Archive for June, 2008
Infectious Hyperbole in The Mortgage Industry
June 17th, 2008 Categories: Mortgage News, Real Estate News
Market bubbles and depressions tend to be more social phenomenon than rooted in fact.
Credit Crunch, Mortgage Meltdown, Sub-Prime Crisis, Alt-A Debacle, Housing Doom, Bursting Bubbles…the cliches are as creative as the financing options that used to permeate the marketplace. But what are the real numbers behind such doomsday hyperbole?
They’re not quite as sexy nor remarkable:
National Foreclosure Rates…
The Spin: National Foreclosure Rate Almost Doubles in 2008! | Foreclosures Hit Historic Highs | Homes in Foreclosure Top 1 Million
Reality: National Foreclosure Rate = 0.7%…up from 0.4% around this time last year. Roughly 7 out of 1000 homes are in foreclosure.
National REO Rates...REO or Real Estate Owned property is the ‘inventory’ banks hold, homes they likely foreclosed on and have yet to resell back into the marketplace.
The Spin: Bank REO’s up 100% From 2007
Reality: National REO Rate = 1.0%…up from 0.5% last year.
With all of the suspect to downright criminal practices that have been unveiled in the mortgage industry over the past year and a half, coupled with mainstream media spin, one would think that the housing and mortgage markets are in a state of pending armageddon, as in the end of days are upon us. It’s simply not true. Yes foreclosures are up and will likely continue to rise but they are the result of unprecedented, unsustainable expansion and growth…what goes up must come down at some point.
During times of lower trending mortgage rates, property generally appreciates as consumers can afford ‘more house’, sales flourish. Consumer defaults and subsequent incidences of foreclosure remain low because money is cheap. When rates rise the same consumer cannot afford the higher costs, appreciation levels or dips (depreciation), defaults and foreclosures increase. -Masters in Rocket Science not required to understand these fundamental market corollaries.-
Much of the skewed perception results from looking at the state of the union through the wrong set of glasses. Map mash-ups like this one:
…do well to point out which States have:
A. The highest degree of mortgage fraud/predatory lending.
B. Fundamentally impractical (stupid) appreciation.
C. Deteriorating local economic conditions.
D. All of the above.
A more useful set of information would compare common interest rates (and their indices) against home sales, values and the relative number of delinquencies/foreclosures across recent history.
Since I can’t find this chart, nor have the time to create one, I’ll use a few others’ ‘chart porn’.
According to this Calculated Risk chart, between 2002 and 2007 there were ~37,950,000 home sales.
What caused this historically explosive growth? Historically cheap and easy money.
The indices in the chart above represent those that are tied to popular mortgage programs. The COFI, MTA, and CMT directly effect (the terribly abused) Option ARM programs while the LIBOR is the index for many conforming ARM mortgages. It’s easy to see that home sales and prices blew up as rates bottomed out in late 2003, early 2004. Lower rates = lower payments. Lower payments = lower income needed to qualify for a mortgage. Lower qualification requirements = more qualified applicants…you get the point.
Consumer demographics that historically would have never qualified for a mortgage suddenly and briefly did qualify. Lenders threw gasoline on this spark and continued pouring it on by further dropping long standing underwriting qualification criteria. Wall Street greatly subsidized the raw fuel to further this incendiary trend: money, gobs of it. The Dream of Homeownership was sold like hard candy. For those consumers that f into the brief
The indices above reached their peak around July 2006, not coincidentally the wheels began to loosen on the market shortly after this and the sky began to fall shortly thereafter…
Advancing to February 2008, median home values and sales are actually increasing. What, Why, How? Rates have recently trended downward again, relieving some of the downward pressure in the housing market.
Studying the data above, it’s relatively surprising that the ‘housing epidemic’ hasn’t actually become one on par with how big the ‘housing bubble’ actually got. The mortgage and housing markets may be suffering from a bad cold, but it’s far from terminal. Much of the same infectious exuberance that permeated the housing market from 2002-2006 has today mutated into a plague of doomsday hyperbole. Market bubbles and depressions tend to be more social phenomenon than rooted in fact. A disjunctive phenomenon can drive an otherwise practical market into uncharted, volatile territory…alas hindsight is 20/20.
So, knowing what we now do, how can the highly contagious, overly optimistic peaks and financially draining valleys be mitigated in the housing and mortgage markets?
A logical first step is transparent access to better mortgage data, I know someone who has a line on this ;) Next would be understanding how to best disseminate through and correlate it against housing market data using meaningful, effective strategies.
The relatively new real estate futures market could serve as an effective tool to hedge against impractical social phenomenon like bubbles. Futures markets are speculated by highly informed and educated people who have access to quality data that can spot potential bubbles well before they get too big. If they begin selling short, its a good idea to curb the enthusiasm. In the alternative, if they’re bullish or going long, lower interest rates, property appreciation, new housing starts and higher sales are likely.
It’s about time these Industrial Age marketplaces started using Information Age practices to stem future ‘epidemics’ and other like hyperbole from unnecessarily spreading…
Sphere: Related ContentConforming Wholesale Mortgage Rates for 6/16/08
June 16th, 2008 Categories: Mortgage News, Real Estate Technology, Tranparent mortgage pricing, Yield Spread Premiums
Originally posted on www.ratespeed.com/blog…
All subsequent daily conforming wholesale interest rate pricing posts, other schwag, definitions, etc. may be found over there…
What you see above is a screen shot from a results page generated by RateSpeed at 1:41pm on 6/15/08.
The risk based credit, financial and property criteria used to generate the above quote is as follows:
Purchase, Primary Residence, Single Family Residence, Fully Documented income, Debt to Income <39%, Loan To Value <80%, $400k Loan Amount, 700 FICO score.
Don’t believe what you see? Try it out yourself.
Shortly, RateSpeed will be enrolling 25 mortgage professionals as beta testers. Are you a mortgage professional looking to differentiate yourself in the market? Stay tuned to find out how you can be one of the early adopters in the transparent mortgage revolution.
Defining the fields and columns above:
Conf 30 Yr Fixed.
This is the term of the mortgage program. In this case the program is a traditional conforming 30 year fixed mortgage product.
Rate.
This is the interest rate of the loan.
APR, in this alpha rendition, will only account for the Broker/Banker Fee. Traditionally it will (and should) include all closing costs. IMO APR is confusing and manipulatable.
Loan Amount.Self explanatory, the dollar amount of the mortgage.
Monthly Payment.
How much you would pay the mortgage provider each month. Includes principle and interest.
Price.
This is the % cost or rebate that the given interest rate yields in the wholesale market. The Loan Amount is multiplied against the Price to equal the dollar ($) amount in cost or YSP credit.
YSP Credit.
RateSpeed is about choice and displays five levels of Price, one Price below Par (a Par rate is the lowest interest rate a borrower qualifies for, given by the wholesale lender) and four above Par. The higher Rate one chooses above Par the more YSP Credit (or cash rebate) the consumer may receive and apply toward closing costs (Broker/Banker Fee and 3rd Party fees, i.e. appraisal, title, escrow, home inspection etc). An interest rate below Par will cost a consumer to acquire, often times called ‘buying down’ an interest rate.
In the above 30 Yr Fixed, $400k Loan Amount example:
6.25% would yield $1084.00 in cash from the wholesale lender to the consumer to be applied toward closing costs.
6.625% would yield $5844.00 in cash from the wholesale lender to the consumer to be applied toward closing costs. The first $2000 would pay the Broker/Banker fee and the rest may be applied toward 3rd party closing costs (in this scenario).
Broker/Banker Fee.
This is the (negotiable) flat fee the mortgage professional is charging to close this loan. It is completely up to the mortgage professional what this fee ultimately is, RateSpeed does not mandate what a mortgage professional can charge.
$2000 is what we chose to represent as the Broker/Banker fee in this example and should not be interpreted as what all licensed mortgage professionals may charge who offer RateSpeed to their clients. The fee may be more or less, completely dependent on the mortgage professional, but always disclosed up-front.
Net Cost.
Net Cost = Broker/Banker Fee minus (plus) YSP Credit (cost).
Using the same qualifying information, compare and contrast the rates and pricing you see above to other mortgage websites and similar applications and you will quickly see the difference between a transparent mortgage professional who offers RateSpeed and those who don’t…unabated access to real time, best-case wholesale mortgage rates and pricing.RateSpeed: Enabling mortgage consumers and professionals to make smarter decisions with better information.
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Sphere: Related ContentMe Thinking Home Mortgage Disclosure Act Data is Improperly Skewed
June 16th, 2008 Categories: Mortgage News
I had the opportunity to chat with Niki Scevak recently, he’s repurposing data provided by the Home Mortgage Disclosure Act into some very cool and useful charts, maps and other intuitive formats on his new site Mortgage.Homethinking. After poking around for a bit I quickly realized how terribly skewed one set of data is, the loan amount to income ratio.
The HMDA was formed by the Federal Reserve Board, yes that Fed. The HMDA purports to:
‘…requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings’
Two charts from Homethinking representing HMDA data:
According to the HMDA:
The loan to income ratio for California was ~2.3 times income in 2006.
The average loan amount was $320,000.
Calculating backwards, this would indicate that the average reported income for a borrower in a $320k mortgage is ~$139,000/year.
According to the US Census Bureau, the median income for a Californian from 2004-2006 was ~$53,000. At 2.3 times income, this should equate to an average loan amount of ~$122,000. Even incorporating some standard deviations to account for % of Californians who own homes vs those who don’t, the disparity is obvious. You can barely buy a house with wheels in California for $122k.
Scaling up to consider real California property economics…borrowers who acquired a $500,000 mortgage on average should have an income of >~$217,000. A $1,000,000 mortgage would indicate that a borrowers average income should be >$434,000/year.
Between you, me and your monitor this isn’t the case, not even close. One doesn’t need to be in the mortgage industry to know that these ratios are way off to the point of being comical. How do I know this? Let me explain how consumers are typically ‘pre-qualified’ for how much mortgage they can acquire:
Using the $139,000/year income example from above…
Borrower Income = $139k/year or ~$11,500/month. They have documentable, stable job and housing history, good credit, and assets.
Situation arbitrarily qualifies borrower for 6%, 30-Yr Fixed program.
39% debt to income ratio (DTI) allowed within the mortgages underwriting guidelines = ~$4485.00 in monthly ‘credit bureau reporting debt’ (mortgage, car, installment loans, credit cards, student loans…) is allowed.
Lets say the borrower has $1000 in monthly reporting credit bureau debt, not including a mortgage payment. This leaves ~$3485.00 in ‘available monthly debt’ left to ‘qualify’ for a mortgage.
At the interest rate and term above, working backwards from a $3485 payment, would ‘qualify’ one for a $581,000+ mortgage, or a loan to income ratio of 4+, almost twice HMDA’s reported ratio. 90% of borrowers will buy a home within 5% of this pre-approval limit, as the mentality transforms from ‘need’ to ‘want’…fast. Anyway, after some unofficial research I found that almost without fail, consumers end up taking out mortgages at near 4 times their annual income.
It seems logical to implicate the rabid abuse of stated, no doc and otherwise non-provable/ liar income loans but ’stated’ income should be represented and accounted for, even if it is fictitious. Niki made a solid point, stating that 2nd mortgages, home equity lines…loans with relatively smaller principle balances…could be tipping the data.
While this may be a ‘boring’ post to many, I’m intrigued because the Fed is making decisions based on this data, which can be easily misunderstood by those in the Ivory Tower and lead to rash, misinformed policy decisions…and thats not good for (almost) anyone.
Anyway, kudos to Niki for bringing greater awareness to an industry that is shrouded in mystery and scandal…
Sphere: Related ContentIt’s an Anonymous, Automated, Transparent, Customizable Wholesale Mortgage Program and Interest Rate Pricing Pre-Qualification Search Engine, Dummy!
June 10th, 2008 Categories: Mortgage News, Tranparent mortgage pricing, ratespeed
‘It’s been a long, strange trip… ‘
- Jerry Garcia
The XBroker blog was started in August of 2006 with this little project in mind.
Part 1: www.ratespeed.com is live…I hope you enjoy the presentation
Part 2:
The Blog will launch over the next 48 hours.Launched.Part 3:
The RateSpeed application will launch by FridayLaunched.
Expounding on the worlds longest title…
Anonymous. Consumers only provide property, financial and credit risk information typically used to determine what mortgage rates and programs are available for a given scenario. This is called ‘risk-based pricing’. RateSpeed does not collect names, addresses, social security numbers, phone numbers or other personal information that may end up in the wrong hands or abused by sales marketers.
Automated. The RateSpeed application is custom configured to simultaneously ‘shop’ every wholesale lender a mortgage professional is individually affiliated with in real time. What used to take a mortgage professional many hours, even days to complete and return to a consumer can now be done in seconds.
Transparent. Users of RateSpeed get to see exactly what they qualify for. Mortgage professionals have no ability to manipulate the information flow between the wholesale lenders database and the consumer, insuring consumers get to see exactly what they qualify for, including every dollar of Yield Spread Premium (the cash rebate a wholesale lender offers the consumer for accepting a higher interest rate than they qualify for.)
Customizable. Unlike other mortgage pre-qualification web-sites and similar applications, RateSpeed is 100% customized to an individual mortgage professionals current stable of wholesale lender relationships. The rates, pricing and programs that RateSpeed displays are the exact same as the mortgage professional would personally quote in person or over the phone.
Wholesale Mortgage Programs. Wholesale mortgage rates, pricing and programs are only available through a licensed mortgage professional. The rates and programs widely advertised on TV and the Internet are retail and often contain hidden and/or inflated costs. RateSpeed allows consumers to see their wholesale rates without middle man manipulation.
Expect to see other news and major announcements shortly, stay tuned…
RateSpeed, The Transparent Mortgage Search Engine…
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Sphere: Related Content
