The Mortgage Guy Blog

The long awaited details on the expanded loan limits for Fannie Mae and Freddie Mac are now becoming available. Here is the latest information we have on the new jumbo loan guidelines for counties located in Connecticut.

While the limits have been approved and the matrices released, FNMA’s Desktop Underwriter (DU) and Freddie Mac’s Loan Prospector (LP) do not reflect these changes or offer pricing for these loans. We expect those details to follow shortly. DU and LP are the computer underwriting models used to determine borrower eligibility.

Here you can find the FNMA Jumbo Mortgage Matrix

And

Here is Freddie Mac’s Jumbo Loan Matrix

We will post any developments with regard to these new limits as they become available.

Tags: Current Events, Mortgages, Real Estate by The Mortgage Guy
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The mortgage and real estate meltdown is becoming apocalyptic in size and influence. An annihilation of the U.S. economy is a very real possibility. The pain is spreading globally as well. As bad as it is and it is very bad, the worst is yet to come. If you doubt me, just think about this. Congress has mobilized to “fix” the problem.

When faced with a dilemma as foreboding as this one, placing blame is a must. Even if you blame the wrong guy, that’s okay as you must blame someone; anyone. Of course this task accomplishes nothing and wastes valuable time and resources. None the less, it feels good and gives the appearance the problem is being dealt with.

True to form, our political leaders and the media have taken up the blame task. Congress and the media are well on their way to effectively dealing with the problem as they have designated their “bad guy”. It’s the mortgage broker.

Warning: There is very offensive language in the clip.
Say Goodnight to the Bad Guy

http://www.youtube.com/watch?v=4pW2ZOBi01U

In an industry cast with many players, from the borrower to the investors buying mortgage paper, the political and media elite would have you believe the bad guy is one of the middle men in the industry. A middle man who is responsible for roughly half of all mortgage originations.

It matters not that this middle man has nothing to do with the flawed design of the products or their final disposition in some investment fund. The mortgage broker is the culprit. After all the media says so and Congress has them in their cross-hairs.

What is obvious to me is that Congress and the media is wrong, dead wrong. Sure brokers share some responsibility for the current economic dilemma. However it’s not to the extent the political and media elite would like you to believe. So let’s take a look at all of the players and try to determine who bears the most blame.

Here is the cast of players in the mortgage industry…

• The Borrowers
• The Originators (both brokers and lenders)
• The Lenders (in the roll of underwriting and pooling mortgages)
• The Investment Firms (responsible for converting mortgages into investment securities)
• The Investors
• The Ratings Agencies (responsible for rating the risk of securities)

How it all works…

Here is how the industry operates in a nutshell. Borrowers seek to borrow money, they contact an originator which can be a broker or lender. The originator will make a loan offering based upon the borrowers characteristics and the lenders guidelines or rules. The lender ultimately decides if the borrower gets the loan. The lender makes the rules that borrowers and originators must follow.

The lender’s rules or guidelines are based upon the requirements set forth by the investment firms. In order for lenders to operate efficiently, they must be able to sell their loans to investment firms to free up money to lend yet again.

Lenders do not lend if the investment firms aren’t buying the mortgage paper. In essence, final loan decisions by the lender are based upon the investment firm’s rules and guidelines. Yes lenders have a higher source to answer to.

The investment firms set their rules for buying the mortgage paper. They must assess the risk characteristics of the loans involved. They categorize and pool up the mortgages based upon the risk factors of the loans. After assessing and bundling up the mortgages, they sell the final investment vehicle to investors usually consisting of large institutions.

Investors rely on the ratings agencies to properly assess the risk elements of these mortgage securities. Additionally, both the institutional investors and selling investment firms alike, have risk management departments whose job it is to determine the risk aspects and suitability of the mortgage investments.

They are the watch dogs. Their job is too make sure the investments in question do not have excessive risk characteristics.

Fast forward to the mortgage meltdown of 2007

Due to an unprecedented number of loan defaults, investment firms are no longer buying any mortgages except those of the highest credit quality. The defaults are due to borrowers agreeing to mortgages with escalating payments they can no longer meet.

Lenders gave these loans to borrowers without the borrower having strong credit histories and in many cases, the proof of the capacity to repay the loan. The lenders also didn’t require that the borrower have capital at stake in these transactions. The lenders financed 100% of the purchases. All the while, the investment firms and ratings agencies were giving the lenders their blessings.

The end result of the loan defaults is a historic number of foreclosures pushing down the price of real estate to dangerous levels. Furthermore, now that investment firms aren’t buying but the best of paper, the lenders have drastically scaled back their loan offerings.

Borrowers needing to refinance out of mortgages they no longer can afford cannot do so because their home values are less than their loan balances and lenders are not offering the necessary products. This just causes the meltdown to get worse, in essence feeding upon itself.

Adding to the downward spiral is the fact many of these troublesome mortgages are yet to upwardly adjust their payments. Meaning there will be even more borrowers faced with not be able to afford their payments and ultimately defaulting. Of course these future defaults will lead to more decreases in the value of real estate and the personal wealth of millions of Americans.

With all of this unfolding, it is plain to see that without investment firms buying and trusting the integrity of mortgage securities, the mortgage industry doesn’t exist.

Unless the system of turning mortgages into investment securities is fixed, we are looking at years of financial and economic pain. Perhaps the total destruction of the American economy.

All right already, who is to blame?

The problem is that borrowers were given improper loans for their circumstances and are unable to repay these loans. Originators could not offer these loans unless lenders were willing to make them. Lenders would not make these loans unless investment firms were willing to buy them. The investment firms and their clients, the buyers of the investments, would not be involved with the mortgage investments unless the rating agencies and risk departments gave these mortgages their stamp of approval.

It’s rather plain to see who is not to take the most blame. That being the borrower, the broker and the lender. They are merely middle men operating according to rules that are ultimately set by the investment firms. The investment firms ultimately make decisions based upon the rating agencies and risk management departments.

That being so, the sleeping sentinels turn out to be the rating agencies and risk departments. Based on their erroneous stamp of approval, investment firms made seriously deficient decisions that effected every player in the industry including the consumer.

The mortgage securities causing all of the woes of today are exactly the same as they were two, three and four years ago. Now it’s come to light just how wrong these self policing entities were and we are just beginning to pay the price for their mistakes.

The bad guys are the rating agencies and the risk management departments.

Having a basic knowledge of the workings of the mortgage industry, it’s plain to see that the political and media elite are wrong in blaming the mortgage brokerage community for the current economic crisis.

Instead of directly addressing the most important and primary problem, which is mortgage securitization, Congress is focusing on the middleman, the broker. They stand ready to legislate more laws and regulations on an already overly regulated industry. The end result will be mortgage brokers going out of business leaving consumers with less choices and more expensive ones at that.

Meanwhile the mortgage securitization machine is broken and no one is paying attention. As long as the machine is broken, the mortgage and real estate industries cannot be repaired. The pain and the crisis will continue while our political, media and business elite are focused on minutia.

So say goodnight to this bad guy. There’s a bad guy coming through, you better get outta the way…

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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It should come as no surprise that when the mortgage industry began it’s meltdown, first time buyers would suffer. As the industry imploded, 100% purchase mortgages became harder and harder to find.

Market Watch reports today that 45% of first time buyers financed 100% of their home purchases. It goes on to say that the median down payment for first time buyers is a mere 2% of the purchase price.

So without liberal 100% purchase financing readily available, there are no first time buyers to drive the real estate market. This will undoubtedly have an affect on the over all real estate market, not just the entry level market.

Fewer first-time buyers can have an effect on an entire housing market, when homeowners looking to trade up to a more expensive home have a harder time finding buyers for their starter homes.

Yes there is still 100% financing available for purchases. However, it is only being extended to the strongest of borrowers. People who can prove their income, have a strong credit score and are actually able to save a few bucks.

Contrast this to the 100% financing of yesteryear, which only required a 580 (”B-” credit) credit score, no proof of income or the ability to save money. Based on the article’s statistics, there is no longer a first time buyer market.

“First-time home buyers will be much lower for next year’s survey, given the credit crunch,” said Lawrence Yun

Arguably, people who cannot balance a checkbook (many in this market don’t even have one), cannot save a month or two’s income and don’t have a history of paying bills on time should not be home owners. Borrowers that are this weak will undoubtedly have a difficult time maintaining their obligations. This is what we are seeing today and this is a contributing factor to the mortgage meltdown.

So even though our government, in it’s infinite wisdom, seeks home ownership for everyone, the natural forces of economics and finance dictate otherwise. Now that the chickens are coming home to roost in the mortgage industry, the hypocrites in government are targeting the industry for delivering exactly what it sought.

To make matters worse, government actions to deal with the mortgage meltdown, will only make products that foster a strong entry level market even more scarce and expensive. In fact, their actions will kill and shrink the mortgage industry, making consumer choices scarce and more expensive.

Government initiatives of this sort have the potential of leading this country, it’s economy and it’s people into a 1930’s style depression.

Tags: Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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While I don’t expect the general public to fully understand the size and scope of the current mortgage and real estate meltdown, I was hoping that at least the professionals from these industries would. My hopes are unanswered as evidenced by this letter to the editor of my local newspaper. The letter was submitted by a realtor. The emphasis is mine.

Why gloom and doom on housing market?
News-Times Staff
Article Last Updated: 11/12/2007 05:07:16 AM EST

After remaining silent over the daily bad news about the housing slump, the front page article, which once again shouted the sky is falling, finally got to me. The statistics were inaccurate. Using the MLS, there were 132 closings in the greater Danbury area in October of this year, not 88.

The current market is down, no argument. We have become accustomed for about 10 years to a seller’s market and coming down to earth is hard.

I became a Realtor in 1988 when the inventory was high, buyers were scarce, and interest rates were in double digits. Real estate is cyclical, and the most recent cycle outlasted all expectations.

The problem we are facing now is that the driving force in the market, moving up, is no longer in play. The 100 percent mortgage financing that was so plentiful has virtually disappeared, and the requirements for qualification are changing daily.

On the bright side, there are buyers, rates are low, and the inventory is pretty good. The smart people are figuring this out, but it would be so helpful if the media would look at all sides for a change.

If you keep on forecasting gloom and doom, that’s what you will get. The truth of the matter is, if you buy a home today, you are well positioned for the next surge in pricing.

How about some positive news about home ownership?

Pat Linnell

WOODBURY

The problem we are facing now is that the move up market is no longer in play? Give me a break or pass the Kool Aid.

The truth of the matter is if you buy a home today, you are well positioned for the next surge in pricing? Sure and if you keep saying tomorrow is Christmas, eventually you will be right.

I suppose, according to Realtor Linnell, we are supposed to ignore facts presented by the likes of Hartford Business dot com.

Reports published last week by Boston-based Warren Group reveal that the tide is turning in the Nutmeg State. A double-digit decrease in home sales along with an alarming number of foreclosures — at 2,948 — in Hartford County alone, reflect the state’s fractured housing market.

Statewide, there have been 12,575 foreclosures, with New Haven County hardest hit with 3,914 foreclosures.

While home sales have plummeted in the past, state officials do not recall when the number of foreclosures has been so great.

“We’re concerned because this is not a typical situation,” said Howard Pitkin, commissioner of the state’s Department of Banking. “This is not something that has happened frequently in the state, and we need to address it.”

The foreclosure process is lengthy one. There is a great deal of time between the initial filing and the actual sale of the property being foreclosed upon. It is when these properties sell, at steep discounts to market, that they will begin to affect the prices of homes not in foreclosure.

In this context, the worst is yet to come from a home value perspective and anyone buying a home now will only see their value decline as these thousands of foreclosed properties hit the market and sell.

Not only does this add to the glut of inventory, it adds thousands of properties that will sell at depressed values. This is only half of the equation, the supply half. On the demand side of the equation, it gets no better.

As the real estate “professional” states, subprime mortgages and 100% mortgage loans are gone. Common sense tells you if the programs are gone so are the buyers that needed them to qualify for home financing. Add to this the prime and alt “A” mortgage market feeling the subprime pain and you now have “A” paper borrower’s having their ability to borrow and buy severely impacted.

This means that there is less demand for the properties on the market, foreclosed or other wise. Obviously, the supply/demand equation on Connecticut Real Estate does not bode well for Connecticut property values. As such, why would anyone be buying now who didn’t have to?

Here is another snippet from the article.

There are an estimated 71,000 subprime mortgages in Connecticut worth approximately $15 billion, and it is possible that up to 8 percent of those loans are delinquent, he said.

Lets do some math. Eight percent of 71,000 subprime mortgages is 5,680. Eight percent of $15 billion is $1.2 billion. So we are to believe that 5,680 potential foreclosures with a market value in excess of $1.2 billion is only a blip on the real estate value radar? The realtor’s letter would have you believe that this is business as usual.

Linnell draws a parallel among the late eighties market and the market of today. However, in the late eighties, there was no political witch hunt affecting the mortgage industry. In the 80’s, 182 lenders, prime and subprime, hadn’t disappeared from the face of the earth. In the eighties, foreclosures were not running at a pace to anything similar today. In the eighties, mortgage programs were beginning to proliferate not shrink by almost half. It’s plain to see that the comparison of the two markets is ill conceived.

Now here is what I believe is a more appropriate perspective of our economy and the real estate market.

In the 1920s, widespread use of the home mortgage and credit purchases of automobiles and furniture in the U.S. boosted spending, but created consumer debt. People who were deeply in debt when a price deflation occurred were in serious trouble — even if they kept their jobs — and risked default. They drastically cut current spending to keep payments on time, thus lowering demand for new products. Furthermore, the debts grew when prices and incomes fell 20-50%, but the debts remained at the same dollar amount. With future profits looking poor, capital investment slowed drastically. In the face of bad loans and worsening future prospects, banks became more conservative in lending money. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed, and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.

You will find this excerpt in Wikipedia’s search result for “Great Depression”. Which scenario do you see most similar to today’s circumstances? Ah but not to worry, because as the realtor states, tomorrow is Christmas. /sarcasm.

Tags: Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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The details are rather murky. The State of Connecticut has set aside $50 million to aid subprime borrowers having difficulty making their mortgage payments.

Rell said the Connecticut Housing Finance Authority will create the $50 million CT Families fund to refinance subprime loans for those who qualify. The money comes from previously issued bonds.

Subprime loans are those given to borrowers who are considered a higher credit risk than people with perfect or near-perfect credit scores. During the recent real estate boom, many of these subprime borrowers were given mortgages with low introductory interest rates for the first two years that reset to higher rates in later years. They often were offered these loans with assurances that they could be refinanced because the home’s value would rise.

A large number of people are defaulting on these loans because housing prices have declined, pushing some home values below the outstanding mortgage.

I find several things disturbing with the above paragraph. First there is the phrase “for those who qualify“. If these people could qualify for another loan, there would be no need to set up this fund. The qualification details are still in the works and have not been released.

However, in order to help these people, people who arguably shouldn’t have been given loans in the first place, Connecticut Housing Finance Authority underwriting guidelines will need to be liberalized. They will need to be liberalized to an extent that is even more liberal than the mortgage loans that put these home owners in jeopardy to begin with.

Not even subprime lenders would grant loans to people whose collateral is insufficient to cover the full amount of the loans. Yet this press release will have you believe that is what CHFA is planning on doing.

So lets take a well performing group of loans (traditional CHFA loans) and mix in $50 million in mortgages that are more liberally underwritten than the loans that are causing the real estate and mortgage meltdown in the first place. This is exactly what happens when those in government who are clueless about an industry, come in to fix an ill perceived problem.

I also resent the demonization of mortgage originators which is accomplished through the sentence “They often were offered these loans with assurances that they could be refinanced because the home’s value would rise.”

I’ve been in this business since 1991. I have seen shady dealings in this industry some serious and some not so. However, I have never seen future real estate value guarantees made by any savvy originator. That is not the purview of an originator.

Real Estate values, past present and future, are in the realm of the Real Estate Agent. If future value guarantees are being made, I would think it is the Real Estate Agent making them and not the originator.

Even if mortgage people did make representations to the like, it would have the same weight as your plummer telling you that you should have that mole looked at before it turns cancerous. Thanks for the concern, but I get my medical advice from medical professionals.

To support my statement that government really doesn’t understand this problem and thus are ill equipped to deal with it, lets examine the last sentence in the block quote above.

A large number of people are defaulting on these loans because housing prices have declined, pushing some home values below the outstanding mortgage.

Historically, real estate values have risen and declined without any effect on a home owner’s ability to repay their mortgage. The underlying real estate value has nothing to do with a home owner’s capacity to repay a loan. Repayment capacity is based solely on the cash flow attributes of the home owner not the value of the real estate.

The value of the real estate can effect the home owner’s ability to refinance. This is especially true when the value of the home declines to a lower level than the amount of the mortgage, which is the case for many home owners nationally.

The large number of mortgage defaults are a result of borrowers not having to prove their capacity to repay the loans (no income, no ratio and no doc loans) and the fact that many of these loans are adjusting their rates and payments upward. Again, declining real estate values have little to do with the mechanics of home owners defaulting.

As for these loans adjusting upwards, there is little excuse for the home owner not to know it was a realistic possibility. Before, during and after a mortgage transaction, the borrower is provided a “Truth In Lending” disclosure which clearly illustrates the possible stream of future payments (note item 11 on the example disclosre “Your payment schedule will be…). In other words, borrowers had the possibility of higher payments disclosed to them several times prior to closing their loan.

The subprime debacle is in essence a microcosm of what is wrong with our society today.

• There is no personal responsibility for one’s actions, someone else is always to blame
• Government is the panacea for all of society’s ills
• The belief that personal responsibility and intelligence can be legislated

While well intentioned and being wonderful pubic relation releases for politicians, initiatives such as this one being undertaken by Connecticut, miss the mark in solving the problems at hand. Sometimes, many times, government cannot fix problems in question. When the government tries to, they often make the problems worse.

This may be one of those times as it can be argued that by bailing out home owners who got themselves in trouble with liberal mortgage loans by giving them yet another liberal mortgage loan is basically institutionalizing the subprime practices that are being blamed for the meltdown in the first place.

As the saying goes, “the road to hell is paved with good intentions”. Here are the details on the Connecticut subprime mortgage bailout initiative.

Tags: Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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The Consumer Confidence Index fell dramatically from an October reading of 80.6 to 64. I believe this is what I have dreaded for months now and that is the mortgage and housing meltdown of 2007 is spreading to the rest of the economy.

The 64 reading was the lowest point for the monthly survey since it hit 61.5 in September 2005, a month when energy prices soared, reflecting the shutdown of Gulf Coast refineries after Katrina struck.

I believe this is only the start of what will be a long and painful negative trend. Read on…

“We have a perfect storm of negative factors affecting the consumer right now,” said David Jones, chief economist at DMJ Advisors, a Denver consulting firm. “We have higher energy prices, declining home prices and a crisis-related tightening of credit.”

Add to this a U.S. dollar that weakens on a daily basis and the perfect storm becomes the perfect hurricane.

Here is Fed Chairman Ben Bernanke’s take on the economy…

Mr. Bernanke said the U.S. economy would grow more slowly in the months ahead as it struggles under the weight of a growing list of challenges - slumping house prices, a credit crunch, a falling U.S. dollar and higher energy costs.

But he believes by spring 2008, we will have bottomed out and things will begin to get better. I couldn’t disagree more and here is one reason why.

Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., said the Fed is underestimating the fallout from the collapse of the housing market.

“Things will be rather worse than this,” Mr. Shepherdson predicted. “Until the Fed gets real and stops referring to the housing disaster as a mere ‘correction,’ they will be behind the curve. The data will force them to ease.”

The housing and mortgage meltdowns are in relatively early stages. Yet they are already trickling over to the rest of the economy. As the meltdowns mature, they will have an even greater impact on the overall economy.

Real wages have been stagnant for years. The savings rate in the country is negative. The nation’s ATM, housing values and easy mortgage money is gone. So is the ability of the ATM to bailout home owners with tremendous credit card debt. The consumer is tapped out and there is no where for the consumer to go keep spending alive.

It’s only a matter of time before we see the consumer and service sectors of the economy (the work horses if you will) start to pull back on hiring and spending. Perhaps leading to wide scale layoffs.

Don’t think it can happen? Tell that to the one hundred eighty plus mortgage companies that have gone out of business and their 100,000 or so laid off employees. They didn’t think it could happen either.

Tags: Finance & Economy, Mortgages by The Mortgage Guy
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Savvy mortgage professionals have been offering no closing cost refinances for years. It isn’t marketed heavily because the interest rates involved are not the lowest one could seek out. So to allocate a big part of a marketing budget to spread the word that your rates are higher than everyone else’s isn’t an attractive idea. So while no cost refinances exist, it’s a pretty well kept secret.

It’s important to understand that the refinance isn’t really free. There are lender fees, appraisal fees, title fees and closing agent fees incurred just like any other mortgage transaction. The difference is all of these costs are being paid by the originator while the borrower pays nothing. The originator can be a lender or broker, either can offer this type of loan transaction.

In order for a free refinance to work, the borrower needs to meet some basic criteria. First the borrower should have a good credit score. At least good enough to meet fannie mae’s or freddie mac’s guidelines. A credit score in the mid six
hundreds usually does the trick.

The borrower will usually have to be able to document employment and income although, in the past, no cost refinances could be done on a stated income (income is stated on the application but not verified) or no ratio basis (income is not disclosed at all on the applicaiton). Additionally, the size of the refinanced loan has to be large enough to cover the fixed and variable costs paid by the originator.

The biggest consideration in any refinance is the length of time it takes to recover the closing costs. This is a non issue with the no closing cost refinance. If you lower your rate by just a quarter percent and it cost you nothing to do so, you don’t have a break even point. The benefits of the transaction are immediate. This aspect of the free refinance makes it both unique and a no brainer.

Who Benefits From The No Closing Costs Refinance?

• All homeowners with rates .25% above the current market rate
• All homeowners with adjustable rate mortgages that want the security of a fixed rate.
• All homeowners with second mortgages.
• All homeowners with a fixed term mortgage that would like to switch to a different term.
  (ie. 30 year to 15 year etc.)

How To Be Sure It’s a No Closing Cost Refinance Mortgage

It’s important to know the difference between a no closing cost refinance mortgage and a no points refinance mortgage. With a no points mortgage, you will still pay all of the other closing costs associated with the refinance. With a no points loan, the only costs waived are the points (origination or discount) or the origination fee. With a no closing costs refinance, none of these fees are paid by the borrower.

One way to tell if your mortgage company is providing you with a true no closing costs loan is to examine the Good Faith Estimate and the Truth in Lending disclosures. These disclosures are required to be sent to you within three business days of the mortgage company receiving your application.

If you are truly getting a no closing costs refinance, your Truth In Lending disclosure will have an APR (Annual Percentage Rate) that is the same as the interest rate being offered. When APR and Interest Rate are the same, that reflects there are no up front costs in obtaining the loan.

The Good Faith Estimate will list the usual closing costs but all of them will be paid by the originator and designated as such. There should be absolutely no costs payable by the borrower.

Another tip is to look at the loan amount on the disclosure forms. The loan amount should be within a thousand dollars or so of the original loan amount being refinanced. Having a big difference between existing loan balance and the new loan amount should raise a red flag. If additional cash wasn’t requested by the borrower, the amount over the existing loan amount may represent fees not disclosed by the lender.

Other Considerations

There are items that mortgage companies never cover in the no closing cost refinance. Generally speaking they are pre-paid items and the initial appraisal cost.

Pre-paid items are not closing costs per se. They are an outlay of items that need to be paid in order to complete the refinance transaction. Typically pre-paid items not covered by the mortgage company are “odd days interest” and escrows for taxes and insurance.

If the borrower cannot front the monies needed for these items, the new loan amount can be increased to cover the layout. If a loan being paid off currently has an escrow account, the unused monies will be reimbursed to the home owner usually within three weeks or those monies are applied to the final payoff. The most common method is a reimbursement after three weeks.

So even though some cash has to be laid out up front by the borrower, these monies are recouped after the old loan is paid off.

In order to protect the mortgage company from ordering and paying for needless appraisals, many mortgage companies will require the borrower to pay for the appraisal up front. If the borrower doesn’t complete the transaction, the appraisal fee becomes the responsibility of the applicant. When the loan closes however, the mortgage company reimburses the borrower.

How The Originating Mortgage Company Gets Paid

This brings up the subject of Yield Spread Premium or Premium (for lenders). A premium is paid to either a mortgage broker or lender for delivering a mortgage to the secondary market that is above the par rate. The par rate is the interest rate that costs an originator nothing and pays an originator nothing.

By delivering a rate higher than par, the mortgage originator is covering the borrowers costs for the transaction and anything left over represents the originator’s profit on the transaction. This is why no closing costs refinances always have rates higher than traditionally priced mortgages.

As long as the rate being delivered is lower than the borrower’s current rate, who cares? The rate reduction, no matter how small or large, was provided free, without any costs what so ever.

The free refinance mortgage can be done over and over again as the interest rate environment allows. It is a no cost way to lower housing and interest costs without risk. The no closing costs refinance should be in every frugal home owners arsenal of money saving techniques.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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Just when the United States is faced with foreclosure epidemic, the very products used in the past to help people in foreclosure have disappeared.

My company was heavily involved in the foreclosure niche. We used to be able to refinance certain borrowers who faced foreclosure. In essence giving them a second or third chance to right their situation.

Before the mortgage meltdown of the summer of 2007, we routinely provided foreclosure bailout loans with loan to values of up to seventy percent of the foreclosed home’s appraised value. With Wall Street’s refusal to buy subprime mortgage paper, these products no longer exist.

The only products that are available to bail people out of foreclosure are private money lenders. The vast majority of private money lenders never lend up to seventy percent of the appraised value. This leaves a tremendous market void for a huge and rapidly growing number of distressed home owners.

How big a void? Let’s take a look at some Connecticut housing statistics highlighted in a Newsday article.

California-based RealtyTrac said the number of foreclosures increased 547 percent in the New Haven-Milford area, 522 percent in the Bridgeport-Norwalk-Stamford region and 446 percent in the Hartford area in the first half of this year, compared with the same period in 2006.

The absence of institutional foreclosure bailout money leaves us only with private money lenders. Private money lenders rarely lend in excess of sixty five percent of the appraised value of a foreclosed home. In many instances, they prefer to stay at around sixty percent of appraised value.

Add to this a real estate market that is experiencing historic declines in value, and you have virtually no market for the foreclosure bailout loan. Even if a private lender were interested in bailing out a home owner, the likelihood of the loan closing is greatly diminished by these real estate price declines.

It’s a double whammy. The industry, for all intents and purposes, has eliminated the foreclosure bailout loan and the avenues left to fill that void are impacted by the precipitous real estate value declines.

It’s obvious that this scenario negatively impacts those currently in foreclosure. What isn’t so obvious is that the foreclosure environment directly and negatively impacts home owners who are paying their mortgages on time and who enjoy the highest of credit ratings.

Foreclosures impact all home owners. When a foreclosed property is re-sold at a depressed price, it affects the values of all properties. Consequently, high grade borrowers are experiencing first hand, major declines in their home’s value.

Tags: Mortgages by The Mortgage Guy
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The mortgage meltdown continues. Just when the financial markets started to settle down, we have news like this to consider. The Independent ran an article today titled Markets fear banks have $1 trillion in toxic debt.

Samir Shah at Landsbanki Securities said: “People thought most of the bad news had been priced in. It seems we’re entering a second phase of the credit squeeze. We’re going back to a place where liquidity is drying up and volatility is increasing.”

This is what we saw back in August of this year. Central Banks around the world were able to jaw bone us back into some semblance of stability. It seemed for awhile anyway that the worst was behind us.

Then Merrill Lynch and Citigroup had written down their losses on their mortgage holdings costing Stan O’Neal of Merrill and Charles Prince of Citigroup their jobs.

At Merrill, The write down was in excess of $7.9 billion and at Citigroup, the write down was an even larger $11 billion. The Merrill Lynch write down resulted in their largest quarterly loss ever.

Following the lead of these two U.S. financial giants, European investment banks are feeling the pain as well. The U.S. mortgage debacle is officially a global concern.

“Some banks have particularly weak disclosure, leading investors to fear what is beyond the veil,” Morgan Stanley’s van Steenis said.

UBS, Deutsche Bank, and Credit Suisse - Europe’s largest investment banks - all reported third-quarter earnings last week, but failed despite massive writedowns to allay fears that the worst is over, analysts say.

Now many are suspicious that not all of the bad mortgage exposure has been disclosed, leading to a lack of trust in the markets. Add this to a lack of liquidity among banks and price volatility among mortgage securities, and you have an ongoing crisis of immense magnitude.

Bill Gross, the chief investment officer of Pacific Investment Management, makes the following points about this financial debacle…

US mortgage delinquencies and defaults would rise in 2008. “There are $1 trillion worth of sub-primes, Alt-As [self-certified] and basically garbage loans,” he said, adding that he expects some $250bn in defaults. “We’ve only begun to see the pain from rising mortgage payments,”

What this means to the average home owner and buyer is that mortgage money will be much more difficult to obtain. It also means we can expect foreclosures in 2008 to dwarf those of 2007. This will result in ongoing real estate price declines which are already at historic levels.

The home equity that you have today, may not be there in 2008. Billions of dollars in wealth is evaporating before our eyes. Sooner or later, this will make the average consumer in the United States feel as poor as they really are.

One can speculate that this will lead to a pull back of consumer spending, spreading the real estate recession to the rest of our economy. In my opinion, this is why the Federal Reserve Bank is lowering interest rates.

If you are a home owner, now is the time to take care of your mortgage needs. The mortgage products you need may not be there in 2008. Furthermore, the expected price declines in real estate values will further negatively impact your ability to obtain favorable home financing.

Hold on tight, we are about to hit some more severe financial turbulence.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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Does it make sense to refinance or buy now or will you be better off waiting. The answer is it depends whether or not you are refinancing or buying a home.

If you are refinancing a home, you may be better off jumping in now. Sure there is a possibility rates will go lower if you wait. After all, the economy seems to be getting worse and the Federal Reserve is recognizing this fact and responding with rate cuts.

But while you wait for rates to go lower, home values are declining dramatically. In northern Fairfield County in Connecticut, we are seeing 10% to 15% declines in value. Value declines of this magnitude can eliminate any potential savings to be gained by waiting for lower rates.

How so? In addition to credit grade and the type of income and asset documentation available, loan to value can have a significant impact on the rate you get on your mortgage. Loan to value is the ratio of your loan amount to the appraised value of your home. The closer you get to 100% loan to value, the worse your financing terms will be.

So while waiting for lower rates, if your home’s value is declining precipitously, you can easily negate the effects of lower rates by increasing your loan to value ratio. Based on this premise and the fact that currently rates are within a point of their all time lows (conventional 30, 20 and 15 year fixed rates), now is the time to refinance. This is especially true in light of what is happening to home values.

If on the other hand, you are a home buyer, by all means take your time. As stated previously, home values are declining so the longer one waits the better deal to be had. Furthermore, there is no bottom in real estate prices anywhere on the horizon.

Foreclosures are expected to at least continue on their current record pace and some say they may accelerate. I believe they will accelerate before the market gets any sound footing. I say this because there are trillions of dollars in adjustable rate mortgages out there getting ready to adjust upwards. This will make homes more unaffordable for people already struggling with their payments.

Many of these people bought their homes with very little or no down payments. These people won’t be able to refinance because the amounts they owe will be greater than value of the home due to severe price declines. They will need to tough it out or be foreclosed upon which will put even more downward pressure on home values.

It was also stated earlier that rates are declining. As the economy slows, which it will due the strain the housing market is putting on it, rates should continue to decline. This means not only will buyers get better prices by waiting but they should also have very good rates available to them when they seek purchase financing.

So if you are a homeowner and are considering refinancing, do it now. If you are considering buying a home, there is no sense of urgency to jump in from a price and interest rate perspective. For the time being, the longer you wait the better it gets.

If you are a homeowner looking to trade up or down, the current environment applies to you on both the sell side and the buy side. Meaning that while you will get less for your current home, you can expect to pay less for your next home. For people in this situation, there really is no need to rush or to wait.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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