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Author: Tom Vanderwell (page 4 of 8)

Mortgage Officer

March 21, 2009

A Few Thoughts About Mortgages…..

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Mortgage Officer

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Since I already sent an update out earlier in the week outlining what the Fed did and how it can/will impact the economy and the mortgage markets, I’m going to focus on a couple of other topics this time.

First I’m going to talk about the four most important things to know about mortgage rates. Then, in the lower section, we’ll take a look at a good strategy to consider when thinking about when to lock in an interest rate.

The four most important things to know about mortgage rates:
What influences them – contrary to popular opinion, mortgage rates are not tied to the 10 year Treasuries any more. For years they used to be and that made predicting short term market movements easy. Now they don’t and it’s much harder. So what does impact them? A couple of quick thoughts about that: 1) Market sentiment – is the market feeling good about things or bad? 2) Political manipulation – does the market feel that Washington is trying to run over Wall Street or is it the other way around? 3) Expectations vs. reality – it’s not so much that the news is bad as it is a question of whether it’s worse or better than it was expected. 4.) Inflation/Deflation and the value of the dollar. 5) Investor appetite for mortgage backed securities (aka how good are loans performing?


Why mortgage rates won’t go down to 4%. According to what I heard and saw, there were experts on places like the Today Show and Good Morning America who were proclaiming that mortgage rates were going to go down to 4.0%, probably by Monday. There are a couple of reasons why that won’t happen: 1) The Law of Supply and Demand – the government is literally flooding the market with additional debt. If there is more debt “chasing”fewer investors, that’s going to push rates upward. 2) The Value of the Dollar – the dollar has taken a beating in the last few days and as the dollar gets cheaper compared to other currencies, interest rates have to go up. 3) Falling House Prices Read more

March 18, 2009

The Fed Translated…..

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Mortgage Officer

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Well, it’s time to do a little Fed translating again.   This one was a big one, so settle in and let’s translate it.    As usual, my comments are in bold and italics.

Release Date: March 18, 2009

For immediate release

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  The economy continues to contract – no surprise there.  But ask yourself, if the economy continues to contract, then why is the stock market rallying?

Job losses, 651,000 jobs lost in February,  declining equity and housing wealth over 20% of the homeowners with mortgages are underwater, and tight credit conditions not only in mortgages, but home equity loans, credit cards, car loans etc., have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit businesses are having a harder time getting credit too. have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession. This isn’t just a US recession, it’s pretty much all across the country.  Although the near-term economic outlook is weak gee, that’s an optimistic outlook of things, don’t you think?, the Committee anticipates anticipates?  Is that sort of like I anticipate that I’ll become a millionaire by the time I’m 45? that policy actions to stabilize financial markets and institutions translated – more bailouts, together with fiscal and monetary stimulus translated – the Fed’s printing press will be working overtime!, will contribute to a gradual resumption meaning we really don’t know when things are going to turn around of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued but they don’t say for how long inflation will stay subdued.  My estimate is that we’re looking at 12 to 18 months before the economy recovers enough for inflation to become an issue.   Moreover, the Committee sees some risk that inflation could persist for a time below rates that Read more

March 9, 2009

Why FHA Loans won’t be getting cheaper or easier…..

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Mortgage Officer

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When the subprime market imploded and people starting rushing to FHA, the “chant” was that FHA is the new “subprime.”   FHA originations skyrocketed and anyone who didn’t have a 700 credit score and a downpayment of 5 to 10% was quickly led into FHA.   I remember reading statistics of different banks seeing a 150% jump in FHA loans.

At that point, I had a sneaking feeling that we’d start seeing some of the losses that hit subprime translating over into FHA.   Well,guess what, we are.

The article cited below is about the fact that FHA is experiencing a substantial rise in what are called “Early Payment Defaults.”   What does that mean?   Substantially more of the newly originated FHA loans are having default issues than is typical.

What does that mean going forward?

  • Increased losses for FHA
  • Tightening underwriting guidelines for FHA loans.
  • Higher fees and rates for FHA loans

Fannie and Freddie are already in trouble and now we’re looking at the first signs that FHA is heading for trouble too.

Interesting times….

Tom Vanderwell

The Next Hit: Quick Defaults – washingtonpost.com

The last time the housing market was this bad, Congress set up the Federal Housing Administration to insure Depression-era mortgages that lenders wouldn’t otherwise make.

This decade’s housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding.

With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.

Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, Read more

March 7, 2009

I’ve taken the liberty of posting my “Mortgage Market Week in Review” here…..

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The Week We Woke Up

I’m going to deviate from the normal format this week, because I believe that this week has deviated from the normal that we’ve been experiencing lately.   I’m calling it the Week We Woke Up.

What did we wake up to?  A couple of things:

  • The fact that the debate on whether we’re going to have to nationalize some of the banks/financial institutions is pretty much a debate over semantics.   The announcement that the government now owns 36% of Citibank and that we had to spend some additional billions (how many has yet to be determined) to save AIG for the third time effectively said that we are now in a situation where the government does own some of the banking industry and the debate should now be about the how and not the whether or not.   This mess sent shock waves through the financial markets and virtually every bank saw their stock prices get “adjusted” accordingly.  There was a time this week that Citibank was trading for less than the cost of a Jr. Bacon Cheeseburger at Wendys.
  • The reality of GM’s scenario became a lot clearer and not in a way that was going to make the economy any healthier.  There’s a phrase in business accounting called, “A Going Concern.”   What does that mean?  Essentially it means that a business is generating enough income and has enough cash to continue in business.  Well, GM not only had some bad news in terms of sales, but they admitted that their auditors don’t believe that they can remain in business. That’s a pretty strong indication that GM’s condition is a lot worse than what we thought a couple of months ago.  What does the prospect of a GM bankruptcy mean?  Best case scenario – renegotiated contracts with the UAW and bond holders, substantial job losses and dealership closures.   Worst case scenario – total liquidation of GM and absolutely staggering job losses that will make Read more
March 4, 2009

The New 105% Refi Plan – What I know and What I don’t…..

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Mortgage Officer

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Okay, here’s the latest on what I know and what I don’t on the 105% refi plan.  I’m going to attempt to summarize a 10 page document, so I’m only going to hit the “highlights” of it:

The things that I know about the plan:

  • The loan to value is indeed max’d out at 105% but with a second mortgage, it can go higher than that (frankly unlimited) if the second mortgage holder will agree to it and if the second mortgage was already in place.   You can’t put a new second mortgage in place right now.
  • There are three “levels” of potential appraisals:  What Freddie Mac calls the “Home Value Explorer.”  or a new appraisal or the existing appraisal.   There’s some verbiage in the Freddie Mac docs about certifications that the lender has to make about the existing appraisal, so I don’t know what that involves yet.
  • The borrower’s mortgage payment history can have no 30 day late payments in the last 12 months.
  • The only loan that can be paid off is the existing first mortgage plus up to $2500 toward closing costs and escrows.
  • The new mortgage has to be done with the same servicer as the existing mortgage.  So, unfortunately for borrowers, you can’t shop around on this type of loan. Update on 3/9/2009 – per my conversation with Rhonda Porter, it appears that Freddie is saying they have to use the same servicer, but if the loan is currently owned by Fannie, then they can use anyone who sells to Fannie.   I was just on a conference call (internal) that said we expect to have more details from Fannie by week’s end.
  • There are some “kind of” confusing guidelines about mortgage insurance and my initial read of it says that there might be some questions on mortgage insurance.  If there was mortgage insurance, it sounds like there would need to be mortgage insurance again, but we don’t know that the mortgage insurance companies will “reissue” the insurance.
  • Primary residence loans that were sold to Fannie Mae or Freddie Mac are eligible.   There are other restrictions too.

The things that I don’t know (about the plan):

March 3, 2009

Confessions of a Married Man

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Mortgage Officer

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No, not that type of confessions, I’ve been happily married for 23 1/2 years and believe firmly in the “until death do us part” of my marriage vows.

But, after a conversation I had with Teri and after reading Sean’s post and the subsequent conversation in the comments by a number of people including a couple of friends who I respect and value their opinions, I felt I had a confession to make.   Much of this confession is based on what I’ve learned from my wife.

So here goes the confession:
1. There is a LOT to worry about right now.  Probably more to worry about now than any time in my adult life.
2. Listening to CNBC can increase the amount of worry that one has about the financial mess that’s happening.
3. There are a lot of people who make a living off of increasing the worry that other people have.  Many of them work in the main stream media, but many of them work in Washington too.
4. While I agree with people like Sean Hannity and Rush Limbaugh more than I disagree with them, I told Jeff Brown yesterday that I can’t listen to either one of them for very long.   Why?  The way that they play on the worry and discord over what’s happening in Washington is just too depressing.
5. While I have voted in every Presidential election I’ve been able to and all of the congressional elections (off years), I have missed a few school board and township elections.  I firmly believe in the power of people to make a difference by voting, but I’m also very jaded by pretty much everyone who is in Washington and the state capitals as well.

So what did I learn from my wife?   It’s pretty simple:

Don’t worry about things you can’t control.

I can’t control what happens in Washington – but I can learn and be informed about what’s happening so I can make wise decisions.

I can’t control what happens in the stock market – but I can learn and be informed so I can make knowledgeable decisions and help my clients and my referral sources Read more

February 9, 2009

What are the Stimulus Plan and TARP II going to mean for the housing and mortgage markets?

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Mortgage Officer

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While I could write for a LONG time about it, I’m going to limit it to what I feel are the top 6 things that I think could very well happen.   Keep in mind, this is being written after watching President Obama’s press conference but before anything gets passed.

1. The market is expecting that both the Stimulus Plan and TARP II will provide “the answer” to the problems that are currently plaguing our economy.   With that being said, I believe the markets will be disappointed because the problems facing the economy are way more complex and urgent than what one or two bills can solve.   The disappointment will put downward pressure on stocks and upward pressure on rates.

2. The $15,000 tax credit for home buyers will pass but rather than jumpstarting the housing market, it will instead cause a few people to buy homes, mainly first time home buyers, and will extend the inventory problems that we have because prices won’t adjust as they should.   We won’t get nearly the “bang” for the $Billions that will be spent on the tax credits.   I’m sorry but I really think the main beneficiaries of the $15K tax credit will be mortgage lenders, real estate people and the relatively few people who were already thinking of buying.   Will it reduce inventories?  No, other than taking some bank owned inventory (for first time buyers) off the banks, the rest of the people will be “shuffling” inventory because they all have a house to sell.

3. Between the Stimulus Plan and the TARP II funds, we’ll (yes, it’s you and me) will be spending close to $1.2 Trillion.   Do we have the money?   No, we don’t, so we’re going to borrow it.   What will that mean to the market?   A couple of things are going to happen (obviously in my opinion):  1) The government is going to flood the market with debt in order to finance this spending.   That’s going to push the supply demand equilibruim off base and that is going to put upward pressure on mortgage rates.

4. What about that 4.5% mortgage rate?  Is it Read more

January 30, 2009

The Fed Translated…..

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Mortgage Officer

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Tom here….  Sorry for the delay, but better late than never….. (my comments are in bold)

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. Nothing new there and no surprises.  Can’t go lower than zero and certainly can’t raise them right now. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. Here again, no big surprises.  I think the surprise is going to be the amount that rates go up once the economy does recover and inflation becomes an issue.   I’ve been talking to a large number of people who want to use a home equity line (at prime or prime minus .5%) to pay off their mortgage.   They would lower their rate down to around 3%, but my recommendation would be to do that only if they can plan on paying the balance off within 1 to 3 years.   My feeling is that any longer term than that will make it too expensive because of the way rates are going to jump up.   For more thoughts on that, see what I wrote a couple of weeks ago about the “W” recovery.

Information received since the Committee met in December suggests that the economy has weakened further. No surprise there. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, Really?  Which ones? in part reflecting government efforts to provide liquidity and strengthen financial institutions; If you look at Bank of America and Citi, you can’t tell that the financial institutions are stronger, nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. Translated – we hope things get better later this year, but we really don’t know, so don’t blame us if it takes longer.

In light Read more

December 16, 2008

The Fed Translated…..

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Mortgage Officer

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Release Date: December 16, 2008

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

What’s up with the “range” of rates?   Well, they’d look pretty foolish if they said they wanted the rate to be at .25% and the market was already trading fed funds futures at .14% as of this morning.   Calling the rate at .25% would be sort of like predicting yesterday’s weather.

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. No arguments there. Financial markets remain quite strained and credit conditions tight. I’m not sure that a lot of people are as aware of the strain on the financial markets as they should be. Overall, the outlook for economic activity has weakened further. Enough said there….

Meanwhile, inflationary pressures have diminished appreciably. Saying that inflationary pressures have diminished is being modest.   Inflation is dead for now. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. For inflation to moderate any further, deflation will become a huge issue. Let me rephrase that, in light of the Consumer Price Index report this morning, it’s pretty apparent that deflation is an issue.

The Federal Reserve will employ all available tools (available tools – oh and since we’re running out of ammo in our normal tools, we’re going to come up with some new ones.   We hope that they work and we hope that they persuade people to start spending and borrowing money again) to promote the resumption of sustainable economic growth and to preserve price stability. Price stability – yeah, we are kind of concerned about that deflation thing and we’re afraid that all of the money we are printing is going to have a very negative effect on the value of the dollar and the value of our stock market investments, but we’ll worry about that some other time. In particular, the Read more

December 9, 2008

Can We Stop Falling House Values? An Op Ed piece by the NAHB

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This is excerpts from an op ed piece written by Steve Hodgkins.   I’ll throw some comments in to explain/clarify what he’s saying and why I don’t agree with a large portion of it.

The decline in single-family home values is the predominate reason for the current economic collapse……

Tom here – which came first, the chicken or the egg?   Did the subprime mortgage lending boom send housing prices way too high because credit was too easy?   Or did housing prices fall because those loans went bad?   Or both?

Falling values have decimated the single-family construction industry, which normally supplies roughly 16% of the gross national product of the United States……

At the height of the housing boom, developers and home builders were buying land, developing lots and building houses based on an economy fueled by subprime mortgages.

They neither asked for nor were even aware of this giant social experiment conceived by our political leaders and the heads of mortgage giants Fannie Mae and Freddie Mac.

Tom here – so they didn’t ask for increased lending?   They weren’t even aware of the fact that lending was significantly more lenient than it was before?   They are saying that they never lobbied for easier lending?   I’m sorry I’m not buying it….

As entrepreneurs and job creators, home builders were simply responding to perceived market conditions. Likewise, their banks and financial partners were making decisions based on historical market data.

Tom here – “making decisions based on historical market data?”   So he’s saying that the sudden relaxation of mortgage guidelines was based on historical data?   How does he figure that?   I’m absolutely positive that I’m not the only mortgage lender who said, “Wow, I can’t believe that Fannie and Freddie will buy this loan…..”

After the subprime loans were pulled out of the marketplace, builders were left with large inventories of land, lots and houses and far fewer buyers who were able to qualify…..

Tom here – I’m not sure that it’s quite an accurate description of the market dynamics.   Did the subprime mortgages get pulled or did buyers stop buying a new home because prices have gotten too high and the increase Read more

December 3, 2008

Treasury may lower mortgage rates?

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WASHINGTON (MarketWatch) – The Treasury Department is contemplating a proposal that would cut mortgage rates for new loans for homes, according to the Wall Street Journal.

The plan would employ Fannie Mae to offer mortgages with rates as low as 4.5%, roughly 1% lower than current rates.

The measure is under consideration as part of the Treasury Department’s continued effort to limit foreclosures, which has been at the core of the financial crisis. The plan would seek to revitalize the financial market without bailing out homeowners and lenders, the Journal reported.

As part of the proposal under consideration, Treasury would buy mortgage securities backed by Fannie Mae and Freddie Mac, in addition to those guaranteed by the Federal Housing Administration.

Fannie Mae and Freddie Mac guarantee a significant chunk of all new mortgages in the United States.

Treasury may set mortgage rates at 4.5% to boost sales – MarketWatch.

Okay, not to rain on everyone’s parade, but let’s take a logical look at the numbers and the statistics behind it.

  1. What’s the only way possible that I’m aware of to lower mortgage rates?  By raising the price of mortgage backed securities which lowers the rates on them.   Lower rates on mortgage backed securities equals lower mortgage rates.
  2. How do you increase the price of mortgage backed securities?  The only way that happens is by increasing the demand for them.
  3. How do you increase the demand for them?  Have the government step in and buy a HUGE (I’m talking many many many zeroes!) amount of mortgage backed securities off of Fannie and Freddie.
  4. How is the US government going to come up with that money?   All joking about printing presses aside, in reality, they are going to have to borrow the money.
  5. How do they borrow the money?   By issuing a LOT of US Treasury bonds to finance their purchase of mortgage backed securities.

So, what happens with the price of US Treasuries if suddenly there’s another $1 Trillion on the market?

  • Demand stays the same
  • Supply goes way way up because the government is flooding the market with more debt.
  • Price goes up down because there is more supply than demand.
  • Rates go up.

(Thanks Sean for correcting my Read more

December 2, 2008

Investor Sues to Block Mortgage Modifications

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Mortgage Officer

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The battle over the mass modifications of troubled mortgages has begun in earnest. On Dec. 1, William Frey, a private investor in mortgage-backed securities, filed a lawsuit in New York State Supreme Court alleging that the proposed modification of some 400,000 home loans originally underwritten by the defunct lender Countrywide Financial is illegal.

Investor Sues to Block Mortgage Modifications – Yahoo! News.

At first glance, you’re probably thinking what I was (well, maybe not…) but seriously, why would some mean hearted investor want to prevent Bank of America from helping 400,000 home owners stay in their homes?

Let me attempt to explain:

  1. Countrywide wrote the loans and sold them on the secondary market.
  2. When they sold them, they didn’t sell them in 1 piece, they sold sections (called tranches) to a multitude of different investors and investment companies.   It’s actually possible that parts of one mortgage end up being owned by 30 different “parties.”
  3. The parties who bought these loans bought them as contracts that had a prepayment risk but didn’t buy them with a modification risk.
  4. When a loan gets modified, it changes that contract which inherently changes the value of the investment.
  5. The investors who are suing to stop it are saying that if you start changing the contracts, you are going to effectively ruin the secondary mortgage market because suddenly the value of the loans that are sold becomes an unknown.
  6. If the secondary mortgage market dies, then the housing market dies.   It’s just that simple, without mortgage money, the party is over.

Are the investors saying that the loans shouldn’t be modified?   No they aren’t.   What they are saying is, “I didn’t buy this investment with the thinking that it could be modified going forward.”   So if you, Mr. B of A, want to change the terms, that’s fine, buy it back and change the terms.

The investors are, it seems to me, hoping for one of two results:

  1. That Bank of America will buy the loans back (with our help of course).
  2. That they take their chances with foreclosures.  Given the report that the National Association of Realtors issued earlier on Mortgage Modification Defaul Rates of 50%, that’s not Read more
November 21, 2008

Quick Summary of the Day…..

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Mortgage Officer

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Okay, here’s a quick summary of the day:

3 Banks got taken over by the FDIC.   The biggest one was Downey Federal, a huge “Option Arm” lender.

While Citibank didn’t go under or get bought out, but their stock was 50% lower tonight than it was Monday morning.

The stock market staged a late day rally but still ended up way down for the week.   Why did it go up this afternoon?   Because President Elect Obama announced that he was selecting Federal Reserve Governor Tim Geithner.   Why did they rally on the announcement?   Best I can say is because they liked the fact that an “insider” who has experience is going to be taking over.

Pretty much the entire financial sector of the stock market got hammered this week.

The disconnect between Treasuries and Mortgage Backed Securities has never been clearer than it is this week.

Based on some of the people I’m reading, the way that yields on Treasuries have moved this week are indicative of huge amounts of fear and tension in the markets.

The Big Three auto makers showed up in Washington begging for money, didn’t get any and left us all with a feeling that no matter whether they get it eventually or not, it’s going to be painful.

After a very calm week last week, the volatility returned to mortgage rates.

Have a good weekend!

Tom Vanderwell

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