Archive for July, 2008
More Texas Hold’em With Freddie
July 18th, 2008 Categories: Mortgage News, fannie mae, freddie mac
The Fannie Mae and Freddie Mac poker game is progressing…their chip stacks have diminished substantially but Freddie appears to be calling in a credit marker from the House…
We’ve seen The Flop…which may have been initiated by the Financial Accounting Standards Board almost 6 months ago.
From yesterdays post:
If I’m reading the table correctly, Fannie and Freddie’s stock is plummeting because stock holders are staring at the prospect of getting diluted by capital infusions (for a number of reasons) and dumping accordingly.
Now The Turn…
Read today over at Blown Mortgage:
…Freddie Mac, is mulling a possible $10 billion equity round to raise capital…
I don’t know how you raise that much cash at such a terrible stock price without completely diluting the hell out of the rest of the shareholders; but onward I say.
Is it me, or does this seem a bit contrived? Stay tuned for The River…
Also See:
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The Fannie Mae and Freddie Mac Poker Game
July 17th, 2008 Categories: Mortgage News, fannie mae, freddie mac
Fannie Mae and Freddie Mac’s recent Wall Street nose dive is an interesting study in how equity market emotionally charged speculative economics have infected the debt sector. The whole string of events that have brought things to where they are today also resembles a poker game, where no one shows their hand until the very end and bluffs are part of the strategy.
If I’m reading the table correctly, Fannie and Freddie’s stock is plummeting because stock holders are staring at the prospect of getting diluted by capital infusions (for a number of reasons) and dumping accordingly. The financial picture behind these two mortgage giants isn’t exactly rosy and a few moving parts (private mortgage insurance companies, sustained ability to provide short term debt) need to hold steady, but both have enough resources available to weather the storm.
A given corporations stock price related to the performance of the underlying business are disjointed at best. Case in point: On April 24, 2002 AOL/Time Warner reported a $54 billion write down, at the time the single largest quarterly loss for a corporation and roughly the equivalent of New Zealands GDP. On April 25, 2002 the stock price rose almost 1%.
Fannie and Freddie’s stock prices may have been trampled, but this isn’t a direct reflection of whats going on inside the companies and/or their ability to sustain through these turbulent times.
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The Final Rule? 3 Years Late and Billions Later…
July 15th, 2008 Categories: Mortgage News
The Federal Reserve yesterday approved their ‘final rule for home mortgage loans to better protect consumers and facilitate responsible lending‘.
My gut reaction was WTF? The perpetual circle jerk just picked up a fat bottle of lube…this is besides the fact that the Final Rule reportedly doesn’t go into effect for another 14 months…Huh, what? I actually feel dumber for having read it.
From the release:
The final rule adds four key protections for a newly defined category of “higher-priced mortgage loans” secured by a consumer’s principal dwelling. For loans in this category, these protections will:
- Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
The “does not need to demonstrate that it is part of a pattern or practice” language is the most interesting line of the entire release, and reads like it’s about to be open season on the legal liability front for any “higher-priced mortgage loans” lender.
‘Assessing repayment ability based on the highest scheduled payment in the first seven years’ effectively means that any loan with a fixed payment period of less than 7 years, i.e. 2, 3, 5 Yr ARM’s, will likely no longer be an option for many borrowers.
- Require creditors to verify the income and assets they rely upon to determine repayment ability.
Brilliant!
- Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
So, no more ARM’s that adjust in 2 years (up to 3%) with 5 year prepayment penalties (equal to 3% of Loan Balance)? If Ameriquest wasn’t already out of business, they would be by October 2009…they made this practice nouveau chic. Don’t know of any lenders still stupid enough to allow this cute hedge clause for greater profitability at the borrowers expense…if they do, they should be hung to dry.
- Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.
Outside of being a rather practical ‘final rule’, this will drive down approvals since escrowing taxes and insurance drives up the monthly payment and kicks otherwise qualifying borrowers to the curb. The industry standard had been that any mortgage that had an LTV >80% required escrow.
If I were a non-agency lender, I’d just go ahead and get out of the industry now, the writing’s on the wall. ‘I’m gonna sue your ass!’ will be the mortgage slogan in late 2009.
This begs the question: Why are these ‘rules’ restricted to “higher-priced mortgage loan” lenders, and not all lenders?
More from the Fed:
In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer’s principal dwelling, regardless of whether the loan is higher-priced:
- Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
You mean this was cool before the Final Rule?
- Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
- Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer’s credit history.
I can’t believe that this language has to be reduced to writing again. Like, ‘This time were seriously serious, seriously!’
Further:
One element of the original proposal has been withdrawn. The Federal Reserve Board had proposed for public comment certain requirements pertaining to so-called “yield-spread premiums.” During the intervening period, the Board engaged in consumer testing that cast significant doubt on the effectiveness of the proposed rule
Why are YSP’s so hard for the Fed to wrap their heads around? Why wouldn’t a consumer want to now if the rate they were being sold was yielding a cash rebate they could use to pay for some or all of their closing costs?
Talk about stating and regurgitating the ridiculously obvious…nice job Fed but I think K-Fed could have done just as well.
‘The Final Rule’ might have been effective and saved billions if it was implemented 3 years earlier, instead of 14 months from now…When will the Fed get in the trenches and adopt pro-active, preemptive practices instead of post mortem autopsies?
The real trick to creating worthy mortgage reform would be getting a bunch of smart, industry savvy yet non-partisan professionals sequestered from the special interest groups and bank lobbyists. Let them spend 60 days cranking out logical, practical, enforceable policies coupled with easy to read documents. I think everyone would be surprised at the outcome…which would surely be far superior than the lip-service above.
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Risk Based Pricing How Mortgage Rates are Determined. Credit Scores and History
July 10th, 2008 Categories: Mortgage Advice, credit scoring, risk based pricing
Risk Based Pricing How Mortgage Rates are Determined. Credit Scores and History
The following material isn’t all that easy to follow, there are many moving parts. It’s the equivalent of college level mortgage economics, I’ll try to be a succinct as possible.
First, IT IS VITAL that you understand exactly what your credit scores are and why, as they are the single most influential driver behind the risk based pricing of mortgage rates. Further, many people are unaware that they can improve their scores enough to yield better risk pricing and lower rates in a relatively short amount of time by employing sound strategies with the help of qualified mortgage professionals and some 3rd party services. A one (1) point difference in credit score can have large financial repercussions when qualifying for a mortgage. Accessing, understanding and pro-actively addressing whats on your credit bureau before you apply for a mortgage is absolutely imperative.
Credit scoring is a complex algorithm that considers many different factors, all weighted differently. Since these factors typically change every month the overall score does too. Some factors include:
- Number of total (open and closed) accounts…aka ‘trade lines’
- Type of account
Revolving (typically credit cards), Installment (automobile loans, student loans, and/or bank loans) and Mortgage. - High-credit limits vs. current balances
Example: Credit card has a $10,000 limit and a $3000 balance owed. - Length of time accounts are open
- Payment history
Utility bills, cell phone etc don’t count towards credit scores unless you don’t pay them (ever), then they may appear as a judgment on your bureau, which will lower a credit score substantially.
The mortgage industry uses a very succinct and comprehensive credit bureau which is far different than the ‘get your free credit bureau’ and other like offers. Most consumers don’t know that there are different credit report types. MyFICO provides a ‘mortgage quality’ Tri-Merge (an aggregate of all three, Experian, Equifax and Trans-Union) credit reports as well as ancillary services that can assist you in improving and maintaining your credit files. Mortgage professionals have access to similar tools and service.
Despite common perception, credit scores alone are not the single driving factor for proper mortgage qualification, the depth of a score is just as important. Credit depth means having accounts open for extended periods of time (2+ years), ‘high balance limits’ on accounts that exceed ~$5000, automobile or other installment loans as well as previous and current mortgage loans…
For the purpose of this post, we’ll assume that the scores and scenarios used below have enough depth behind them to qualify for a mortgage.
Below is chart pulled from a conforming lenders rate sheet demonstrating Risk Based Pricing (RBP) adjustments for credit scores with their Loan to Value (LTV) corollaries:
-Credit Score and LTV Risk Pased Pricing Chart
First thing you should note is the relative increases in price when comparing credit score to LTV. As LTV’s rise, price (and rate) become more expensive. Lower credit scores in relation to LTV cause further RBP’s for the worse. (Click the image to enlarge)
Notice that credit scores above 720 cause no RBP adjustment for the worse, this shows unequivocally how important good credit is for obtaining the best price (and rate) possible. Few other notes:
- LTV’s <60% have either no adjustment to price (or price for the better if the credit score is above 700), reason being that high equity properties are considered far less risky due to the blunt point that if the bank had to foreclose on the property they would likely get their money back and then some.
- LTV’s from 60.01% to 70% begin to trigger RBP adjustments for the worse, to the tune of 0.500(%) - 0.750(%) (higher cost and rate) depending on credit score.
- LTV’s >70.01% further a RBP adjustment for the worse, ranging from 0% to 2.75% depending on credit score.
- 1 point, the difference between a 679 and a 680, can effect the price of an interest rate up to .750%
This a real life example of the ‘Credit Crunch’; RBP adjustments for LTV’s and correlating credit scores are far more ‘expensive’ than they used to be. Today a borrower needs higher credit scores and lower LTV’s to acquire favorable rates and prices compared to what was available less than a year ago.
How do RBP adjustments actually effect interest rates?
<–What you see here is a daily pricing chart for a Conforming 30 Yr Fixed program.
Any price below 100.00 costs money to obtain, any price above 100.00 pays money (YSP) to obtain.
If there are no RBP adjustments, a 6.125% rate (25 day lock period) is the best available that doesn’t cost money to obtain, it actually pays 100.139 or 0.139% of the loan amount (YSP). If the loan amount is $300,000 then a 6.125% rate would pay $417.00 in YSP to the borrower ($300,000 x .139% = $417.00).
At 6.500% with no RBP adjustments and a $300,000 loan amount, the YSP rebate to the borrower would be $5004.00 ($300,000 x 1.668% = $5004.00)
25 days and 60 days are the ‘lock periods’. Once you lock a loan you have either 25 or 60 days to close it (with this lender), depending on which price you choose. When a loan is locked the bank ‘holds’ that money to fund the loan (which costs them money along the lines of the Federal Reserve Overnight Rate), the shorter the lock period the better the price.
To demonstrate how credit score RBP can effect a rate and cost, lets compare a borrower who has a 660 credit score and needs 90% LTV financing to a borrower that has a 720 score (same 90% LTV) under the ‘25 days’ lock period.
Looking at the credit score and LTV chart above, a 660 score at 90% LTV yields a RBP for the worse in the amount of 1.250(%).
Now look at the 30 Yr Fixed chart: If a 660 credit score borrower wanted the 6.125% rate you must subtract 1.250 from the price next to the rate, or 100.139 - 1.250 = 98.889. The difference between 100.00 and 98.889 is 1.111(%). If the loan amount is $300,000 and the cost is 1.111(%), it would cost $3333.00 ($300,000 x 1.11%) to obtain the 6.125% rate for the 660 borrower at 90% LTV.
In the alternative, a 720 score at 90% LTV has no RBP adjustment and therefore could acquire the 6.125% rate for the 0.139% price, rebating $417.00 in YSP to the borrower.
So, to acquire the 6.125% rate, a 660 credit score borrower needing a 90% LTV mortgage will have to pay $3750.00 more than a borrower with a 720 credit score. Assuming all other RBP factors are equal.
Lets say the 660 credit score borrower wanted a rate that didn’t cost money to acquire. To do so you must find the price and corresponding rate that meets or exceeds 101.250 to account for the 1.250(%) RBP adjustment. In this example, 6.500% has a price of 101.668. Adjusting for the RBP of 1.250 yields a net price of 100.418 (101.668 - 1.250 = 100.418) or 0.418%. At a $300,000 loan amount, a 6.500% rate after the RBP adjustment would rebate $1254.00 ($300,000 x .418% = $1254.00) to the borrower in YSP.
All this may seem pretty complex until you begin to figure in other RBP factors like Loan Type and Property Use, not to mention the ambiguous rules of credit depth property location…then the fun (and mistakes) really start to fly. It’s no wonder many consumers are either honestly misquoted, bait and switched (or worse) with great frequency. There are almost more moving parts than can be counted. Fortunately there are competent mortgage professionals (and slick technologies) that can quickly disseminate through all this information, calculating mortgage rates and their respective prices accurately and transparently for the borrower.
If I lost anyone here feel free to hit my email or comment thread…chances are if one person has a question many more have the same question. If you made it all the way through this post and have a greater understanding for how mortgage rates are determined, give yourself a well deserved pat on the back…it’s not easy material to follow.
Next up: Loan Amounts and Loan to Value.
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Risk Based Pricing. How Mortgage Rates are Determined Property Type and Property Use
July 7th, 2008 Categories: Mortgage Advice, risk based pricing
Risk Based Pricing. How Mortgage Rates are Determined Property Location and Property Use
In the world of residential mortgage Risk Based Pricing (RBP), Property Location and Property Use are two factors that have nothing to do with the actual borrower, whereas the same borrower would receive two different sets of program and interest rate quotes depending on where the subject property is located and what the property is used for.
Property Location has become much more prominent in RBP scenarios with the recent uptick in popularity of FHA mortgages. Loan limits for FHA loans have become very localized, right down to the County level. It’s possible that one County may have a loan limit of ~$417k with an adjacent County at ~$700k+, via FHA. Loan amounts above local limits will cause a pricing for the worse, so location in relation to loan amount can be a substantial factor as to what interest rate any given borrower qualifies for.
Even without considering FHA loan limit guidelines, there are state level and regional rate and pricing guidelines…you wont get the same programs, rates and pricing in Kanosh, UT and Manhattan. Property in locations deemed high risk (depreciating, bubble/volatile prone, high foreclosure, poor economy) are likely to see a pricing for the worse (higher interest rate) compared to ‘more stable’ locations. There are even locations like the inner city of Cleveland, Ohio where many banks won’t lend, period, due to the depth of mortgage fraud that ripped through the city during the refi-boom.
Property based RBP changes can range from 0% to 2% (or pts) which may have a corollary effect of increasing the interest rate 1+%.
Property Use is broken down into three subsets:
- Primary Residence
- Second Home
- Non-Owner Occupied or Investment
A Primary Residence is a property you plan to personally live in. The bank thinks you’re likely to highly value and treat the house you live in with love and respect so properties that are used for primary residences have no RBP adjustment for the worse.
RBP adjustments for Second Homes are getting pretty lender specific, depending on secondary factors like credit score and Loan to Value (LTV). Second Homes with LTV’s <80% generally have no RBP adjustment while an LTV >80% will require higher credit scores and RBP for the worse. In order for a property to qualify as a Second Home, you can’t (claim to) make money by renting it out (this would make it an investment property), and you must represent that you stay at the property a certain amount of time each year.
Non-Owner Occupied or Investment Property will have a substantial RBP adjustment for the worse, typically between 1.5%-2.5% which may correlate to 1%+ increase in interest rate, compared to a primary residence or second home, regardless of any secondary factors. Secondary factors like loan amount and LTV play a heavy role in how big the adjustment is.
Where there is up to 2.5% (or points) on the table there are likely to be people trying to game the system. Misrepresenting property use is a very common type of mortgage fraud since it’s heavily based on the honor system. Yes, stating that a property you are buying will be your primary residence when you really intend to rent it out is mortgage fraud. There are certain measures the bank and broker (should) go through to make sure the stated property use is in fact true.
Next up is Credit Scores and History…
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