In you want an understanding of why documentation and verification of information is so difficult on mortgage loans, this article provides some insight.
http://www.reuters.com/article/2010/08/17/us-housing-usa-fraud-idUSTRE67G1S620100817?pageNumber=1
(Reuters) - The house on the 53rd block of South Wood Street in Chicago's Back of the Yards doesn't look like a $355,000 home. There is no front door and most of the windows are boarded up. Public records show it sold in foreclosure for $25,500 in January 2009, then resold for $355,000 in October. In between, a $110,000 mortgage was taken out on the home, supposedly for renovations. This June, the property went back into foreclosure.
To Emilio Carrasquillo, head of the local office of non-profit lender Neighborhood Housing Services of Chicago (NHS), the numbers don't add up. He believes this is a case of mortgage fraud.
It may not make the blood boil like murder or rape, but mortgage fraud is a crime that cost an estimated $14 billion in 2009 and could be hampering an already fragile recovery in the housing market. The FBI has been fighting back, assembling its largest ever team to fight it. They have their work cut out for them, though, as a tsunami of foreclosures is making classic scams easier and spawning new ones to boot.
"There's no way any property in this neighborhood should sell for that kind of money," said Carrasquillo, standing outside the house on Wood Street in this poor, predominantly black area of Chicago's South Side. "Even if it was in great condition."
Carrasquillo has identified a number of properties in Back of the Yards that sold for between
$5,000 and $30,000 last year and then came back on the market for up to $385,000. He said property prices are being artificially inflated, allowing fraudsters to walk away with vast profits and making it harder for honest local people to buy a home.
Mortgage fraud takes many forms, but a well-organized scam frequently involves a limited liability company (LLC) or a "straw buyer." In this scheme, fraudsters use a fake identity or that of someone else who allows them to use their credit status in return for a fee. The seller pockets the money the buyer borrows from a lender to pay for the home. The buyer never makes a mortgage payment and the property goes into foreclosure.
In other words, the money simply disappears, leaving the lender with a large loss. Since the U.S. government is now backing much of the mortgage market in the absence of private investors, that means "taxpayers are ultimately on the hook for fraud," said Ann Fulmer, vice president of business relations at fraud-prevention company Interthinx.
Back of the Yards was hit by fraud during the housing boom and Carrasquillo says the glut of foreclosures is now making it easier for scammers to pick up properties for a song and flip them for phenomenal profits.
Drug dealers and gang members have taken over abandoned houses, many adorned with spray-painted gang signs. Prior to touring the area, Carrasquillo attached two magnetic signs touting the NHS logos on his minivan's doors to show he is not a police officer. He said he also prefers touring in the morning, as drug dealers and "gangbangers" tend not to be early risers.
"These properties are just going to sit there, boarded up, broken into and a magnet for crime," he said. "And that makes our job of trying to stabilize this neighborhood so much harder."
CRACKDOWN NETS MORE REPORTS OF FRAUD
The U.S. Federal Bureau of Investigation said in a report released on June 17 that suspicious activity reports (SARs) related to mortgage fraud rose 5 percent in 2009 to around 67,200, up from 63,700 the year before. The number had tripled from 22,000 in 2005 and the number of SARs for the first three months of 2010 hit nearly 38,000.
"We don't see the number declining while foreclosures remain so high," said Sharon Ormsby, section chief of the FBI's financial crimes section.
Robb Adkins, executive director of the Financial Fraud Enforcement Task Force, is known as U.S. President Barack Obama's financial fraud czar. He describes mortgage fraud as "pervasive" and fears it is exacerbating the nation's real estate woes. "That, in turn, could act as an anchor on the economic recovery," he said.
For the housing market to recover, potential homeowners need confidence in home prices and investors need confidence to get back into the secondary mortgage market, Adkins explained.
Since the subprime meltdown, a wide variety of scams have come to the fore. They include big cases like that of Lee Farkas, the former head of now bankrupt mortgage lender Taylor, Bean & Whitaker Mortgage Corp, charged in June with fraud that led to billions of dollars of losses. The scheme involved the misappropriation of funds from multiple sources, including a lending facility that had received funding from Deutsche Bank and BNP Paribas.
That appears to be the scam of choice. On July 22, for instance, seven defendants were indicted in Chicago in a $35 million mortgage fraud scheme involving 120 properties from 2004 to 2008 using straw buyers. Of the half dozen properties listed in the indictment, two were in Back of the Yards.
In the mid-2000s, the availability of easy money, poor due diligence by lenders and low- or no-documentation loans, acted as a magnet for fraudsters, who used identity theft and other scams to bag large sums of cash.
"During the boom it was almost like people in the real estate market could do no wrong," said Ohio Attorney General Richard Cordray. "As ever more money rushed in, it attracted a lot of people who engaged in shady behavior."
Instead of leaving them without a market, the crash has instead provided fraudsters with a glut of foreclosures, stricken borrowers and desperate lenders to take advantage of.
"There were plenty of opportunities for fraud on the way up and there are plenty on the way down," said Clifford Rossi, a former chief credit officer at Citigroup and now a teaching fellow at the University of Maryland in College Park.
Alongside familiar scams like property flipping, the crash has added new terms to the lexicon: short sale fraud, builder bailouts and flopping. Rescue scams targeting struggling homeowners with false promises of help are also on the rise.
If some of the mechanisms are new, a lot of the fraudsters are not: in many cases, they turn out to be mortgage brokers, appraisers, real estate agents or loan officers. "Because they're insiders, they see exactly what's happening and they're able to stay one step ahead of the game," said Todd Lackner, a fraud investigator in San Diego. "They're the same people who were committing fraud during the boom and they were never caught or prosecuted."
BACK TO THE YARDS
Just a stone's throw from downtown Chicago, Back of the Yards is the setting for Upton Sinclair's classic 1906 novel "The Jungle," a tale of grueling hardship and worker exploitation at the city's stockyards. The book includes an act of mortgage fraud against an unsuspecting Lithuanian family.
"Mortgage fraud is nothing new," said Christopher Wagner, co-managing attorney of the Ohio Attorney General's Cincinnati office. "It's been around for a long time."
Saul Alinsky, considered the founder of modern community organizing, started out in Back of the Yards in the 1930s. Decades later, a young community organizer named Obama got his start near here.
The neighborhood has always been poor, but south of the old railway tracks at W 49th St, the housing crisis' legacy of empty lots and boarded-up homes is evident on every block. There are few stores and services available -- in four separate visits for this story, no police vehicles were sighted.
"This is what we refer to as a 'resource desert,'" Carrasquillo said. "When no one pays attention to an area like this, it makes it easier to get away with fraud."
Marni Scott, executive vice president for credit at Troy, Michigan-based lender Flagstar Bancorp, says there are virtually no untainted sales in the area. "There are no cases of Mr and Mr Jones selling to Mr and Mrs Smith."
"We see cases of mortgage fraud around the country," she added. "But there's nothing out there that could match the mass-production, assembly-line fraud that's going on here."
In 2008 Flagstar instituted a rule whereby any loan applications here and in parts of Atlanta -- another fraud hot spot -- must be approved by Scott and the lender's chief appraiser. In a Webex presentation, Scott rattles through a number of properties snapped up for pennies on the dollar in 2009 and then sold for around $360,000.
She provides an underwriter's-eye-view of one property, on the 51st block of South Marshfield Avenue, sold in foreclosure in July 2009 for $33,000. In January of this year Flagstar received a loan application to buy the house for $355,000.
The property appraisal -- compiled by an appraiser who Scott believes never visited the area -- showed four nearby comparable properties of around the same age (100 plus years) sold recently for around $360,000. The trick to this kind of scheme is engineering the sale of the first few fraudulently overvalued properties to get "comps" -- comparable values -- to fool appraisers and underwriters alike.
"Miraculously, all of these properties were all within a very narrow price range," Scott said with weary sarcasm. "This is a perfect appraisal for an underwriter. If you are an underwriter sitting in Kansas or California it all looks fairly straightforward so you can just hit the button and approve it."
Using a $5 product called LoanIQ from U.S. title insurer First American Financial Corp called LoanIQ, Flagstar determined the application itself was fraudulent and there was a foreclosure rate in the area of nearly 60 percent. What is more, property prices here spiked 84 percent last year after 44 percent and 26 percent declines in 2008 and 2007.
"No neighborhood should look like this," said Scott, who declined the application.
Last April, however, another lender approved a loan application for $335,000 on the same property from the same people.
FORECLOSURE MAGNET
Reports this year from Interthinx, CoreLogic Inc and the Mortgage Asset Research Institute (MARI) -- which all provide fraud prevention tools for lenders -- show foreclosure hotspots Florida, California, Arizona and Nevada are also big mortgage fraud markets.
MARI said in its April report that reported mortgage fraud and misrepresentation rose 7 percent in 2009, adding fraud "continues to be a pervasive issue, growing and escalating in complexity."
Denise James, director of real estate solutions at LexisNexis Risk Solutions and one of the author's reports, said reported fraud will continue to rise throughout 2010.
In its first-quarter report, Interthinx said its Mortgage Fraud Risk Index rose 4 percent to 151, the first time it had passed 150 since 2004. A figure of 100 on the index would indicate virtually no risk of fraud.
According to various estimates, the 30310 ZIP code in Atlanta is one of the worst in the country. An analysis of that ZIP prepared for Reuters by Interthinx showed a fraud index of 414, making it the eighth worst ZIP code in the country. Back of the Yards -- ZIP code 60609 -- had an index of 309.
"In some neighborhoods in Atlanta there hasn't been a clean transaction in 10 years," interthinx's Fulmer said.
In 2005 local residents here formed the 30310 Fraud Task Force. Members sniff out potential signs of fraud -- such as repeated property flipped -- and report them directly to the FBI and local authorities. Information from the task force led to the arrest of a 12-member mortgage fraud ring on September 15, 2008 -- better known in the annals of the financial crisis as the day Lehman Brothers filed for Chapter 11 bankruptcy protection.
Brent Brewer, a civil engineer and task force member, said the arrests had a noticeable impact on fraud in the area. "It made a statement that if you come here to commit fraud there's a good chance you'll get caught," he said.
But Brewer harbors no illusions the fraudsters are gone. "There's no way they can catch everyone who's involved in fraud. But if you're dumb, greedy or desperate, you're going to get caught."
FBI GETTING INTERESTED
Law enforcement has come a long way in combating mortgage fraud, though officials freely admit that's not saying much.
Ben Wagner, U.S. attorney for the eastern district of California, said as mortgages are regulated at the state and local level, for years there was little federal interference. Prior to the recent boom, he said, fraud simply "was not identified as a huge problem."
"There has been a little bit of a learning curve," Wagner said. "This was not something federal prosecutors had much familiarity with. Now we're getting pretty good at it."
Half of Wagner's 50 or so criminal prosecutors focus on white-collar crime including fraud. Two new prosecutors will be dedicated solely to mortgage fraud.
Now mortgage fraud is a known quantity, Wagner said all U.S. prosecutors tackling it are linked by Internet groups. The May edition of the bi-monthly "United States Attorneys' Bulletin" (published by the Executive Office for United States Attorneys) was devoted entirely to mortgage fraud.
The FBI has more than 350 out of its 13,000 agents devoted to mortgage fraud. There are also now 67 regular mortgage fraud working groups and 23 task forces at the federal, state and local level. "This is the broadest coalition of law enforcement ever brought together to fight fraud," Adkins said. He admitted, however that limited resources to fight fraud still pose a challenge.
In June U.S. authorities said 1,215 people had been charged in a joint crackdown on mortgage fraud. Many of the charges were for crimes committed years ago.
Latour "LT" Lafferty, the head of the white-collar crimes practice at law firm Fowler White Boggs in Tampa, Florida, said fraud in the boom was so pervasive that many crimes will go undetected and unprosecuted. "Everyone had their hands in the cookie jar during the boom," he said. "Lenders, brokers, Realtors, homeowners ... everyone."
OLD DOG, NEW TRICKS
A new mortgage scam born out of the housing crisis is short sale fraud. Short sales are a way for stricken homeowners to get out of their homes, whereby in agreement with their lender they sell their home for less than they paid for it and are forgiven the remainder.
But they have also proven a tempting target for fraudsters, usually involving the Realtor in the deal. Lackner, the fraud investigator in San Diego, described a typical scheme: "Let's say you have a property up for short sale that you know as a Realtor you can get $350,000 for," he said. "But you arrange a low-ball appraisal of $200,000 and have someone make an offer of that amount."
"The Realtor says to the bank this is the best offer you're going to get, take it or leave it," he added. "Then they turn around and flip it immediately for $350,000. In cases like this, the lender is probably already stuck with a lot of foreclosed properties and doesn't want more. So they go for it."
Where the process of fraudulent appraisals overvaluing a property for sale is "flipping," deliberately undervaluing them has become known as "flopping."
Bob Hertzog, a designated real estate broker at Summit Home Consultants in Scottsdale, Arizona, says he gets emails from unknown firms offering to act as a "third-party negotiator" between the seller and the bank with what turns out to be a grossly undervalued bid.
Hertzog has tried tracing some of the LLCs, but describes a chain of front companies leading nowhere.
"The problem is it is so cheap and easy to set up an LLC online that sometimes they are set up for just one transaction," Flagstar's Scott said. "And if they're set up using fake information or a stolen identity, it's very hard to trace who's behind them."
Many web sites boast they can help you form an LLC online for under $50.
Another common target for fraud is the reverse mortgage. Designed for seniors to release equity from a property, according to financial fraud czar Adkins, they have been used to commit a "particularly egregious type of fraud."
Fraudsters commonly forge their victims' signatures and, without their knowledge or consent, divert funds to themselves. The scam is worst in Florida, a magnet for American retirees.
"Unfortunately it is often not until the death of the victim that their heirs realize that all of the equity has been stripped out of the property by fraudsters," Adkins said.
But Arthur Prieston, chairman of the Prieston Group, which sells mortgage fraud insurance and has launched a patented system to rate lenders on the quality of their loans, said most mortgage fraud he comes across consists of ordinary people fudging figures to get a loan. "The vast majority of the fraud we see is where people intend to occupy a property, but can't qualify for a loan," he said. "They'll do anything to get that loan approved."
He added this is achieved with the active collusion of Realtors, brokers and lenders looking to make a sale and keep the market moving. Before his firm issues fraud insurance it reviews a lender's loans and between 20 percent and the 30 percent of the loans reviewed so far have had "red flags."
The problem with assessing the extent of the damage caused by mortgage fraud is that it's not just the dollar amount of the fraud itself. It also hits property values, property taxes and often causes crime to rise.
"Most people interpret white collar crime as a victimless crime, where the bank pays the price and no one else," said Andrew Carswell, associate professor of housing and consumer economics, University of Georgia. "This is a mistaken perception ... neighborhoods and homeowners pay the price."
UNCOVERING THE SCAMS
Companies like Interthinx, CoreLogic and DataVerify all have data-driven fraud prevention tools for lenders. Interthinx's program, for instance, identifies some 300 "red flags" including a buyer's identity and recent sales in a neighborhood, while CoreLogic uses pattern recognition technology. CoreLogic also aims to bring a short sale fraud product to the market soon.
Interthinx's Fulmer said regardless of the source, on average solid fraud prevention tools can be had for as little as $10 to $15 per loan. "The tools out there enable us to see what's going on out there right now in real time," she said.
Apart from fraud insurance, Prieston Group's new credit rating system for lenders should have
enough data within the next year to start providing valid ratings.
Prieston said the firm's insurance product is growing at more than 100 percent per month, while CoreLogic's Tim Grace said the firm's fraud prevention tool business was booming.
Many lenders are also sharing more information about bad loans, though LexisNexis' James said it is not nearly enough. "If lenders don't start to share more information then fraudsters will continue to go from bank to bank to bank until they're caught," she said.
The University of Maryland's Rossi said what the industry needs is a "central data warehouse" to combat fraud. "There has been a failure of collective data warehousing across the industry," he said.
Mortgage Bankers Association (MBA) spokesman John Mechem said members have no plans for a central database, but added "we view our role as being to facilitate and encourage information sharing in the industry."
The U.S. Patriot Act of 2001 allows lenders a safe harbor to share information, but does not mandate it. "We always encourage more information sharing," said Steve Hudak, a press officer at the U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCen. "As of now, however, this is an entirely voluntary process."
But Rossi said the government should step in. "The Federal government is probably going to have to take the initiative because I don't see the industry doing this one on its own," he said. "I am personally not a fan of big government, but we need more information sharing."
Ultimately, the expectation is lenders will be forced either to improve due diligence, or face being pushed out of business as investors burned by sloppy underwriting during the boom urge them to adopt fraud prevention tools.
"Investor scrutiny is going to be higher than it ever has been," Rossi said. "The days of a small amount of due diligence are gone."
Many investors are also investigating their losses and forcing lenders to repurchase bad loans. This is resulting in "thousands of repurchases a month," according to Prieston.
"When it comes to small lenders with only a few million dollars of loans, ten repurchases will absolutely put some of them out of business," he said.
The government now guarantees more than 90 percent of the mortgage market and forms almost the entire secondary mortgage market, as private investors have not returned. The FHA, Fannie Mae and Freddie Mac are thus seen as playing an instrumental role in pushing improved due diligence to clean up the government's multi-trillion dollar portfolio.
FHA commissioner David Stevens was appointed in July 2009. Since then the FHA has shut down 1,100 lenders, after decades in which the government closed an average of 30 lenders annually. He says most lenders he deals with are of a "very high quality," but that "there are still lenders that either don't have controls in place or are proactively engaging in practices that pose a risk to the FHA."
Stevens does not expect to shut down lenders at the same rate as the past year, but added "the number will be much higher than the historical average."
CoreLogic's Grace said most large lenders have the tools in place to combat mortgage fraud, but admitted he was concerned about some smaller lenders. "The next shakeout of weak lenders will take place over the next 12 to 24 months," he said.
The MBA's Mechem said the U.S. mortgage market must be cleaned up if it is ever to return to
normal. "The one thing private investors need to get back into the secondary market is confidence," he said. "And investors won't risk buying mortgages if they don't have confidence in the quality of the loans. Restoring that confidence is going to play a pivotal role in restoring the markets."
In the meantime, mortgage fraud is expected to cause more problems in areas like Back of the Yards in Chicago.
Three doors down from the boarded-up, foreclosed property that has aroused Carrasquillo's suspicions, father-of-three Oti Cardoso says he and his neighbors try to cut the grass at the abandoned properties on his block and to keep thieves out. But he has heard most empty houses end up occupied by gang members.
"I want my children to be safe, I don't want drug dealers here," he said. "I have tried to find the owner of these houses so I can work with them to help keep their homes clean."
"If they only knew what was happening here," he added, "I'm sure they would want to do what was right."
By Nick Carey
(Additional reporting by Al Yoon, editing by Claudia Parsons and Jim Impoco.)
Sunday, February 27, 2011
Friday, February 25, 2011
Fence-Sitting Homebuyers Face FHA Fee Hike Deadline
Here's a story from Mortgage News Daily regarding the upcoming FHA changes in the mortgage insurance premium.
http://www.mortgagenewsdaily.com/02242011_fha_volume.asp
Both applications for FHA-guaranteed mortgages and FHA endorsements were lower in January than in the previous month or in January 2010. Reduced loan demand was reflected across all subsets, purchases, refinances and mortgages for first-time buyers.
Applications for FHA mortgages totaled 103,991 in January compared to 112,500 in December and 126,043 a year earlier. The year-over-year figure reflects a drop of 17.5 percent. There were 55,417 applications for mortgages to purchase homes and 41,178 to refinance. This was a 3.4 percent decrease in purchase applications since December and a 21.6 percent change from January 2010. Applications to refinance were down 12.1 percent quarter-to-quarter and 16.9 percent over the longer period.
FHA endorsed 119,521 mortgages in January compared to 133,603 in December and 158,612 in January 2010. January numbers are lower by 10.5 percent and 24.6 percent respectively. Purchase mortgages totaled 63,887 compared to 66,165 (-3.4 percent) and 90,030 (-29 percent) in the earlier periods. 47,429 (74.2 percent) of the purchase mortgages went to first time buyers compared to 48,539 (73.4 percent) and 90,030 (56.8 percent) in December and in January 2010.
Home Equity Conversion (HECM) or so-called Reverse Mortgages for senior citizens represented 5.4 percent of FHA endorsements compared to 4.9 percent in December and 4.8 percent a year earlier.
Year-to-date figures also show a substantial decrease in activity between FY 2010 and FY 2011. Total applications are 26.7 percent lower with purchase mortgages down 34.3 percent and refinancing off 22.1 percent. Total endorsements are 24.1 percent off of the 2010 pace with most of the fall-off accounted for by the purchase sector which was down 34 percent. Refinancing endorsements dropped 8.1 percent and HECM endorsements are at -23.3 percent the 2010 level.
Mortgage Insurance -in-Force in January totaled 5,882,984, an increase of 1 percent month-over-month and 16.3 percent over the January 2010 total of 5,917,805. The total unpaid principal balance amount is $947.8 billion. The portfolio has a current delinquency rate of 8.9 percent with 612,443 loans over 90 days delinquent. In December the rate was 8.8 percent and one year earlier it was 9.2 percent.
The weighted average FICO score for FHA mortgages was 703, one point higher than the previous month and nine points above the score a year earlier.
FHA took an average of 5,735 applications per day in January. The average processing time from application to closing was 8.1 weeks, up from 7.6 in December but about the same as a year earlier and 4.0 weeks from closing to endorsement, 1.3 week less than a year ago.
These figures are from the Single-Family Operations Report for January issued this week by the Department of Housing and Urban Development. FHA mortgages have risen dramatically in popularity since the beginning of the housing crisis but the agency has also raised upfront and annual premiums in the past year. Declining loan demand in January is no surprise given the uptick in mortgage rates we witnessed. Rates are now off those highs but loan production has yet to pickup. We are curious to see how the FHA's decision to raise the annual mortgage insurance premium will impact loan demand before the new fee structure goes into effect on April 18th.
Perhaps buyers will rush to beat the deadline?
http://www.mortgagenewsdaily.com/02242011_fha_volume.asp
Both applications for FHA-guaranteed mortgages and FHA endorsements were lower in January than in the previous month or in January 2010. Reduced loan demand was reflected across all subsets, purchases, refinances and mortgages for first-time buyers.
Applications for FHA mortgages totaled 103,991 in January compared to 112,500 in December and 126,043 a year earlier. The year-over-year figure reflects a drop of 17.5 percent. There were 55,417 applications for mortgages to purchase homes and 41,178 to refinance. This was a 3.4 percent decrease in purchase applications since December and a 21.6 percent change from January 2010. Applications to refinance were down 12.1 percent quarter-to-quarter and 16.9 percent over the longer period.
FHA endorsed 119,521 mortgages in January compared to 133,603 in December and 158,612 in January 2010. January numbers are lower by 10.5 percent and 24.6 percent respectively. Purchase mortgages totaled 63,887 compared to 66,165 (-3.4 percent) and 90,030 (-29 percent) in the earlier periods. 47,429 (74.2 percent) of the purchase mortgages went to first time buyers compared to 48,539 (73.4 percent) and 90,030 (56.8 percent) in December and in January 2010.
Home Equity Conversion (HECM) or so-called Reverse Mortgages for senior citizens represented 5.4 percent of FHA endorsements compared to 4.9 percent in December and 4.8 percent a year earlier.
Year-to-date figures also show a substantial decrease in activity between FY 2010 and FY 2011. Total applications are 26.7 percent lower with purchase mortgages down 34.3 percent and refinancing off 22.1 percent. Total endorsements are 24.1 percent off of the 2010 pace with most of the fall-off accounted for by the purchase sector which was down 34 percent. Refinancing endorsements dropped 8.1 percent and HECM endorsements are at -23.3 percent the 2010 level.
Mortgage Insurance -in-Force in January totaled 5,882,984, an increase of 1 percent month-over-month and 16.3 percent over the January 2010 total of 5,917,805. The total unpaid principal balance amount is $947.8 billion. The portfolio has a current delinquency rate of 8.9 percent with 612,443 loans over 90 days delinquent. In December the rate was 8.8 percent and one year earlier it was 9.2 percent.
The weighted average FICO score for FHA mortgages was 703, one point higher than the previous month and nine points above the score a year earlier.
FHA took an average of 5,735 applications per day in January. The average processing time from application to closing was 8.1 weeks, up from 7.6 in December but about the same as a year earlier and 4.0 weeks from closing to endorsement, 1.3 week less than a year ago.
These figures are from the Single-Family Operations Report for January issued this week by the Department of Housing and Urban Development. FHA mortgages have risen dramatically in popularity since the beginning of the housing crisis but the agency has also raised upfront and annual premiums in the past year. Declining loan demand in January is no surprise given the uptick in mortgage rates we witnessed. Rates are now off those highs but loan production has yet to pickup. We are curious to see how the FHA's decision to raise the annual mortgage insurance premium will impact loan demand before the new fee structure goes into effect on April 18th.
Perhaps buyers will rush to beat the deadline?
Monday, February 14, 2011
FHA Sets New Premium Structure for 15- and 30-Year Loans to Boost Capital Reserves
Here's a story of interest from The National Mortgage Professional:
As part of ongoing efforts to strengthen the Federal Housing Administration’s (FHA) capital reserves, FHA Commissioner David H. Stevens has announced a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (0.25) on all 30- and 15-year loans. The upfront MIP will remain unchanged at one percent. This premium change was detailed in President Obama’s fiscal year 2012 budget and will impact new loans insured by FHA on or after April 18, 2011.
“After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market,” said Stevens. “This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”
The proposed change was announced last week as part of the Obama Administration’s report to Congress, which outlined the Administration’s plan to reform the nation’s housing finance system. The Administration’s housing finance plan also recommended that Congress allow the present increase in FHA conforming loan limits to expire as scheduled on Oct. 1, 2011.
This premium change enables FHA to increase revenues at a time that is critical to the ongoing stability of its Mutual Mortgage Insurance (MMI) fund, which had capital reserves of approximately $3.6 billion at the end of FY 2010. The change is estimated to contribute nearly $3 billion annually to the Fund, based on current volume projections. It is vital that HUD take action to ensure that FHA will continue to serve its dual mission of providing affordable homeownership options to underserved American families and first-time homebuyers while helping to stabilize the housing market during these tough times.
On average, new FHA borrowers will pay approximately $30 more per month. This marginal increase is affordable for almost all homebuyers who would qualify for a new loan. Existing and HECM loans insured by FHA are not impacted by the pricing change.
FHA will continue to play an important role in the nation’s mortgage market in 2011. President Obama’s FY 2012 budget projects the FHA will insure $218 billion in mortgage borrowing in 2012. These guarantees will support new home purchases and re-financed mortgages that significantly reduce borrower payments.
Click here to read FHA’s Mortgagee Letter on this premium increase.
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/11-10ml.pdf
http://nationalmortgageprofessional.com/news23623/fha-sets-new-premium-structure-15-and-30-year-loans-boost-capital-reserves
As part of ongoing efforts to strengthen the Federal Housing Administration’s (FHA) capital reserves, FHA Commissioner David H. Stevens has announced a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (0.25) on all 30- and 15-year loans. The upfront MIP will remain unchanged at one percent. This premium change was detailed in President Obama’s fiscal year 2012 budget and will impact new loans insured by FHA on or after April 18, 2011.
“After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market,” said Stevens. “This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”
The proposed change was announced last week as part of the Obama Administration’s report to Congress, which outlined the Administration’s plan to reform the nation’s housing finance system. The Administration’s housing finance plan also recommended that Congress allow the present increase in FHA conforming loan limits to expire as scheduled on Oct. 1, 2011.
This premium change enables FHA to increase revenues at a time that is critical to the ongoing stability of its Mutual Mortgage Insurance (MMI) fund, which had capital reserves of approximately $3.6 billion at the end of FY 2010. The change is estimated to contribute nearly $3 billion annually to the Fund, based on current volume projections. It is vital that HUD take action to ensure that FHA will continue to serve its dual mission of providing affordable homeownership options to underserved American families and first-time homebuyers while helping to stabilize the housing market during these tough times.
On average, new FHA borrowers will pay approximately $30 more per month. This marginal increase is affordable for almost all homebuyers who would qualify for a new loan. Existing and HECM loans insured by FHA are not impacted by the pricing change.
FHA will continue to play an important role in the nation’s mortgage market in 2011. President Obama’s FY 2012 budget projects the FHA will insure $218 billion in mortgage borrowing in 2012. These guarantees will support new home purchases and re-financed mortgages that significantly reduce borrower payments.
Click here to read FHA’s Mortgagee Letter on this premium increase.
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/11-10ml.pdf
http://nationalmortgageprofessional.com/news23623/fha-sets-new-premium-structure-15-and-30-year-loans-boost-capital-reserves
Saturday, February 12, 2011
White House's unwritten mortgage memo: Act now
Here's an interesting article from Reuters about the mortgage market and expectations on interest rates.
http://www.reuters.com/article/2011/02/11/us-usa-housing-consumer-idUSTRE71A65P20110211
(Reuters) - The Obama Administration's newly unveiled housing finance plan may have clouded the picture for policymakers, lenders and bond buyers, but it made the future for borrowers starkly clear: It's going to cost more to get a home loan.
Mortgages have already become more expensive in recent weeks, as Fannie Mae and Freddie Mac began adding risk fees to almost all of the loans they sponsor. Average rates on 30-year fixed rate-loans have already moved from 4.4 percent in November to 5.2 percent now, according to Mortgage Marvel, a loan comparison web site.
In a much-awaited report released Friday, the administration proposed winding down the role of the two government-sponsored mortgage repackagers and left open for prolonged Washington debate what would remain in their place.
It also called for higher down payments, a lower cap on the amount of mortgage that could be guaranteed and another increase in the fees Freddie and Fannie charge in the short term. All of those measures are likely to steepen the cost of securing a home mortgage.
"Rates are probably on the rise, due to the increases in fees," said Keith
Gumbinger of HSH Associates, a mortgage research firm. "But will the borrowing process get better, faster or easier as a result of reforms? No."If you can effect a transaction now, it's probably not a bad idea," Gumbinger said.
Rates are also likely to rise as the economy improves and the rock-bottom interest rates that have been protected by the Federal Reserve Board edge up.
The rising credit market rates will have a bigger effect on mortgages than the winding down of Freddie and Fannie, said Scott Happ, president of Mortgagebot, a company that builds and runs mortgage web sites.
The cost of loans that are not handled by the guaranteed mortgages and those that aren't guaranteed is roughly 0.6 percentage points now, he said.
RISING RATES, FEWER OPTIONS
It's not just low rates, but also mortgage products that could disappear as reforms worked their way through the system, some analysts believe. The end of U.S. loan program -- one of the options outlined in the White House report -- "almost certainly will lead to fewer long term fixed rate mortgages (and) higher prices," the Consumer Federation of America said in a statement released after the report.
Home loans in Europe and Canada are dominated by variable-rate loans, for example, and it's conceivable that the long-term fixed-rate loan could become much less common -- or even extinct -- in the U.S., if lenders don't want to offer them without guarantees.
A more likely scenario is that fixed-rate loans would remain, but become relatively more costly, said Sam Garcia of Mortgage Daily, a trade publication.
Homeowners who haven't already nailed down long-term low-rate loans may want to jump at the chance with a refinance now, even if it means bringing cash to the table to replenish equity that may have disappeared in the housing market's price decline.
SHORTER DURATIONS, MORE SAVINGS
Some advisers say the best way to save money on a mortgage could be to look at shorter-term financing, instead of focusing on rising rates and fees that they cannot control. The pullback of Federal subsidies might encourage more prudent borrowing.
"The best way to build equity is with a 15-year loan. Within the first five years of the loan, "the additional equity built (compared to a 30-year loan) is really significant," he said.
Short-term borrowers get a rate break, too, since rates on 15-year fixed-rate loans are running almost 0.5 percentage points below the rates on 30-year mortgages.
The biggest impact may be on pricey homes. The ceiling on loans guaranteed by Fannie and Freddie, currently $729,750, is scheduled to drop to $625,500 on October 1. The White House supports that size reduction.
For buyers, it could lead to a jump in offerings on the market as sellers try to get homes sold before the cap takes effect.
(Reporting by Linda Stern; Editing by Richard Satran)
http://www.reuters.com/article/2011/02/11/us-usa-housing-consumer-idUSTRE71A65P20110211
(Reuters) - The Obama Administration's newly unveiled housing finance plan may have clouded the picture for policymakers, lenders and bond buyers, but it made the future for borrowers starkly clear: It's going to cost more to get a home loan.
Mortgages have already become more expensive in recent weeks, as Fannie Mae and Freddie Mac began adding risk fees to almost all of the loans they sponsor. Average rates on 30-year fixed rate-loans have already moved from 4.4 percent in November to 5.2 percent now, according to Mortgage Marvel, a loan comparison web site.
In a much-awaited report released Friday, the administration proposed winding down the role of the two government-sponsored mortgage repackagers and left open for prolonged Washington debate what would remain in their place.
It also called for higher down payments, a lower cap on the amount of mortgage that could be guaranteed and another increase in the fees Freddie and Fannie charge in the short term. All of those measures are likely to steepen the cost of securing a home mortgage.
"Rates are probably on the rise, due to the increases in fees," said Keith
Gumbinger of HSH Associates, a mortgage research firm. "But will the borrowing process get better, faster or easier as a result of reforms? No."If you can effect a transaction now, it's probably not a bad idea," Gumbinger said.
Rates are also likely to rise as the economy improves and the rock-bottom interest rates that have been protected by the Federal Reserve Board edge up.
The rising credit market rates will have a bigger effect on mortgages than the winding down of Freddie and Fannie, said Scott Happ, president of Mortgagebot, a company that builds and runs mortgage web sites.
The cost of loans that are not handled by the guaranteed mortgages and those that aren't guaranteed is roughly 0.6 percentage points now, he said.
RISING RATES, FEWER OPTIONS
It's not just low rates, but also mortgage products that could disappear as reforms worked their way through the system, some analysts believe. The end of U.S. loan program -- one of the options outlined in the White House report -- "almost certainly will lead to fewer long term fixed rate mortgages (and) higher prices," the Consumer Federation of America said in a statement released after the report.
Home loans in Europe and Canada are dominated by variable-rate loans, for example, and it's conceivable that the long-term fixed-rate loan could become much less common -- or even extinct -- in the U.S., if lenders don't want to offer them without guarantees.
A more likely scenario is that fixed-rate loans would remain, but become relatively more costly, said Sam Garcia of Mortgage Daily, a trade publication.
Homeowners who haven't already nailed down long-term low-rate loans may want to jump at the chance with a refinance now, even if it means bringing cash to the table to replenish equity that may have disappeared in the housing market's price decline.
SHORTER DURATIONS, MORE SAVINGS
Some advisers say the best way to save money on a mortgage could be to look at shorter-term financing, instead of focusing on rising rates and fees that they cannot control. The pullback of Federal subsidies might encourage more prudent borrowing.
"The best way to build equity is with a 15-year loan. Within the first five years of the loan, "the additional equity built (compared to a 30-year loan) is really significant," he said.
Short-term borrowers get a rate break, too, since rates on 15-year fixed-rate loans are running almost 0.5 percentage points below the rates on 30-year mortgages.
The biggest impact may be on pricey homes. The ceiling on loans guaranteed by Fannie and Freddie, currently $729,750, is scheduled to drop to $625,500 on October 1. The White House supports that size reduction.
For buyers, it could lead to a jump in offerings on the market as sellers try to get homes sold before the cap takes effect.
(Reporting by Linda Stern; Editing by Richard Satran)
Wednesday, February 9, 2011
Mortgage Rates: Borrowing Costs Up Five Days in a Row
Now is the time to purchase or refinance your home because it appears rates are headed up.
Here's a good story from Mortgage News Daily
HTTP://WWW.MORTGAGENEWSDAILY.COM/CONSUMER_RATES/198079.ASPX
Mortgage Rates: Borrowing Costs Up Five Days in a Row
BY ADAM QUINONES
Home loan borrowing costs have extended their losing streak to five days. "Best Execution" mortgage rates didn't move higher today though, just the closing costs associated with those quotes.
The "Best Execution" conventional 30 year fixed mortgage rate is still split between 5.125% and 5.25%. If you meet the requirements outlined in the disclaimer below, you should be able to execute a loan commitment at 5.25% with lender credits. 5.125% is on the board in some spots of the country but the permanent buydown isn't worth it to every applicant. We would generally advise the permanent floatdown if you plan to live in your house for longer than 5 years. 5.00% is still out there as well but will definitely require points paid at the closing table. Ask your originator to run a breakeven analysis on any origination points they might require for the permanent float down.
On FHA/VA 30 year fixed "Best Execution" is priced between 4.875% and 5.00% with the same comments above re: the split and closing cost credits. 15 year fixed conventional loans are best priced between 4.25% and 4.375%. Five year ARMS at 3.625-3.75%.
The primary mortgage market is very segmented at the moment because of a pending shift in the production mortgage-backed security coupon in the secondary mortgage market. Some lenders have already shifted while others are taking their time.
"Bext Execution" is the most efficient combination of note rate and points paid at closing. This note rate is determined based on the time it takes to recover the points you paid at closing (discount) vs. the monthly savings of permanently buying down your mortgage rate by 0.125%. When deciding on whether or not to pay points, the borrower must have an idea of how long they intend to keep their mortgage. For more info, ask you originator to explain the findings of their "breakeven analysis" on your permanent rate buydown costs.
Important Mortgage Rate Disclaimer: The "Best Execution" loan pricing quotes shared above are generally seen as the more aggressive side of the primary mortgage market. Loan originators will only be able to offer these rates on conforming loan amounts to very well-qualified borrowers who have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recording. Don't forget the intense fiscal frisking that comes along with the underwriting process.
OUR GUIDANCE FROM YESTERDAY STILL APPLIES TODAY: We do expect borrowing costs to rise before a sustainable recovery rally is considered in the secondary mortgage market. We anticipate the first real chance for notable improvements will be seen on Thursday.
What MUST be considered BEFORE one thinks about capitalizing on a rates recovery?
1. WHAT DO YOU NEED? Rates might not recover as much as you want/need.
2. WHEN DO YOU NEED IT BY? Rates might not recover as fast as you want/need.
3. HOW DO YOU HANDLE STRESS? Are you ready for MORE VOLATILITY in the bond market
Here's a good story from Mortgage News Daily
HTTP://WWW.MORTGAGENEWSDAILY.COM/CONSUMER_RATES/198079.ASPX
Mortgage Rates: Borrowing Costs Up Five Days in a Row
BY ADAM QUINONES
Home loan borrowing costs have extended their losing streak to five days. "Best Execution" mortgage rates didn't move higher today though, just the closing costs associated with those quotes.
The "Best Execution" conventional 30 year fixed mortgage rate is still split between 5.125% and 5.25%. If you meet the requirements outlined in the disclaimer below, you should be able to execute a loan commitment at 5.25% with lender credits. 5.125% is on the board in some spots of the country but the permanent buydown isn't worth it to every applicant. We would generally advise the permanent floatdown if you plan to live in your house for longer than 5 years. 5.00% is still out there as well but will definitely require points paid at the closing table. Ask your originator to run a breakeven analysis on any origination points they might require for the permanent float down.
On FHA/VA 30 year fixed "Best Execution" is priced between 4.875% and 5.00% with the same comments above re: the split and closing cost credits. 15 year fixed conventional loans are best priced between 4.25% and 4.375%. Five year ARMS at 3.625-3.75%.
The primary mortgage market is very segmented at the moment because of a pending shift in the production mortgage-backed security coupon in the secondary mortgage market. Some lenders have already shifted while others are taking their time.
"Bext Execution" is the most efficient combination of note rate and points paid at closing. This note rate is determined based on the time it takes to recover the points you paid at closing (discount) vs. the monthly savings of permanently buying down your mortgage rate by 0.125%. When deciding on whether or not to pay points, the borrower must have an idea of how long they intend to keep their mortgage. For more info, ask you originator to explain the findings of their "breakeven analysis" on your permanent rate buydown costs.
Important Mortgage Rate Disclaimer: The "Best Execution" loan pricing quotes shared above are generally seen as the more aggressive side of the primary mortgage market. Loan originators will only be able to offer these rates on conforming loan amounts to very well-qualified borrowers who have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recording. Don't forget the intense fiscal frisking that comes along with the underwriting process.
OUR GUIDANCE FROM YESTERDAY STILL APPLIES TODAY: We do expect borrowing costs to rise before a sustainable recovery rally is considered in the secondary mortgage market. We anticipate the first real chance for notable improvements will be seen on Thursday.
What MUST be considered BEFORE one thinks about capitalizing on a rates recovery?
1. WHAT DO YOU NEED? Rates might not recover as much as you want/need.
2. WHEN DO YOU NEED IT BY? Rates might not recover as fast as you want/need.
3. HOW DO YOU HANDLE STRESS? Are you ready for MORE VOLATILITY in the bond market
Sunday, February 6, 2011
Averting another mortgage crisis
Here's a good article from the Washington Post.
http://www.washingtonpost.com/wp-dyn/content/article/2011/02/06/AR2011020603413.html
THE DODD-FRANK financial overhaul law required the Obama administration to produce a plan by no later than Jan. 31 for reforming the nation's mortgage finance system, which is dominated by the crippled government-sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac. Fannie and Freddie, currently operating under direct federal control, back about 90 percent of all new U.S. mortgages, but their taxpayer-covered losses have hit $150 billion - and are rising. Their combined debt, guaranteed by taxpayers and held in large part by China and Japan, is more than $1.5 trillion. But the administration still hasn't come out with anything, though we're told it's forthcoming.
Meanwhile, let us take a shot. The first question is why the United States might need a government role in securitizing mortgages in the first place. For many years, during the long reign of Fannie and Freddie, the answer was: to promote homeownership by keeping home mortgage finance cheap and available, even during the economy's cyclical downturns. Only a government backstop, the argument goes, can compensate lenders for the risk of lending to homeowners at a fixed rate for 30 years in a world where rates fluctuate. Homeownership does help instill thrifty habits and solidify communities, but it can be taken too far. And, in recent decades, it was. Along with other policies such as the home mortgage interest deduction and credit allocation goals for borrowers with low incomes, the GSEs helped fuel unsustainable over-investment in housing.
How unsustainable? The national homeownership rate today has slipped back to its 1998 level, according to the Census Bureau. In terms of building community, etc., it's as if the past 13 years never happened, except for the catastrophic losses to taxpayers - and home buyers. It might be more accurate to say that federal housing policy has helped destroy communities.
Does this prove that all government intervention is bound to fail or merely that the Fannie-Freddie model was flawed? The GSEs were government-chartered, which gave them access to cheap capital based on the assumption by investors that they would be bailed out in a crisis; yet they were also privately owned, which drove them to maximize profits. In short, they had both the incentive and the capacity to take on excessive risk. One proposal for reforming, but not ending, government-backed securitization would abolish the GSEs and replace them with private firms that would package and sell mortgage-backed securities with an explicit government guarantee. The firms would pay the federal government for the guarantee; those fees, in turn, would fill a crisis bailout fund that distressed entities could draw on if their own reserves ran out. The institutions would serve only "prime" borrowers - those with high credit scores and plenty of equity.
This concept, various iterations of which are circulating on Capitol Hill, the think tanks and K Street, is an improvement over Fannie and Freddie in that it replaces a murky public-private nexus with transparent rules. But there's a problem, as the GSEs' current top regulator, Edward J. DeMarco, told Congress in September: "First, the presumption behind the need for an explicit federal guarantee is that the market either cannot evaluate and price the tail risk of mortgage default . . . or cannot manage that amount of mortgage credit risk on its own. But we might ask whether there is reason to believe that the government will do better? If the government backstop is underpriced, taxpayers eventually may foot the bill again." Indeed, the experience of Fannie and Freddie, which organized a fearsome lobby to protect and expand their business, suggests that the new government-backed system will quickly come under interest-group pressure to reduce the guarantee fee, steer liquidity to "underserved" groups and otherwise loosen taxpayer protections - all in the name of "the American dream."
More fundamentally, this alternative does not address the question of why government should insulate housing, alone among all market sectors, from the vagaries of the business cycle. True, partly as a consequence of federal policy, home equity represents the bulk of household wealth in America; removing government backing entirely might erode it even further. Yet other countries have high rates of homeownership without government-backed mortgage securitization. If government doesn't steer capital into housing, the capital doesn't disappear; it could fund other job-creating businesses.
Congress and the administration should not settle for a second-best solution. To be sure, immediately ending Fannie and Freddie would be impractical, given the fragile market's dependence on them. But they can and should be shrunken and broken up gradually over several years, with their bad assets liquidated by the government and their good ones sold at a profit to the private sector. Thereafter, financial institutions would be free to hold loans in their portfolios or to securitize whatever loans investors want to buy - subject to the discipline of the marketplace and tight federal regulation of mortgage underwriting. Government aid to low-income home buyers would be limited to the Federal Housing Administration, whose activities are on-budget and transparent.
There are risks in this approach, of course: Big banks that entered the securitization business would get bigger, perhaps "too big to fail." But we prefer the potential risks of privatization to the proven risks of government-backed mortgage securitization. Indeed, no one is suggesting a pure "free market" approach. There should still be not only tough underwriting rules but also requirements that loan securitizers maintain adequate capital and retain some of the mortgages they securitize on their own books.
Advertised as a way to stabilize the housing market, government-backed mortgage securitization ended up distorting and destabilizing it. The resulting misallocation of resources - evident not only in today's massive bailout of Fannie and Freddie but also in the vast quantities of land, water and energy wasted on suburban sprawl from Las Vegas to Fort Lauderdale - is a true American tragedy. Today's housing crisis is an opportunity to make sure nothing like it ever happens again.
http://www.washingtonpost.com/wp-dyn/content/article/2011/02/06/AR2011020603413.html
THE DODD-FRANK financial overhaul law required the Obama administration to produce a plan by no later than Jan. 31 for reforming the nation's mortgage finance system, which is dominated by the crippled government-sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac. Fannie and Freddie, currently operating under direct federal control, back about 90 percent of all new U.S. mortgages, but their taxpayer-covered losses have hit $150 billion - and are rising. Their combined debt, guaranteed by taxpayers and held in large part by China and Japan, is more than $1.5 trillion. But the administration still hasn't come out with anything, though we're told it's forthcoming.
Meanwhile, let us take a shot. The first question is why the United States might need a government role in securitizing mortgages in the first place. For many years, during the long reign of Fannie and Freddie, the answer was: to promote homeownership by keeping home mortgage finance cheap and available, even during the economy's cyclical downturns. Only a government backstop, the argument goes, can compensate lenders for the risk of lending to homeowners at a fixed rate for 30 years in a world where rates fluctuate. Homeownership does help instill thrifty habits and solidify communities, but it can be taken too far. And, in recent decades, it was. Along with other policies such as the home mortgage interest deduction and credit allocation goals for borrowers with low incomes, the GSEs helped fuel unsustainable over-investment in housing.
How unsustainable? The national homeownership rate today has slipped back to its 1998 level, according to the Census Bureau. In terms of building community, etc., it's as if the past 13 years never happened, except for the catastrophic losses to taxpayers - and home buyers. It might be more accurate to say that federal housing policy has helped destroy communities.
Does this prove that all government intervention is bound to fail or merely that the Fannie-Freddie model was flawed? The GSEs were government-chartered, which gave them access to cheap capital based on the assumption by investors that they would be bailed out in a crisis; yet they were also privately owned, which drove them to maximize profits. In short, they had both the incentive and the capacity to take on excessive risk. One proposal for reforming, but not ending, government-backed securitization would abolish the GSEs and replace them with private firms that would package and sell mortgage-backed securities with an explicit government guarantee. The firms would pay the federal government for the guarantee; those fees, in turn, would fill a crisis bailout fund that distressed entities could draw on if their own reserves ran out. The institutions would serve only "prime" borrowers - those with high credit scores and plenty of equity.
This concept, various iterations of which are circulating on Capitol Hill, the think tanks and K Street, is an improvement over Fannie and Freddie in that it replaces a murky public-private nexus with transparent rules. But there's a problem, as the GSEs' current top regulator, Edward J. DeMarco, told Congress in September: "First, the presumption behind the need for an explicit federal guarantee is that the market either cannot evaluate and price the tail risk of mortgage default . . . or cannot manage that amount of mortgage credit risk on its own. But we might ask whether there is reason to believe that the government will do better? If the government backstop is underpriced, taxpayers eventually may foot the bill again." Indeed, the experience of Fannie and Freddie, which organized a fearsome lobby to protect and expand their business, suggests that the new government-backed system will quickly come under interest-group pressure to reduce the guarantee fee, steer liquidity to "underserved" groups and otherwise loosen taxpayer protections - all in the name of "the American dream."
More fundamentally, this alternative does not address the question of why government should insulate housing, alone among all market sectors, from the vagaries of the business cycle. True, partly as a consequence of federal policy, home equity represents the bulk of household wealth in America; removing government backing entirely might erode it even further. Yet other countries have high rates of homeownership without government-backed mortgage securitization. If government doesn't steer capital into housing, the capital doesn't disappear; it could fund other job-creating businesses.
Congress and the administration should not settle for a second-best solution. To be sure, immediately ending Fannie and Freddie would be impractical, given the fragile market's dependence on them. But they can and should be shrunken and broken up gradually over several years, with their bad assets liquidated by the government and their good ones sold at a profit to the private sector. Thereafter, financial institutions would be free to hold loans in their portfolios or to securitize whatever loans investors want to buy - subject to the discipline of the marketplace and tight federal regulation of mortgage underwriting. Government aid to low-income home buyers would be limited to the Federal Housing Administration, whose activities are on-budget and transparent.
There are risks in this approach, of course: Big banks that entered the securitization business would get bigger, perhaps "too big to fail." But we prefer the potential risks of privatization to the proven risks of government-backed mortgage securitization. Indeed, no one is suggesting a pure "free market" approach. There should still be not only tough underwriting rules but also requirements that loan securitizers maintain adequate capital and retain some of the mortgages they securitize on their own books.
Advertised as a way to stabilize the housing market, government-backed mortgage securitization ended up distorting and destabilizing it. The resulting misallocation of resources - evident not only in today's massive bailout of Fannie and Freddie but also in the vast quantities of land, water and energy wasted on suburban sprawl from Las Vegas to Fort Lauderdale - is a true American tragedy. Today's housing crisis is an opportunity to make sure nothing like it ever happens again.
Tuesday, February 1, 2011
8 Reasons To Invest In Your Home.
Here's a great article from CNN Money.
http://www.newzfor.me/news/140057238.aspx
Not long ago, you could have your big remodeling project and get your money back too. Owners recouped an average of 87% of home improvement costs at resale in 2005, according to Remodeling magazine.
But by 2010 the magazine had pegged the typical payback at just 60%. Hardly the right time to tackle the new kitchen or master bathroom you've been dreaming of, right?
Not so fast, says Kermit Baker, senior research fellow at Harvard University's Joint Center for Housing Studies.
"In many cases, these projects make more sense now than they did at the height of the market," he said.
Assuming you like what you can't change about your home -- the neighborhood, the school district, the proximity to things that matter to you -- and you're planning on staying for five or more years, improving your home is a smart move. Here's why.
1. Funding is cheap
The current economic climate sweetens the pot for people on solid financial footing.
Should I spend $60,000 to renovate my house?
"The Fed doesn't want you to save -- it wants you to put your dollars into circulation," said Keith Gumbinger, mortgage market analyst at HSH.com.
Today's historically low interest rates mean that most home-equity lines of credit are charging their floor rates (your HELOC's probably is around 3% if you've held it for a couple of years, 4% or 5% if the loan is more recent).
And with the typical bank account and money fund paying far less than 1%, drawing down your savings barely costs you anything in lost income -- just don't jeopardize your safety cushion.
2. Eager contractors are discounting
Although the construction industry rebounded somewhat last year, business is still slow. Remember when getting a contractor to call you back was a challenge?
Now the best pros in town will happily bid on your job -- and they'll probably offer you prices that are 10% to 20% below what you would have paid when real estate was going gangbusters, according to Bernard Markstein, senior economist for the National Association of Home Builders.
3. Materials have come down
The cost of building supplies has tumbled too. Plywood is down 23% since its peak in the mid-2000s. Drywall is off 29%, framing lumber 35%.
Not all raw materials prices have fallen that much: Asphalt roofing, which is made from a petroleum byproduct, is down only 7% over the past two years. Insulation -- which has been in high demand because of energy rebates and high fuel prices -- is down a mere 2% since 2006. Still, on the whole, construction supplies are bargains right now.
4. You'll cut your energy costs
You don't have to hire a green builder to see energy savings from a renovation. In a prewar house in the high-energy-cost Northeast, for example, a standard kitchen remodel could cut your utility expenses by $400 a year thanks to new insulation, windows, and appliances.
Even years of such savings will never come close to covering the project's price tag, but think of your lower electric and heating bills as an annual dividend.
5. Fixing up costs less than trading up
With the median home price down 22% since 2006, you might think this is an opportune time to trade up for the new master bathroom or other modern feature you want. After all, why not buy somebody else's remodeling headache at a discount.
But you can't assume that you'll easily sell your house in this tough market and then find a new place that has the exact features you want (and not a bunch of stuff you don't want). And moving remains far costlier than improving, said John Ranco, past president of the Greater Boston Association of Realtors.
For starters, commissions and fees to sell a $400,000 home could run $25,000.
"You can get a lot of remodeling done for that kind of money," said Ranco. "And that doesn't even include the higher price you're paying for the new house, the moving costs, or the inevitable painting and window treatments the new place will need."
6. You can keep that sub-5% mortgage
As long as you're not underwater and haven't wrecked your credit, you've been able to take advantage of recent rock-bottom interest rates to lock in a fixed-rate mortgage below 5%.
Move several years from now, and you'll have to give up that loan, probably for something in the sixes or sevens, said Harvard's Baker. That's not bad, but it could mean hundreds a month in added interest costs.
"If you can remodel your way into staying put long term, you can hold on to that once-in-a-lifetime rate," says Baker.
7. Smart projects still add value
In the post-boom era, the rule of thumb for gauging the potential payback from a home improvement is simple: If you're bringing your house in line with similar homes in the area, you'll most likely earn back the lion's share of the cost when you sell. If you're surpassing the neighborhood, you probably won't.
"Remodeling a 10-year-old kitchen because you don't like its style doesn't pay anymore," says Thomas Collimore, director of investor education for the CFA Institute. "But replacing a 1960s kitchen is a different story."
At least for the foreseeable future, buyers will either lowball their bids or pass on your house entirely unless you've already tackled this kind of deferred renovation.
8. You get to enjoy the results
When it comes time to sell your place, chances are you'll probably wind up having to do the sorely needed renovations you didn't take care of earlier. Not only does that add a huge amount of stress to the process of putting a house on the market, but you still end up spending the money (quite possibly when contractor, materials, and borrowing costs are higher).
Why not get the benefits of a new furnace or an updated powder room for you and your family instead of buying them for the house's next owners? And why not do the projects soon so you get as much time as possible to enjoy the results?
Unlike vacations, luxury cars, or other discretionary expenditures, your remodeling project might recoup a significant chunk of its cost someday.
Even so, home improvements aren't purely investment decisions -- you shouldn't redo a kitchen or bathroom in the hopes of making a profit. But if you want to upgrade the quality of your home life and you can afford the cost, it's money well spent.
http://www.newzfor.me/news/140057238.aspx
Not long ago, you could have your big remodeling project and get your money back too. Owners recouped an average of 87% of home improvement costs at resale in 2005, according to Remodeling magazine.
But by 2010 the magazine had pegged the typical payback at just 60%. Hardly the right time to tackle the new kitchen or master bathroom you've been dreaming of, right?
Not so fast, says Kermit Baker, senior research fellow at Harvard University's Joint Center for Housing Studies.
"In many cases, these projects make more sense now than they did at the height of the market," he said.
Assuming you like what you can't change about your home -- the neighborhood, the school district, the proximity to things that matter to you -- and you're planning on staying for five or more years, improving your home is a smart move. Here's why.
1. Funding is cheap
The current economic climate sweetens the pot for people on solid financial footing.
Should I spend $60,000 to renovate my house?
"The Fed doesn't want you to save -- it wants you to put your dollars into circulation," said Keith Gumbinger, mortgage market analyst at HSH.com.
Today's historically low interest rates mean that most home-equity lines of credit are charging their floor rates (your HELOC's probably is around 3% if you've held it for a couple of years, 4% or 5% if the loan is more recent).
And with the typical bank account and money fund paying far less than 1%, drawing down your savings barely costs you anything in lost income -- just don't jeopardize your safety cushion.
2. Eager contractors are discounting
Although the construction industry rebounded somewhat last year, business is still slow. Remember when getting a contractor to call you back was a challenge?
Now the best pros in town will happily bid on your job -- and they'll probably offer you prices that are 10% to 20% below what you would have paid when real estate was going gangbusters, according to Bernard Markstein, senior economist for the National Association of Home Builders.
3. Materials have come down
The cost of building supplies has tumbled too. Plywood is down 23% since its peak in the mid-2000s. Drywall is off 29%, framing lumber 35%.
Not all raw materials prices have fallen that much: Asphalt roofing, which is made from a petroleum byproduct, is down only 7% over the past two years. Insulation -- which has been in high demand because of energy rebates and high fuel prices -- is down a mere 2% since 2006. Still, on the whole, construction supplies are bargains right now.
4. You'll cut your energy costs
You don't have to hire a green builder to see energy savings from a renovation. In a prewar house in the high-energy-cost Northeast, for example, a standard kitchen remodel could cut your utility expenses by $400 a year thanks to new insulation, windows, and appliances.
Even years of such savings will never come close to covering the project's price tag, but think of your lower electric and heating bills as an annual dividend.
5. Fixing up costs less than trading up
With the median home price down 22% since 2006, you might think this is an opportune time to trade up for the new master bathroom or other modern feature you want. After all, why not buy somebody else's remodeling headache at a discount.
But you can't assume that you'll easily sell your house in this tough market and then find a new place that has the exact features you want (and not a bunch of stuff you don't want). And moving remains far costlier than improving, said John Ranco, past president of the Greater Boston Association of Realtors.
For starters, commissions and fees to sell a $400,000 home could run $25,000.
"You can get a lot of remodeling done for that kind of money," said Ranco. "And that doesn't even include the higher price you're paying for the new house, the moving costs, or the inevitable painting and window treatments the new place will need."
6. You can keep that sub-5% mortgage
As long as you're not underwater and haven't wrecked your credit, you've been able to take advantage of recent rock-bottom interest rates to lock in a fixed-rate mortgage below 5%.
Move several years from now, and you'll have to give up that loan, probably for something in the sixes or sevens, said Harvard's Baker. That's not bad, but it could mean hundreds a month in added interest costs.
"If you can remodel your way into staying put long term, you can hold on to that once-in-a-lifetime rate," says Baker.
7. Smart projects still add value
In the post-boom era, the rule of thumb for gauging the potential payback from a home improvement is simple: If you're bringing your house in line with similar homes in the area, you'll most likely earn back the lion's share of the cost when you sell. If you're surpassing the neighborhood, you probably won't.
"Remodeling a 10-year-old kitchen because you don't like its style doesn't pay anymore," says Thomas Collimore, director of investor education for the CFA Institute. "But replacing a 1960s kitchen is a different story."
At least for the foreseeable future, buyers will either lowball their bids or pass on your house entirely unless you've already tackled this kind of deferred renovation.
8. You get to enjoy the results
When it comes time to sell your place, chances are you'll probably wind up having to do the sorely needed renovations you didn't take care of earlier. Not only does that add a huge amount of stress to the process of putting a house on the market, but you still end up spending the money (quite possibly when contractor, materials, and borrowing costs are higher).
Why not get the benefits of a new furnace or an updated powder room for you and your family instead of buying them for the house's next owners? And why not do the projects soon so you get as much time as possible to enjoy the results?
Unlike vacations, luxury cars, or other discretionary expenditures, your remodeling project might recoup a significant chunk of its cost someday.
Even so, home improvements aren't purely investment decisions -- you shouldn't redo a kitchen or bathroom in the hopes of making a profit. But if you want to upgrade the quality of your home life and you can afford the cost, it's money well spent.
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