higher than expected last month. Also helping were the continuing problems in Greece and a declining stock market. When negative news drives the stock market down, money managers move massive amounts of money out of stocks and into the safety of other investments such as bonds and Mortgage-Backed Securities. It’s the pricing of Mortgage-Backed Securities that dictates the daily movement in mortgage rates to the borrower.
Tomorrow morning at 5:30am the Government releases the official Employment Report for the month of May. This is without a doubt the most important report of the month and has the potential to be a real market-mover if the actual numbers are very far from expectations.
Mortgage Interest Rates for Fixed and Variable Rate Mortgages*
Rates as of Thursday, 2nd June, 2011: