R C's Blog

OK - the next time I see a story in the Gazette or D. Post talking about record Colorado or Colorado Springs foreclosures I'm gonna scream.  Not because foreclosure isn't a terrible thing for a family to go through, but because it simply isn't true.

Here are the facts:

While the number of foreclosures is, in fact, higher than any other time in our history, the foreclosure rate is only a fraction of what we experienced in '89.  Foreclosed inventory is 1.2% of Colorado loans.  Our high-water mark was set in the 3rd quarter of 1989 at 3.1% of Colorado mortgage loans . . . 258% higher than our current rate.

1. Realtytrac needs to get it right . . . according to the Colorado Division of Housing's 2nd quarter 2007 foreclosure report, there were 10,017 filings (Election and Demand for Sale) but only 6,322 sales by the Public Trustees.  Realtytrac, however, reported that Colorado had experienced 17,852 foreclosure events for the second quarter - looks like they're adding the notices to the sales to get a better story.
2. More Realtytrac mis-information . . . quoted directly from the Division of Housing's report . . . "Realtytrac has also provided widely reported foreclosure data stating that in 2006, Colorado experienced 54,747 foreclosures and had a total foreclosure rate of 1 in 33 households.  Accoring to Division of Housing data, the 2006 statewide foreclosure rate for Colorado was 1 in 58 households with a total number of 28,453 foreclosure filings." - so the truth is only about 1/2 of what Realtytrac is reporting.  For the period Jan thru June this year, the rate per household in El Paso county is 1 in 123 households!
3. Why is this important?  Well, first of all, I'd much rather make decisions based on facts, not hype.  Most important though, is how such lies impact our markets.  Do you want to go buy your first home in a market that's described as one of 'record foreclosures'?  Want to buy a home in a declining market?  No, of course not - not until the trough's been reached.  What impact does such false and alarmist reporting have on the psyche of the market?  Positive? . . . of course not.  Housing's having a tough enough time right now based just on the facts - we don't need any more help 'down the ladder' into a deeper housing recession - particularly when it's not true. 

. . . and we wonder where all the buyers went . . . I swear, the next time I see such an artical in the Gazette I'm calling Wayne.

OK, if you're a loan officer or Realtor and you've never had a client tell you "I checked on the internet last night and their interest rates are much better" - raise your hand.  Hmmm, I don't see any hands.

Here's some insight into what's going on.

First and most obvious is that most internet sites "troll with rate", that is, they put out rates that will grab attention.  Now that isn't the rate you will be able to qualify for, unless you're one of those unique 800+ fico borrowers who want to borrow 60% of value on a 3 yr. arm with a two-year pre-payment penalty. 

The other factor concerns the business model that most internet companies use;  phone banks with low-paid staffers who work from a script, not the highly-trained loan officer who makes the mortgage industry his/her life's profession.  In other words, with most internet sites, you get what you pay for, maybe.  That 'maybe' has to do with the concept of accountability.  If I'm in New Jersey pulling the graveyard shift on the phone bank and you call to make sure your closing tomorrow is all ready to go, the answer of 'yes' carries no burden of accountability comparable to that of working in the same community, going to the same church, same grocery store, repeat business referrals, etc.

Let's skip grooves, lest this start sounding like a typical "buy at home" rant.

Things to know about mortgage pricing:

        But you get the idea - I only listed 7 of the 13 standard loan level price adjustments on one loan product, a FNMA 30 yr. fixed rate loan.   It'll make your head hurt. 

I don't want to lose the point in the details here.  What you see on the internet is not specific to your location, your property, your transaction, or your personal financial circumstances, while the quote from your professional loan officer is.

Just a friendly heads-up on that one. 

I met a nice lady over the weekend to talk about Spanish horses . . . and lo and behold, she turned out to be a realtor.  Nothing very noteworthy about that, but something she said reminded me of a commonly-held misconception . . . that the Fed lowering the discount rate by 1/2% will translate into lower mortgage rates.

Let's go back to finance 101.  Interest rates are basically a function of the risk of the investment coupled with the risk of money devaluing during the period of the investment.  If I anticipate inflation at 4% over the next five years, a 4% return on a five year investment leaves me a profit on my investment of exactly 0%.  That's why the Fed lowering short rates might actually affect long-term rates in the opposite direction.  If investors - particularly investors in mortgage-backed securities - believe the Fed's actions raise the risk of inflation, mortgage rates will increase. 

Bob Ivry, writing for Bloomberg.com, noted today that ". . . investors concerned about inflation flowing the Fed's half-point interest rate cut have driven up the yield of 10-year treasury notes by 23 basis points, or 0.23 of a percentage point, to 4.7 percent.  The increase has dashed hopes that lower home-loan costs might entice more Americans to overcome their fear of falling prices and buy homes." 

Where does that leave us here in Colorado?  First, let's not forget that mortgage rates are still at historic lows . . . next, help potential buyers understand that waiting for rates to drop due to the Fed's recent move may work to their detriment.  Waiting for something that's not assured may, in fact, result in buyers missing a wonderful opportunity to purchase in a 'buyer's market'

. . . and when was the last time we saw one of those?  1990, 17 years ago.

 Thursday, September 20, 2007 11:07:17 AM

Anybody who's conscious knows by now that there's something going on in the mortgage markets - but what?  Has "the mob" taken over while we weren't looking?  Not exactly.

I started my career at a little western slope S&L in 1970 (I know that makes me at least 37 years old).  We actually made home loans from excess deposits and sometimes had to say no to homebuyers when there weren't available funds.  Since that time, this country has created the secondary mortgage market - a machine that's the most efficient, incredible capital delivery system ever created - but a machine that's got a little sand in its gears at the moment.  What happened?

Wall Street, the folks who create the fancy investment vehicles backed by the mortgages we originate, responded to investor appetites for higher yields.  If you're a mortgage banker or broker who gets paid to originate loans, and your capital source is telling you that subprime and Alt-A loans that never made sense in the past are the new "hot thing", what do you do?  Probably go out and originate the stupid stuff - after all, the 'smartest guys in the room' are telling you they need more . . . and more - and if you can't do it the guy down the street will.  The ratings agencies (Moody's, Standard & Poors) are happy with it; the M.I. companies who re-insure it are happy with it; sheesh - what do I know compared to those smart guys?

In fact, the default rate on that paper was lower than forecast in 2005 (whoopie! Let's rev it up!).  Then in '06 it switched to higher than expected(oops).  Then in '07 default rates hit the fan.  Our friends at the ratings agencies said that they goofed; then said that they didn't actually know what the risk ratings on those securities should be.  Now I ask you, if you're running a multi-billion $ investment pool for the G.M. retirement fund, are you buying sub-prime or alt-a mortgage securities?  Not if you want to keep your job, you aren't.

Were there bad guys involved?  Let's see - excess capital chasing opportunity, greed, nobody watching.  What do you think?  Does that make everyone in the industry a bad guy?  Of course not.  But where does that leave us?

For starters lots of mortgage people out of a job, an industry retrenching - going back to what is known to be safe, and back to the mid-90's in product availability, underwriting, and credit scoring.  Oops, almost forgot the politicians - they're busy trying to look like heroes so they can get re-elected.  Witch hunts will be popular in Washington and here in Colorado.  What's the old saying?  "First identify the problem - next, find someone else to blame".   

So no, this magnificent capital delivery system we call the secondary market isn't dead, it's just catching it's breath and sizing this 'new world' up.  Investor confidence will recover and the dollars will flow again - just not into the same goofy loans that shouldn't have been originated in the first place.

What if you're a real estate agent with a family who wants to buy?  Do business with mortgage people you know and trust (duh), now more than ever.  If your buyer only qualifies for a 'hybrid' of some sort be very careful.  Companies who have offered those products have been known to say "yes, yes, yes, yes', then no at the closing table - because they folded last night at 5:00.