Paul Gowen

HARP’s Broken Promise

When it debuted in March of 2009, the government’s Home Affordable Refinance Program (HARP) was hailed as a way for borrowers, many of whom had seen the value of their homes plummet, to refinance their loans in to much lower interest rates.

The idea was very sound. A HARP refinance, for instance, allowed someone who put 20% down on a home purchase prior to 2009 to redo their loan without the added cost of monthly mortgage insurance. (A monthly mortgage insurance premium is required if a borrower puts less than 20% down on a purchase).

But with real estate values heading further south than Buenos Aires  (some markets fell nearly 50% from their highs) a lot of borrowers found themselves locked out of even HARP loans, because a new loan could only be done as long as the loan was no more than 105% of the home’s new value.

Then in March of this year, to much fanfare, the administration announced HARP 2, a set of relaxed guidelines they claimed would get everyone off the sidelines. Appraisals, in most cases, would not longer be required. Loans over 105% would be allowed.

Sadly, in the real world, we are finding out that the reality is not measuring up to the hype.

Why?

Simply because there is a wide (think Grand Canyon) gap between what the program allows, and what actual lenders will. As of this post, banks all over decided, on their own, that they didn’t want to take on the risk of dramatically underwater loans. One TARP recipient bank is allowing HARP loans over 105%, but only if the existing loan is serviced by that bank.

Riverside, California’s Press-Enterprise has a perfect takedown of the mess in the April 2 edition.

“Some lenders said they are adopting loan to value limits and setting their own minimum FICO scores for applicants because they fear that if the loans default in the future and mistakes are found in the loan underwriting, Fannie Mae and Freddie Mac will require them to buy the loans back at a substantial loss.

Some of the largest banks like J.P. Morgan Chase and Bank of America meanwhile have adopted policies to refinance only the mortgages that they currently service and not refinance the mortgages serviced by their bank competitors.

Because banks are focusing on refinancing the mortgages they manage and are not competing for more business, the interest rates on the loans are not as low as they might be, said Laurie Goodman, senior managing director at Amherst Securities Group.

‘This tends to lock a borrower into refinancing with their existing lender, which conveys tremendous pricing power to the banks’, Goodman said.”

The rest is here.

I have two clients we’ve been in contact in just the last week, who could both save more than $250 per month on their loans. Per the stated HARP guidelines, they are eligible. But both are stuck because banks have chosen NOT to take loans that fall under some HARP’s expanded guidelines.

It is long past time for our industry to step up to the plate and use the HARP guidelines as they are designed.

All of them.

If people, who have been diligent with their obligations, can save money on their mortgages everyone benefits. EVERYONE.

The borrower enjoys less strain on the family’s monthly budget. In turn, those savings mean they may choose to go to a restaurant a couple of times a month, instead of eating Top Ramen noodles at home every night. Now the restaurant owner has more business. Feeling more confident about things, and to handle the increased traffic what does he do? He hires more staff? Hey look, the unemployment rate is going down! That new employee at the restaurant? With a steady job, she just went out and replaced her clunker with a new car. Hey! The car dealer has more business! Etc. Etc. Etc.

Hey banks, we’re looking at you! Step up. Until you do HARP is just HYPE.

Patience is a Virtue With Rates This Low

With mortgage rates hovering near all time lows, homeowners in Portland and around the country are scrambling to refinance their higher rate loans.

Perhaps not surprisingly, the surge in applications is putting a huge strain on the industry’s back office personnel who are much smaller in number due to layoffs over the past two years.

Business Week covers the story well this week, with an article headlined “Want to Refinance? Get in Line.”

Key takeaway…

“Compounding the delays are stricter underwriting and disclosure requirements put in place over the past few years, which leave no room for shortcuts, says Stew Larsen, head of the mortgage unit at San Francisco-based Bank of the West. The largest U.S. home lender, Wells Fargo (WFC), no longer hires temporary staff and outsourcing companies when applications jump because of new rules tied to the creation of a national registry of loan officers, says Franklin Codel, head of national consumer lending at its mortgage unit. “The industry has come a long way in terms of automation, but it’s still a people-driven industry,” says Larsen. “Mortgage insurers, appraisers, and title companies, all those surrounding industries, they downsized as well.”

Read more here.

Keep an eye on the blog. Tomorrow we’re going to have a detailed rant on the mortgage process, and just how crazy it is right now.

Home Prices Rise, Portland Market Flat.

This map displays the results of the Case-Shiller home price index for June 2011. Nineteen of the 20 cities in the index saw home price increases, with Portland remaining flat. Overall the 20 cities combined for an increase of 1.1% in June. Nationally, home prices rose 3.6% in the second quarter.

US Debt Downgrade

On behalf of all my clients, and potential clients, who were considering locking in their interest rate, but haven’t yet, I want to send a hearty Bronx cheer to the folks at ratings agency S&P.

You see, S&P downgraded it’s rating on US debt, for the first time in the nation’s history, lowering it from AAA to AA+.

That may not seem like much, but it the ripple effects of the move could be enormous.

More from Bloomberg.

Right now, as this is being typed in the early evening of Friday, August 5, I’m having flashbacks to 1996 and 1998. I don’t think anyone who was in the mortgage business back in 1996 has forgotten the Valentine’s Day Massacre. Interest rates, in one day, shot up over half a point.

The same thing happened in October of 1998.

One day. 24 hours. What you counted on was just…

Gone.

I’m praying, when the markets open on Monday, that we don’t all relive those awful days.

Here’s what may be happening. Right now.

A consumer is talking to his loan officer about a certain interest rate for a new mortgage. If the loan officer is like me, he’s urging the client to lock in, TODAY, because markets are volatile, we’re near all time lows, and you just don’t know what can happen if you wait.

But he needs to run it by the spouse. Or mow the lawn. Haircut. Pick up the dry cleaning. Dinner with friends. Whatever.

Then he calls Monday, ready to lock in that great rate.

“I’m so sorry,” says the loan officer. “I know we were looking at 4.25%, but the best I can do now is 4.75%.”

I want so desperately to be wrong about this.

There is one reason to have some optimism. The markets may have already “priced this in” as they say on Wall Street. Moody’s and Fitch, the other ratings agencies, both have recently reaffirmed their own AAA ratings for US debt.

And S&P hasn’t exactly covered itself in glory, either yesterday, or 3 years ago. Who can forget that these same ratings agencies were basically asleep at the switch, refusing to downgrade mortgage backed securities that investment banks were buying hand over fist in the early to mid 2000s. You remember those things? The ones that were full of toxic sub-prime mortgages? The ones that triggered the market meltdown of 2008, TARP and “Too Big to Fail”?

The reason the S&P downgrade is creating so much controversy is they apparently got the math wrong, over estimating the US debt by $2 Trillion. Hey, what’s a trillion here or there?

I will have a very careful eye on the Asian markets when they open Sunday night.

Keep your fingers crossed folks.

What Happens if Debt Ceiling isn’t Raised?

As the knuckleheads in Washington work through the weekend, trying to avoid a first ever US default, you might be asking, what, if any, impact missing the August 2nd deadline would have on the real estate and mortgage industries.

There could be several. The first is this “crisis” itself could cause bond rating agencies like Moody’s and S&P to downgrade US debt below it’s current AAA rating. That in and of itself wouldn’t affect mortgage rates in Portland and elsewhere, because mortgage rates are tied to the prices of Mortgage Backed Securities (MBS), not Treasuries as many people think. But…We still could see a follow up ratings downgrade in the debt issued by Fannie Mae and Freddie Mac. That would cause a nearly immediate spike in rates, most likely about one half of a percent over current levels.

What that means for the average real estate buyer is a higher monthly payment. Let’s say you’re in the market to buy a new home, and will get a $200,000 mortgage. A 1/2 percent increase in your rate means a $60 higher monthly payment than you would otherwise have had.

Thanks politicians!

Missing the deadline could also have some practical affects on real estate finance as well. Because existing government obligations would have to be prioritized, a lot of government functions, especially those involved with consumers using FHA or VA mortgages, would have to be shut down.

Here’s a partial list…

FHA Case Numbers: For each FHA loan, we are required to order a FHA case number. This number is generated before an appraisal can even be ordered. With a shutdown, we may not be able to order case numbers. Because of this, it is critical to let us know if there is a contract executed on any loan, so that our office can go ahead and order a case number without risking the loan being on hold during a shutdown. Note: with the new FHA guidelines, a contract must be executed before a case number can be ordered.

The ability to close FHA loans is questionable, depending if HUD keeps its website running to obtain FHA case numbers (During the November 1995 shutdown, case numbers could not be obtained, but this was prior to the internet and was a manual process). The shutdown in 1995 mainly caused a delay rather than a drop in FHA loan origination, but if lenders decide to stop accepting FHA applications, it could be a problem.

4506 IRS Transcripts: Each loan requires the verification of at least one tax return by the IRS to verify the numbers that each customer presents us on their tax returns. During a shutdown, this process would be delayed as the IRS wouldn’t be at work to verify the transcripts.

Verifying Employment of a Government Employee: We are required to verify the employment of each customer. If the customer is a federal government employee, we would be unable to verify his or her employment during a shutdown.

FEMA: Homes in a Flood Zone: Homes that are determined to be in a flood zone would not be able to close as flood insurance could not be obtained.

USDA: During a shutdown, the USDA office would be closed because they have government underwriters that insure behind the lender.  With a shutdown, we would see delays with all USDA loans.

VA: Like the FHA, the disruption is possible — but not absolute — during a shutdown. This would all depend on if they continued to allow their website to function. A disruption would cause delays in VA appraisals and the issuing of certificates of eligibility.  If the website was closed during a shutdown, we would see delays in all VA loans.

We Have Met The Enemy, and He is Us.

Soapbox time.

Regular readers have read bits and pieces of this over the years. But several events have come together recently that convince me that the real estate market will not sufficiently recover until the real estate finance market returns to sanity.

Nearly everything that has been done in response to the near crash of 2008 has made getting a mortgage more difficult, time consuming and expensive.

It is long past time for this country’s banks, investors, legislators, and the mortgage industry itself, to urge a return to common sense standards. Standards that functioned perfectly well for decades.

Let’s start with appraisals. Until March of 2008, appraisals were done by independent appraisers. The appraisers were hired by someone like me, to work on behalf of the borrower and the bank funding the proposed mortgage. Appraisers do a thorough examination of the home and a detailed analysis of it’s value compared to similar homes nearby. Sounds fairly simple right? For years it was. For years we would send an order to one of the three appraisers we worked with, and they would charge the borrower $350 for the full appraisal report.

Today? As a result of something called the Home Valuation Code of Conduct (HVCC), I’m required to send an “appraisal request” to the lender, who then forwards it to an Appraisal Management Company (AMC), who then forwards it to a randomly selected appraiser. HVCC was put in place by mortgage servicing giants Fannie Mae and Freddie Mac, in order to settle a legal dispute with the attorney general of New York. It was billed as a way to restore trust and integrity to the appraisal process, and to improve services for consumers. What it has done is made the process more cumbersome, less effective, and of course, by inserting a middle man in to the process, more expensive for consumers. Appraisals now often cost in excess of $500. And because the order process is random, appraisals are often done by less qualified appraisers, who often times know next to nothing about the conditions in a market area they are working in.

Let’s take a recent example of some clients of mine. They own a charming Mid-Century Modern home in Lake Oswego. The home was built by an architect named Robert Rummer. Rummer homes, over a 1,000 of which were built in the Portland area in the 60s and 70s, are some of the most highly sought after homes in the Northwest.

More on Rummer here.

Realtor Jim Demarco told the Oregonian a few years ago… “I compare owning a Rummer to owning a classic car.”

In 2009, my client’s home appraised for $510,000. Since then, they had taken out a home equity line of credit and poured over $100,000 in to a careful, true to the builder, renovation of their home.

Guess what the appraised value came in at.

$405,000.

That’s right, the appraiser had dinged the value of the home 20% over a two year period, which is at the upper end of price depreciation in Lake Oswego. The six figures spent on renovation and addition of the house? Gone in the wind.

My clients and I were appalled. We appealed to the only entity we could, the AMC. The appeal was denied. The appraiser actually tried to argue that Rummer homes had no additional value over other similarly sized homes.

You can see how silly that assertion is just by typing “Rummer home” into the Google, and reading any of the web sites, blogs, and group pages devoted to Rummer homes.

Stuck, we did the only thing we could to give the clients some help. The transaction was restructured to allow them to save just under $100 per month, with a credit that covered all their closing costs. Sadly, the 2nd mortgage, taken to finance the renovation, remains in place. The clients are saving money, but nowhere near the amount they could have saved with a competent appraisal.

And sadly, appraisals are just the beginning.

The Department of Housing and Urban Development (HUD) recently made changes to the monthly mortgage insurance premiums charged to borrowers with FHA loans. The stated goal was to add money rapidly to the FHA trust fund, to ensure it’s ongoing viability. Of course, HUD could have poured thousands, if not millions, in to it’s trust fund by increasing the upfront part of the mortgage insurance it charges, instead of the monthly premium. But they left the upfront premium at it’s current level and jacked the cost of the monthly premiums up 100%, to the point where the premium on a median sales price home in the Portland area is $150 more per month!

How is that supposed to make home ownership easier for first time buyers?

I have clients in current FHA loans, many of whom could take advantage of today’s low rates to do a no cost rate reduction with us. But they can’t because the increase in the monthly premium would eat up all the savings they’d enjoy from a lower rate.

While we’re on the subject, Fannie Mae and Freddie Mac need to get rid of what’s called “risk based” pricing. In the good old days, rates were fairly uniform. Yes, there were some additions for things like investment properties, multi-unit properties, etc. But not the eye chart of costs and credits we see today.

As we’ve mentioned, in today’s world, a borrower with a 739 credit score (which is very good) pays a hit of .5% to their closing costs, even if they are putting 20% down on their home!

When clients call and ask, “What’s your rate for a 30 year fixed?” I often answer “I don’t know.”

And before they think I’m just being snarky, I explain that I can let them know what the rate is only after we determine the numbers for nearly a dozen variables.

I truly believe we have to take some steps now. Common sense ones, that can restore some sanity to the process, and help put the recovery of real estate prices on a sustainable path.

1) Kill HVCC. Do it yesterday. It’s time to return the business of appraisals to competent, independent appraisers.

2) If FHA wants more money, change the upfront mortgage insurance premium. It will accomplish what you said the goal was, with an immediate infusion of money in to the trust fund. But because the upfront premiums are often financed in to the final loan, the affect on the buyer’s monthly payment will be much more reasonable.

3) Get rid of risk based pricing. Banks long ago turned their mortgage underwriters into the industry’s equivalent of private investigators, pouring through and documenting every tiny detail of a potential borrower’s existence. Let them do their job. If the borrower is deemed qualified, they shouldn’t pay an extra cost for having a 739, instead of 740, credit score.

Regulators, and industry players, need to stop looking for exotic answers to the problems in the real estate market. There are fundamental, common sense things we can do right now that will save consumers time and money, speed the recovery in real estate and slow the rate at which I’m losing my hair!

Denied

Yes, regular readers know I’ve been on a rant for some time now about how much harder my industry is making it for housing to recover.

But I’ve got the numbers on my side.

Banks are denying even more loan applications (a national average of 26.8%) in the most recent year (2010) for which the stats are available. Oregon, because I know you’re wondering, is just a shade under the national average at 26.5%

Here’s more from the Wall Street Journal.

“Clearly we got too loose. This is a return to historical standards,” says Doug Duncan, Fannie’s chief economist. “When markets were stable and these standards were applied, you didn’t hear the same complaints.”

But Doug, that’s just not true. This is not a return to historical standards.

You, and your friends at Freddie Mac are making it more expensive for even well qualified borrowers to obtain a mortgage.

Here’s an example. Sally has a good job, little debt, and good savings. Her credit score is 739. She plans to put 20% down to buy a $300,000 home. Doug Duncan says her loan is being underwritten based on “historical standards”. But it certainly isn’t priced that way.

Until a few months ago, Sally would be on equal footing with everyone else with good credit and 20% down. But today, Sally is judged to be just a little riskier than the bank’s baseline, so she’ll pay a .5% fee on top of her other costs due to what lenders call “risk based pricing”. That means Sally will pay an extra $1200 in closing costs on her $240,000 loan. A cost she wouldn’t have to pay during the 80s, or the 90s, or up until now.

Sally is putting $60,000 of her hard earned savings in to this house. She would have to increase her down payment to $90,000 to avoid the fee.

I’m sorry, but in a million years you can’t convince me that a person, with a credit score as high as 739, putting that much of their own money in to a home, is a credit “risk”.

The best thing those of us in the mortgage industry could do right now?

A return not to Duncan’s “historical standards” but a return to sanity.

The Cruelest Month

June in Portland is dreadful.

Sorry to be the bearer of bad news, but it just is.

Can’t.

Take.

It.

Anymore.

Look, if you live in the Pacific Northwest, as I have for the past 21 years, you get used to the rain and the gray. Winters don’t bother me. Why? Because…let’s be honest, the weather sucks much worse in most of the country during November through February. Turn on the national news, and the reporters always seem to be interviewing a group of poor souls who are sleeping on the floor of some tacky East Coast airport, because the city is buried under 15 inches of snow and planes can’t get in and out because of the snow and frozen runways.

Now that June has arrived? This is the time of year when the Pacific Northwest loses it’s allure. Turn on the national news, and all you see are images of people, ALL OVER THE FREAKING COUNTRY, frolicking in the sun. They’re taking in major league baseball games, walking through parks, barbecueing in the back yard. And they are smiling.

Why?

Because they’re doing it in shorts and flip flops. Basking in the balmy sunshine and 80 degree + temperatures.

Meanwhile, the poor souls stuck here in the upper left hand corner of the US map, are drenched and bundled up in polar fleece.

Monday of this week it was warmer in Alaska than in Portland.

That just ain’t right.

July can’t get here soon enough.

June, you’re dead to me.

Housing Double Dip?

Thanks a lot Case Shiller. The most widely recognized index of home prices in the United States is out this morning.

And it’s awful.

According to the S&P/Case Shiller Index, home prices nationally dropped again in March, and are now below the previous low set in 2009.

More here from CNBC.

If there is a ray of sunshine in the report for people in and around Portland, it’s that the majority of the losses have come in local areas of the Southwest, Southeast, and hard hit manufacturing states in the rust belt like Michigan and Ohio.

Year over year, prices in Portland rose over 6 percent in March, and are up 2.4% in April compared to March.

Our good friend Dustin Miller is at Realty Trust in Lake Oswego. Here’s his take on the Portland area numbers.

“What we can expect though, is the next 2-3 months confirming what we know now as well . . . and that is that prices are improving in the Portland Metropolitan area.  If you live here and are buying or selling real estate now, you would know that the lower price ranges and some close in Eastside neighborhoods are seeing a heavy level of competition for desirable homes which bring multiple offers in some cases.”

You can read more from Dustin here.

Fed Gave Away Money in 2008

I hate to jump on the soapbox again, but when I read something like what I read yesterday, it makes me want to vomit. Or scream.

Maybe both.

Bloomberg is reporting that during the financial crisis of 2008, the Federal Reserve lent handed out at least $80 billion to banks like Goldman Sachs, Credit Suisse and Royal Bank of Scotland. The money was in loans with interest rates as low as 0.01%.

Read the rest here if you have a strong stomach.

Where is the outrage? These banks all made risky and bad bets on sub-prime mortgages that went bad. So we the taxpayers bailed them out. The idiots who made these huge bets are all still around, and they’re all still collecting millions of dollars in bonuses.

And the Fed gave these banks free money to play with. The Fed gave Goldman and others the cash, and they went out and bought stuff at fire sale prices from poor suckers who didn’t have access to free cash like that. Then they turned around and sold it all at a profit.

I want to know, where is the 0.01% loan for my client? You know her, or him. Hard working, decent job, saved some money and put 20% down on a house in 2006. Now the client owes more on the house than it’s worth, and her job is being outsourced to another country. Meanwhile the idiot trader who lost billions, yes billions, of dollars of other peoples money is still drawing a $10 million bonus and buying bling at Tiffany. Which of course is probably why Tiffany’s profits are up 25% for the most recent quarter and the stock is trading at an all time high.

I recomended Andrew Ross Sorkin’s great book, “Too Big to Fail” when it came out, and it covers some of this stuff.

A movie based on the book, and carrying the same title, debuted on HBO this month.

Watch the movie. But if you’re like me, you’ll want to make sure there’s nothing in the room that would be harmful if you threw it at your television screen.