Mortgage

1. Over the past year there has been a big push from the U.S Government and organizations like Hope Now to slow down the amount of foreclosures going on. The goal is to help people stay in their homes and continue making payments to mortgage companies so they don’t go completely broke which most of them are doing.

2. The Detroit News ran an article today talking about how over 50% of the people who had their loans modified this year are again 30 days late on their mortgage payment. John Dugan, head of the Treasury Department’s Office of the Comptroller of the Currency (Really, is such a long title necessary? Sounds like a made up position) said “The results, I confess, were somewhat surprising, and I say that not in a good way.” Why were you surprised John?

3. It does not surprise me at all. When I worked at Quicken Loans I saw a ton of people who should never of been approved on a loan to begin with. It was all of those sub-prime loans they had in the first place which I could not even work with. Many were behind on their payments already or owed over 100% of the value of the home. This was when the market started going down or as I like to say back to what it should have been.

4. The people whose loans are being modified are probably the people who should have NEVER BEEN APPROVED ON A LOAN IN THE FIRST PLACE!!!!

5. The banks are trying to keep the people in those homes paying some sort of payment. Its better to accept half of what the mortgage payment use to be then to foreclose on the home and let it sit vacant for a year because homes are just not selling. It costs the mortgage company more to maintain a foreclosed home then it does to keep the people in there.

6. One of the problems with the way mortgages are done is the mortgage companies only look at what they see on your credit report. I can remember just barely approving people on 30 year mortgages and their debt to income ratio (DTI) was at 57%. That’s right 57% of their income was going to what I saw on the credit report. This was usually the mortgage, car payment, and maybe a credit card. This does not account for car insurance, food, cell phone bills, gym memberships, or any other monthly obligations. You know that if mortgages were to take those into consideration nobody would get approved on any mortgage. You know what, maybe they shouldn’t be.

7. These same people are not changing any of those things they do on a monthly basis because they do not have to. If we really wanted to protect the housing industry the banking community should come together and make people send in receipts of all of their purchases every month to determine what their true DTI is. Unfortunately it will probably be at 90% every month. Before the refi boom happened you had to have a DTI under 38% to get approved.

8. Let’s say that these people are doing their best to make the payments but its all of those what ifs that are happening. Lay offs, less hours at work, car repairs, or maybe the cost of operating the house went up. Electricity rates are going up by 10% in Michigan alone this year. Maybe you live in the city of Detroit and the Water and Sewage Departments plan to raise water rates by 10% and sewer rates by 17% . I can’t believe they are doing that. Their reasoning is because demand went down because of a wet summer. I’m no economist but don’t prices go down when demand goes down. Probably not since its a government thing. They need to protect their jobs so its easy to raise peoples rates instead of being happy that their fellow neighbors didn’t pay as much this past year. With all of these increases in things needed to keep the house livable its no wonder why people are still defaulting on their modified mortgages.  Don’t even get me started on the cost of food. The only thing we can be happy about is the sharp decrease in the cost of gas.

9. With all of these outside factors that a mortgage company does not take into consideration when approving somebody on a loan we can probably bet on seeing another article in 6 months about how 75% of modified mortgages are now 3 months late. I think its admirable what the banks are doing but its going to be a lose/lose situation. People need to understand that owning a home is the biggest liability you could ever take on. A home is not an asset until it is paid off. The people who are having their loans modified probably do not deserve to be a home owner. Sometimes its better to rent and know if something goes wrong (leaky roof, furnace, etc.) you can call the landlord and they have to fix it, not you.

10. You know there is no way that the bank is going to forgive a large portion of the debts because it hurts their bottom line. Not even a 4.5% interest rate on the same balance of loan is going to make enough difference to help them out. Expect to see more of the same troubling news in the housing market even with this so called help.

The Top 10 Reasons

1. In a article written at CNN today it talked about how the treasury is throwing around the idea of lowering 30 year mortgage rates down to 4.5%. If the Treasury Department steps in and does this it does nothing to fix the down turn in the housing market. The amount of homes on the market are not going to decrease.

2. The old saying of “Good Ain’t Cheap And Cheap Ain’t Good” could describe what will happen if this goes through. Remember last time interest rates were lowered. Wasn’t it in 2002 after 9/11? Didn’t Alan Greenspan and the rest of the ass clowns at the Federal Reserve lower rates on things like home equity lines of credit to historical lows to spur the economy. It worked, right? Well it did for about 5 years and look at where we are at now. Is going back to low mortgage rates the answer? No!!

3. I understand their thinking. They think that if their were lower rates it will get people off of the fence who are ready to buy but are waiting for rates to come down. Some people may have been declined on a loan because their debt to income ratio was too high. By lowering the 30 year mortgage rate to 4.5% this will be all the motivation one needs to write up a purchase agreement and get moving. Umm, no. The amount of homes sitting vacant is going to grow because of all the layoffs going in the economy. Foreclosures are still popping up and probably will continue to do so. So who is going to buy all these homes again?

4. The reason people are not buying homes has nothing to do with interest rates. People are not buying homes because real estate values have been dropping by double digit figures every 6 months since late 2007. So what sounds better to the person sitting on the fence. Save 1% on your mortgage rate or 10% off the price of the house? Both do of course but what’s better? Is that a trick question?

5. As an example. Let’s say a couple is planning on buying a $175,000 home. They plan on putting 20% down payment for a loan of $140k. Let’s assume that 30 year interest rates as of 12/5/2008 are at 5.5%. This would give them a payment of $794 principal and interest a month. If they could get the 4.5% interest rate their payment would be $709 a month. That’s $85 less a month in interest. Not that much. To somebody looking at buying that much of a house is not going to slow down their decision. It might (and I mean might) sway them but that’s like not going out to the bar one night a month. If they want that house they are going to buy it regardless of the rate. Let’s take that same couple who is waiting until home prices start averaging home value drops of 2%. Its smart to wait until that time period because nobody offers full price in a down market. You always offer 10% less than what they are asking. For the examples sake let’s say they wait another 6 months and the value of the home drops another 10% like what’s happening here in Michigan. The same home of $175k is now worth $157,500. Putting the 20% down the loan is now $126k. Let’s say 30 year mortgage rates are at 5.5% in 6 months. Their monthly payment would be $715. Only $6 more a month in interest. Some may argue that it makes sense to get off the fence and buy with those numbers. What you don’t think about is where the money’s coming from. Its coming from the Government who just decided to print up a bunch of money and flood the markets again with cheap coin. This causes inflation and a decline in the value of our dollar. Both are a lose/lose scenario. You might say that on paper it makes sense but you will be paying for it in the long run in your taxes and your purchasing power. 

6. The problem is not the interest rates, its getting people approved on the loans. Mortgage rates are near historical lows. Mortgage lenders have had to tighten lending restrictions to people without a good credit history or enough income to make their mortgage payment. Nobody deserves to be a home owner. You have to earn it.

7. More mortgage companies will go bankrupt. Sure, in the short run it will be like the good old days of the refi boom where people were calling left and right and begging to do a loan. Most of the housing boom was called the “refi boom” for a reason. People were refinancing because rates were low, not buying. All of the people who have stuck it out at mortgage companies will get rewarded with this quick burst of refi applications, or will they? I can remember before I was shown the door at Quicken Loans that over 90% of my clients had a loan to value over 85% and a 30 year interest rate around 6%. From what I hear from my friends that still work at mortgage companies they don’t allow cash out refinances over 90% LTV anymore. I assume that most of my past clients are around 95% LTV which disqualifies them before you can even get into the mortgage application. Too bad for them.

8. What about the people who can get approved? Now they have a 4.5% interest rate. Do you think they will ever refinance again? They better not. If they do, then their dumb. So now the mortgage company has lost a past client it could do a loan for. So much of the business mortgage companies do is refinances, not purchases. It was just like when I did a second mortgage for one of my favorite clients in Washington. We did 4 loans for her in a matter of a year and a half. She kept taking money out of the equity in her home and then on the last one I told her that we would probably never be able to do a loan for her again because she was (over a year ago) at 100% LTV. She’s probably at 110% LTV now. On to the next client.

9. So with everybody jumping in to get lower interest rates now the margins the banks make on the loan is going to be less. I wonder if it will be enough to cover their losses from the past or be able to hit their estimates on Wall Street.

10. The biggest reason why it won’t help is because the Government is running the show. They want to show all of us that Fannie Mae and Freddie Mac still work. The market clearly shows they make it worse. Its not that I don’t want the economy to get back on track but every time I hear the Directors at the Federal Reserve talk I wonder how such intelligent people could ever think of such idiotic ideas. They should let the market take its own course, lock the doors at the Fed and get out of the way.

1. People trying to refinance their home after having it listed for sale are about to run into a big road block. Refinancing a home after being listed is one of the biggest underwriting guidelines that has to be passed. This is not about you, its about the mortgage company.

2. Most mortgage companies like Quicken Loans for instance have very particular guidelines when it comes to this. With all of the homes listed for sale around the country this is one that can become a real deal breaker. Depending on the company, many have a 12 month delisting period. Some will have a 6 month but for the most part its 12.

3. What does this mean? You need to be able to show the mortgage company that you have taken your house off of the market. You can do this by getting a de-listing ticket from your realtor. On the “De-Listing Ticket” it will show how long the home was listed for sale and the exact date it was taken off of the market. The mortgage company needs this information and must follow all of the guidelines set forth by Fannie Mae. This is one of them.

4. So why does the mortgage lender care when your home was listed and de-listed? It really comes down to you, the home owner. The mortgage companies know that you are just trying to consolidate all of your debts to give you some breathing room while you try to sell the home. The mortgage company wants you to stay in that home and pay them the interest on that loan.

5. You are probably going to find this out the hard way first. I remember being a mortgage banker and getting that phone call from people desperate to refinance their home. I would go through all of the normal application questions and ask them if their home was listed for sale. For the most part people would tell me whether or not it was. If they did not we would find out. Unfortunately, it would be when the appraisal gets back. The appraiser has a database of all of the homes that were listed for sale. The home owner is the one that is affected the most because they just spent $350 on a appraisal and are not going to be able to close the home loan.

6. So what are you to do? The best bet would be to call the mortgage company who holds the note, i.e, Countrywide, Chase, Bank Of America. Ask them if there is anything that they can do. More than likely all that they will do for you now is a “rate/term refinance.” This is for people who are in a adjustable rate mortgage. The mortgage company will not let you do a “cash out refinance” because they do not want you rolling more debt into the equity of the home. You will have to wait the time needed to refinance. Its probably not worth your time to call up a mortgage broker. They have to follow the guidelines set forth by the lender who actually funds the loan.

7. No need to call the original mortgage company that did the loan for you if its different than the one who holds you mortgage note now. You probably noticed after your loan closed your mortgage was sold to another company. The deal is the first company gets paid by the next company a premium for your loan. They keep this money as long as you do not refinance or sell the home within 120 days. The 120 days is known in the mortgage business as the “recapture period.” Its more like 140 days because its not from the day the loan was closed, its from when the mortgage was bought the first time. So you have to look at this from the lenders point of view. Here is somebody who is trying to sell their home, then can’t, and now is trying to roll more debt in to the equity of the home. The company knows you are going to put that house right back up for sale the second after the loan closes. So why waste time on somebody who is going to stick it back to them within 4 months if they can? No need to do that. Move onto the next client.

8. A real big reason why mortgage companies are not letting people refinance after the home was listed for sale was now it gives you the chance to foreclose on the property with all of your debts in the new loan (that is if you are rolling in debts). Now the loan to value (LTV) is way high. You are not going to be able to sell the home now because any wiggle room in the equity of the home is gone. Now the bank is stuck with a mortgage note on a property that is not going to sell for what is needed to cover the mortgage note. The bank will have to write off some of the balance and take a loss just to move the property off their books. You in the mean time have all of your debts paid by the new mortgage and those are included in the house you just foreclosed on. Your credit cards, car loans, past collections, everything. Who cares if you need to rent for two years. At least all of your bills are paid so you can start fresh with just a minor (big) blemish on your credit report.

9. So how can you not get caught? There is only one way to get around this underwriting guideline. It is to list your home “For Sale By Owner.” When you do a “FSBO” (fancy term for “For Sale By Owner) your property never goes in the database called “Multiple Listing Service” or “MLS”. Wikipedia has a great definiton of what it does. As long as you do not contact a Real Estate Agent than you are in the clear. When people told me their house was “FSBO” I told them to walk out into the front yard and take down the sign. Then after we closed the loan they could put it back up if they wanted. Does that sound shady?

10. The most common response I heard from people that I denied on a mortgage was that “you get the house if I foreclose.” Mortgage companies do not want you to foreclose. They do not want your house. They want you in the house paying a mortgage note they earn interest on. The scenario of why mortgage companies will not refinance a home that has been listed for sale is really a lose – lose one. The mortgage company cannot make new loans. The home owner cannot get into a better loan or even roll in some bills to help them keep the house. If you are thinking about putting your house up for sale I suggest you do it “FSBO.”