R C's Blog

Three important facts of life for today: 

1. There's no crying in baseball . . . Go Rockies!
2. There's no magic in finance.
3. Hard times breed hard practices.

This just in from the AP:

"Mortgage lenders have accounted for nearly 70,000 job cuts through the first nine months of the year, more than all other financial services firms combined.

As the U.S. mortgage industry's slowdown accelerated in August and September, job cuts among mortgage companies accounted for 82 percent of all job losses in the financial sector. Nearly 52,000 of the 70,000 mortgage job cuts have come in the past two months."

This from a senior economist at the National Association of Realtors:

"More than 10% of sales contracts fell through at the last moment in August, primarily the result of cancelled loan commitments."

. . . and this just heard on a KOA radio ad:

"Call Ideal Mortgage (or something like that) right now.  We have a limited amount of funds for 30 year, fixed rate mortgages at a starting rate of 4 5/8ths percent - you heard right, a 30 year fixed rate mortgage starting at 4 and 5/8ths percent!  Call now!"

Are you seeing the thread running through all three items?

My brain hit tilt when I heard the radio ad.  US Treasury 30 yr. bonds (not issued since 2001, but still traded) carry a current yield of about 4.7%.  do they expect me to believe that I can borrow 30 year money cheaper than the US Treasury?

What's going on with this obviously misleading radio ad?  Since there's no such thing as 30 year mortgage money at 4 5/8ths, my educated guess is that they're offering a standard mortgage (around 6 1/2% today) with a 2% one-year buydown - of course they don't tell you that in the ad, nor do they say who's paying for the temporary buydown (and it's not them). The borrower will pay; either in the form of a higher coupon on the note, or a higher house price that will allow the seller to contribute the cash needed for the buydown (about 2 points).  Do I have a problem with that?  Yes.

Actually I have two problems:

1. The ad's deceptive and written to be such.  If you're uneducated enough to bite on an ad like that (notice I didn't say stupid), you might also be uneducated or trusting enough not to notice that your monthly payment is going to pop about 30% next year. 
2. The ad's in direct violation of RESPA.  Any time a lender advertises a rate, they must also disclose the APR.  This ad didn't.  The APR on this deal is probably a little north of 7%. 

The mortgage industry is getting painted black by practices like this and the only way to stop it is to be aware, be educated, and be doing business with people you know. 

The happy news is that there are far more good guys than bad guys in this business; the bad news is that now is when the bad guys come out to play.

Head's up, folks.

rc 

Yesterday was an interesting day.

Talked to some clients, checked the business pages - good, no new failed mortgage companies in the headlines; checked the business news channel at lunchtime - whoa!  There's two guys on Fox Business Channel saying that housing prices are down 4% nationwide . . . never happened since the Great Depression!  OMG!  Probably gonna get worse!  Now I'm nauseous.  Forget lunch.

Then I remembered that the NAR (that's National Association of Realtors to you civilians out there) had just published their "Median Sales Price of Existing Single-Family Homes for Metropolitan Areas" this week.  Went to their website and here's what I found:

• Q3'06 - Q3'07 National median sales price existing homes down 1.3%
• Q3'06 - Q3'07 National median sales price new homes down 0.9%*

Well, that's not good news for residential real estate, but it sure as heck ain't down 4%.  What's up with that?  Better check the numbers closer to home.

• Q3'06 - Q3'07 Colorado Springs sales price existing homes up 1.4%!

Maybe it's those nere'-do-wells up in the Denver market . . .

• Nope . . . Q3'06 - Q3'07 Denver/Aurora existing homes no change, as in flat, as in 0%.

So I looked at all 156 metro areas in the survey and only 18 of them had price declines of at least 4% or greater.  That's 10.9% of the markets surveyed.  Hey, those guys said it was a National number! 

Of the markets with 4% or greater price declines, five are in the upper midwest rustbelt area; five are in the northeast; three in Florida; one is the hurricane Katrina market; and the last four are Amarillo TX, Chattanooga TN, Reno NV, and Sacramento CA.  I've been to Amarillo, Reno, and Sacramento and . . . (deleted snide comment here about these towns)

What do we know now? - Contrary to what was reported by the tv experts yesterday, 89.1% of the markets did not experience declines of 4% or more; 28% of the markets had declines, but less than 4%; two markets were unchanged (Denver and Appleton, WI) and 60% of the 156 surveyed markets, including Colorado Springs, actually experienced price increases.

Those figures don't describe a thriving market, but the truth is a far cry from what the 'experts' said on TV yesterday.  What's dangerous in all this is the old saw that 'perception is reality'.  I've talked to numerous local Realtors who indicate that the buyers have vanished, that no-one in their right mind would buy into a market that's crashing and hasn't bottomed out yet.

I'm not a pollyanna.  I know our markets are stressed right now.  Let's deal with the facts though, we don't need no stinkin' lousy untrue reporting too.  "We're doing quite poorly all by ourselves right now, no extra help needed - thanks just the same" :o)

So the next time someone tells you 'the sky is falling', show them a copy of this. 

btw, the NAR stats used in this post are available for all to see at

 http://www.realtor.org/

 Best, rc 

 *(Just for some perspective, the DOW closed down 2.3% today - that's a one day loss . . . the numbers we're using here cover the past year.)

What an excellent question!  (even though I made it up myself)

How's that go on the radio again?  Oh yeah, ". . . it's the biggest no-brainer in the history of earth . . . we'll refinance you over and over again and it won't cost you a nickle!"  Maybe the "no-brainer" is really a description of the customer's mental aptitude if they believe this guy.  But that's not fair . . . finance, particularly mortgage finance is complicated, so let me shine a little light on this guy and his ad.

I'll say this again, all mortgage companies sell their loans into the same markets - at the same price.  The difference you'll find in mortgage pricing has to do with the provider's business model efficiencies and what they consider a fair 'markup', not magic - 'cause there isn't any magic!

There are two ways to refinance your mortgage without taking money to the closing table:

1. The new mortgage will be written for an amount high enough to both pay off your new mortgage and pay the transaction (closing) costs.
2. The new mortgage will be written at an interest rate that's higher than current market.  When the new loan is sold into the secondary market, it sells at a premium price due to the higher rate; like 102% or 103% or more, of the face amount.  From that premium, your closing costs are paid by your lender . . . you just don't see that part on your settlement statement.

In example #1, you'll pay this guy's non-existent closing costs with $ borrowed against your house that will be repaid some day.  In example #2, you'll pay every month in terms of a higher monthly payment than you'd otherwise have. 

Both of these approaches to refinancing are perfectly legal and above-board.  I've used them countless times when it makes financial sense for our client - with the client's full understanding of what's going on.  I've just never lied about it at the top of my lungs on a 50,000 watt radio station.

Does the "and it won't cost you a nickle" phrase ring true now?  I guess you could say a qualified yes, because it'll actually cost you thousands of dollars, not a nickle - ok, ok, so technically he's right :o)  Perhaps that's how he sleeps at night.

Think about finance like you would a hydraulic system . . . the fluid in the system won't expand or contract - so when you push it in 'here', it has to push out 'there', or somewhere.  That makes perfect sense to me - hope it does to you too.

Best - rc

One of my all-time complaints about politics and housing just bit the dust . . . the "Nehemiah" dance that effectively allowed the seller to provide the minimum 3% downpayment required on FHA loans. 

For those of you not familiar with 'the dance', it goes like this: 

• FHA requires a minimum buyer downpayment of 3% of the purchase price;
• a gift can be the source of downpayment if from a family member, certain corporations or charities;
• since a gift can come from a charity, let's set up a "charity" that takes a donation from the seller, clips off a bit for admin. expense, and passes the required 3% on to the buyer as a "gift". 
• Viola!  we just created a zero-down FHA loan!

FHA's been trying to slam this door for at least 10 years.  Loans insured by FHA, with this scheme providing the required downpayment, have default rates two to three times higher than the normal FHA loan.

So this one's almost gone.  The almost is because the Rule goes into effect 10/31/07 for everyone but Nehemiah . . . they're out of the 'game' on March 31, 2008, the delay because of a settlement agreement between Nehemiah and FHA back in 1998.

Here's a copy-paste of the heart of the new rule, published 10/1/07.

"The final rule establishes that a prohibited source of downpayment assistance is a payment that consists, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale: The seller, or any other person or entity that financially benefits from the transaction; or any third party or entity that is reimbursed directly or indirectly by the seller, or any other person or entity that financially benefits from the transaction."

In the discussion portion of the rule, FHA cites input and opinion from the IRS relative to the bona fides of such charities:

"The IRS stated that, in a typical scheme, there is a direct correlation between the amount of the downpayment assistance provided to the buyer and the payment received from the seller, the seller pays the organization only if the sale closes, and the organization usually charges an additional fee for its services. The IRS noted that so-called charities that manipulate the system do more than mislead honest homebuyers; these organizations ultimately cause an increase in the cost of the home and damage the image of honest, legitimate charities."

So a tip of the hat officially to the folks at FHA who finally slammed the door on the Nehemiah fake downpayment scheme.  Thank you.  Now I can get back to enjoying "The Dance" again - the real one by Garth.

rc

As most of us know, Colorado now requires registration of mortgage brokers -as they have required for years of our real estate agent friends.  This is not something easily accomplished and the Co Legislature gave Erin Toll, Director of the Real Estate Division, little time to work with. 

One of the complications of registration is who it covers.  Previously, an exemption was granted to loan officers who were employed by FHA-approved and audited mortgage bankers.  This year's legislation dispensed with that exemption and now every loan officer in the state must register, pass a criminal background check, and post a personal $25,000 surety bond . . . unless you're working for a state or nationally chartered bank or credit union - then you're exempt.  (hmmmm - the law of adverse selection would suggest that all the folks who can't pass the CBC or get a bond will now go to work for the banks and credit unions?)  Just joking, sort of.  I'm personally aware of two such loan officers now employed by chartered institutions for just that reason - but I digress. 

12-61-904.5(1)(b), CRS requires the mortgage broker to recommend appropriate products to their borrowers . . . "after reasonable inquiry has been made in order to understand borrower's current and prospective financial status."  sounds like a good idea, right?  Except in the case of a borrower who wishes to take advantage of a NINA or SISA loan product, which puts the loan officer into a serious quandary.  The advantage of such products in the past was that a borrower didn't have to go through the hassle of demonstrating or documenting income - and was willing to 'pay up' a bit on the rate for the favor.  If a loan officer today complies with the law and 'makes reasonable inquiry' (thus negating the benefit to the borrower of such a loan ) and writes it down (or not, as the case may be), and doesn't verify the income - he/she may have just committed mortgage fraud.  As a result, most loan officers and their companies want nothing to do with SISA/NINA loans here in Colorado . . . and many aggregators won't buy those products originated in Colorado for the same reason.

DORA published an emergency rule (09/04/07) attempting to deflect the risk concern and suggesting that declining to originate such loans is an unnecessary overreaction - my words, not DORA's - but the style of surviving mortgage firms today is to "first identify the risk, regardless of size - then avoid it".

The "Tangible Net Benefit" form that must be completed by all borrowers, regardless of refi or purchase, is up and available on the Division of Real Estate section of the DORA website, along with the emergency rule referenced above.  This completed form must now accompany each and every loan application and be completed and signed again at each closing.  Remember, these laws apply only to non-bank or non-C.U. lenders here in Colorado . . . like me :o)

Enjoy your weekend - GO ROCKIES!

rc