Maryland and Virginia Real Estate and Homes Blog

YOU GOTTA LOVE THE WALL STREET BAIL OUT, er um, BANK BAIL OUT.

Ain’t it wonderful to be so big that the government wants to make sure you’re confident?

The government is injecting $250,000,000,000 into the largest, most successful, richest, major BANKS in the country. 

Why?

Because they, the banks, are not lending to each other. 

Why? 

Because they are not confident.

Why? 

Because they don’t trust the balance sheets of their competitors.

Why?

Because too many of them have gone under overnight when off balance sheet hedges, swaps, investments, etc., have caused them to fail.

Why? 

Because they didn’t want the Fed, FDIC, SEC, etc. to know how much they are really worth.

Why? 

Because there was a huge amount of manipulation and illegality and unregulated activity involved.

Why?

Because they made big bucks on unregulated transactions.

So, in order to give these huge entities, major banks, confidence, the Fed will inject between $25,000,000,000 and $2,000,000,000into them.   The bigger thay are, the more of our money they will get. 

Ain’t confidence wonderful?

IT’S BEEN A ROCKY 2-3 YEARS.   Many real estate agents are working twice as hard for 1/2 the money, and they’re the lucky ones.   Many loan officers spend weeks documenting, getting approvals only to have a loan denied funding the day before closing.  No one ever really learns why but the implecation is always that the borrower didn’t qualify for one reason or another, more documentation, more money to close, house in wrong location.  I love that last one, house in wrong location.  A few years ago, many of these loans would have been approved and worthy home buyers would be moved in to their newly purchased dream home and making payments timely.

WHAT HAPPENED?  PERHAPS THERE IS JUST NO LOAN PRODUCT TO FIT THE NEEDS OF TODAY’S BORROWERS. 

REMEMBER THE ALT-A?  A LOAN PRODUCT REVIVED FOR A NEW MARKET.  When did we first learn of the Alt-A loan?  Seems to me it was sometime in 2002-2003, although I’m not sure.  I got an e-mail from a loan officer with whom I had done a lot of business over the previous 10 years. 

Lenn
Contact me about a the Alt-A loan product.
Alt-A loans will help buyers with good credit without income documentation.

The Alt-A was not a sub-prime PRODUCT.  The loans were purchased by Fannie Mae.  They met a need for consumers who “didn’t quite fit the traditional loan PRODUCT”. 

Interesting, I thought.  Goodness, this loan product must have been designed for some of our home buyers.  In the previous few months, we had prospective home buyers interested in taking advantage of falling interest rates but who couldn’t document sufficient income to qualify for the price range in which they wished to buy.  These buyers were either self employed contractors, business owners, sole proprietors, private duty nurses, software company partners, etc.  Many of these borrowers had been offered sub-prime loans because they couldn’t adequately document their income.  These buyers were almost all self employed, some with incomes to qualify at conforming rates or FHA but didn’t want to pay the high mortgage payments with the sub-prime rates.   The Alt-A loan PRODUCT was meant for this group of home buyers.

Primarily credit-score driven, the Alt-A loan product alleviated the limitations and due diligence headaches associated with documentation as well as assets and income verification. Translation:  If the credit score was high enough, the loan would be approved.  The borrower would pay a premium of 1/8 to 1/2% for the same interest rate, but they could buy their dream home.  Actuarial models had proven over and over again that borrowers with sufficiently high credit scores, 720 or above, were good risk borrowers.  WHAT?  No due diligence on the part of the loan officer/lender/investor???  Exactly.  The interesting thing about the Alt-A and similar loan products is that the guidelines do not require that the loan officer/lender/underwriter show that the borrower have the ability to repay the loan.  Such a deal! 

Of course, we know what happened.  The guys on Wall Street got greedy and designed a series of loan PRODUCTS that would permit more and ever more buyers to “qualify” but who didn’t have to demonstrate the ability to repay.  As long as Fannie Mae would buy the loans, bundle loans, chop them up and sell them to ever widening pools of big monied investors; investment bankers, hedge funds, sovereign wealth funds, etc., who knew that, as long as the American home owner continued to make their mortgage payment, their mortgage backed security was a safe investment. 

Alt-A Loans are defaulting left and right. 

What a difference 3 years make.  When home prices increased almost 100% in 4 years, the entire landscape of home buying and mortgage lending changes.  

• Folks who wanted to sell could not.
• Folks who wanted to buy could not.
• Mortgage brokers lost investors.
• Mortgage companies tightened guidelines.
• Fannie Mae ran out of money. 

YOUR LOAN IS NOT APPROVED!!  An interesting thing happened when Fannie Mae ran out of money.  Rather than admitting their incompetence and perfidy, they severely tightened the mortgage loan guidelines in an attempt to shift the blame for the lack of mortgage funding ability to the consumer borrower.  Loan officers were caught in the middle.   They knew the borrower met the guidelines when the buyers were approved.  The guidelines had become a moving target.

Fannie Mae and Freddie Mac ,who were experiencing monumental losses, falsified their  to be able to continue to borrow at advantageous rates to continue to buy loans on which no one had established the ability of the home owner to make their mortgage payments.  Of course, those same falsified financials permitted the Director, Franklin Raines, of Fannie Mae to receive multi-million bonuses. 

In 2004, $100,000 income qualified the average home buyer for a mortgage loan of about $525,000.  Many home buyers could qualify for 80/20 loans with $ZERO down payment.  As long as the credit score was high enough, a family could buy their dream home and qualify for a loan LTV of about 30-35% and often higher.  No longer did the ratios have to meet the traditional 28/36 test.  Millions of families took advantage of the liberal qualifying requirements.  Real estate agents sold a lot of real estate.  “Ah!  I remember it well.” 

In 2007, $100,000 income qualified the average home buyer for a mortgage loan of about $400,000.     Not only did the 2007 home buyer qualify for a much lower mortgage due to rising interest rates, the homes had increased in price almost 100% between 2002 and 2006.   The 4 bedroom Single Family Colonial on a 1/4 acre that was available in 2003 with a $100,000 income was now a 3 bedroom Town Home for the same $100,000 income.  Not only that, the buyers needed a down payment and a higher credit score to qualify for any loan.  Not only that, many buyers were pre-qualified, qualified, pre-approved, approved, provided a loan commitment, etc. only to find out 2 days before closing that their loan was not funded and their broker couldn’t find an investor.  Or, they got to the settlement table and found out that they needed another $4,000-$10,000 to close.  Why does everyone look at the real estate agent when that happens??

The above does not compare identical loan instruments because many of the loan instruments available in 2003 no longer existed in 2007.  Home buyers are often less interested in loan types than the monthly mortgage payment.  I love the American home buyer, but I do not give them any credit for understanding market value or mortgage loan products.  The consumer is focused on the monthly payment.  When it is low they know they can make it.  The fact that the payment will increase substantially is rarely the focus of the borrower.  They fully intend to refinance out of the ARM but need it to qualify to buy their dream home today.  There’s a bit of Scarlet O’Hara in most of us.   The American consumer is also very optomistic and very trusting of mortgage professionals.  They have to be.  They don’t understand what is happening.  Just give me my house!

WAIT, IT GETS WORSE!  For the first time in the history of the real estate market, not only did the home buyer / borrower have to qualify for the loan, so too did the property.  Remember the “DECLINING MARKET SYNDROME”?   Homes in some neighborhoods that had declined in market value or were thought to have the potential of declining in value at some unknown time in the unknown future, THROUGH A PROCESS OF DEVALUATION, were denied appraisals and the loan was denied. 

This was the most illogical force in mortgage lending in my memory since racial red lining. 

By about late 2006 to early 2007, home buyers looked at what they were qualified to buy and said “I don’t want that piece of junk”.   They stayed where they were and are just now coming back to look at the market, albeit, very, very slowly and with a lot of trepidation. 

Sure, it was a buying frenzy.  Prices were going up.  Interest rates were going down and, suddenly, families realized that it was an opportunity to buy in that great school district or buy that wonderful 4,500 square foot home that they had dreamed about for many years.  If they didn’t buy now, they might not be able to next year.  Of course, there were many buyers who purchased with the clear intention of reselling immediately following settlement.  Not a small percentage of these investment buyers were in the real estate industry. 

WHAT HAVE WE LEARNED?  A few things come to mind.

Just as car manufacturers design new vehicle models to respond to consumer demand, the mortgage industry designs mortgage products to respond to market changes.  Innovation is a good thing.  New products and new ideas fuel the engine of free enterprise.  However, in light of the disaster that is the real estate industry and mortgage industry today, in the future, I suspect that most of us will be just a bit more careful, run those numbers, and if a buyer doesn’t appear to qualify and show the ability to repay their mortgage loan, let them know it.  Show them the numbers today and 3 years from now.  Run that amortization table.  It’s an eye opener for many prospective home buyers.   

Courtesy, Lenn Harley, Broker, Homefinders.com. 

IT’S A MORTGAGE MESS, NOT A REAL ESTATE MESS. A DEFENSE OF REAL ESTATE AGENTS

                                * * * *   HARD CORE REAL ESTATE TALK * * * *

Thanks to the Mortgage Pro Week in Revew: 6/30/2008 throught 07/06/2008  by Alan ‘AJ’ Nisen, I found some very good reading material by ActiveRain members from the mortgage loan industry.   

NOTE:  ADD this link to the content in this post.  It’s very interesting. 

One of the featured articles includes real estate agents in the group responsible for the mortgage mess.  Including real estate agents in the blame game for the mortgage mess appears to be a knee jerk reaction.  However, the writer doesn’t say how the real estate agents were responsible for the mortgage mess.  We know how mortgage loan officers can be responsible for approving loans for unqualified buyers.  I have yet to hear how a real estate agent can be responsible for a loan officer approving an unqualified prospective borrower. 

“Get pre-approved before selecting a real estate agent” is the advice from mortgage loan officers and HUD.  If mortgage loan officers can pre-qualify a prospective home buyer before the consumer has selected a real estate agent, how does the real estate agent become responsible for the actions of the loan officers approving loans for consumers once the consumer has an agent???  

The mortgage loan officer is not responsible for the institutional creation of the Alt-A, the Neg. Am, etc. loan instruments.  Those loans were created at a much higher level than the mortgage loan officer.  In fact, Fannie Mae and Freddie Mac guidelines approved many loans that were doomed to failure.  Surely, the mortgage companies that employ loan officers have Policies and Procedures for their employees.

• On Tuesday, Fannie Mae (nyse: FNM - news - people ) executives told analysts that 43.0%, or $946 million, of the $2.2 billion in losses incurred during the first quarter involved Alt-A loans. They also said that the company’s “Alt-A book will continue to drive an outsize portion of our overall credit losses.” Fannie also reported $344.6 billion current Alt-A exposure and a limited strategy for stemming future losses.  Forbes, May 6, 2008.
   

REAL ESTATE AGENTS ARE AT THE BOTTOM OF THE FOOD CHAIN.   I’ve read the license law in both states in which I practice real estate brokerage.  Neither have any duty on the part of the broker or agent to advise or have any knowledge of mortgage lending, rates, terms or conditions.  How can real estate agents be held responsible to police the actions of mortgage loan officers??  Not only are they not trained in the intricacies of mortgage loans, they have no authority to police the application and approval process or criteria for mortgage loan approval. 

Why does everyone try to suck the agents into this mortgage mess?  Agents have their job and loan officers have their job. 

• Does the agent blame the mortgage loan officer when the agent fails to provide required disclosures? 
• Does the agent blame the loan officer when a buyer closes on a home without the HOA docs?
• Does the agent blame the loan officer when the agent practices undisclosed dual agency? 
• Does the agent blame the loan officer when the agent provides an inaccurate CMA?

Real estate agents and brokers do have many duties for which they bear responsibility.  Mortgage loan approval is not a duty of the real estate agent.  There are many levels of knowledge and exprience of real estate agents.  However, mortgage lending is not a required competency for real estate agents.  I have always been of the opinion that it takes about 100 transactions before a real estate agent really has an understanding of real estate brokerage.  If agents are responsible for mortgage loan failures, you’ll have to add a few years experience for competency.  Few agents even attend or participate in mortgage loan applications.  If we are responsible, we would have to have been involved in the approval process.  Real estate brokerages have published Policies and Procedures for their real estate agents.  Those guidelines do not include mortgage loan approval authority. 

Loan officers often say that they wouldn’t approve bad loans for buyers if the agent didn’t “pressure” them to do so.  This statement astounds me.  Pressure from an agent is hardly an excuse for failing to follow the law or guidelines for a mortgage loan. 

All the mortgage loan officer has to do is “SAY NO”!The blame game has to stop when one sector of the real estate industry tries to suck everyone into the mess and refuses to police themselves and accept responsibility for the causes.  

If the mortgage loan industry is not going to accept the responsibility for making mortgage loans to consumers who didn’t meet the guidelines, the persons making those loans will continue to perpetuate this problem and the consumer will continue to be badly served. 

Consumers do not understand mortgage loans even when they shake their heads up and down and say that they understand. 

Many real estate agents do not understand mortgage loans, even when they shake their heads and say that they understand. 

Mortgage loan officers DO understand mortgage loans and if they approve a loan for an known unqualified home buyer, they may bear responsibility for their actions.  FHA and VA have “charge back” features that go a long way to prevent unqualified buyers being approved.  Loan officers know when a buyers is qualified and when they are not. 

In all the years I’ve been selling real estate, I’ve never known a loan officer who couldn’t say “NO”.

                            “Good news!  I can qualify you for a loan with a 1.5% start rate.”

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THIS MAIL HAS GENERATED SOMETHING I HAVEN’T GOTTEN IN QUITE A WHILE

I’M GETTING FLAMED!!! 

Note, that the whiners don’t have the guts to publish their views.  They primarily flame me with e-mail exhibiting a considerable level of commission envy. 

I never quite understand why loan officers complain about the “6 or 7%” that real estate agents collect at the end of a sale.  Fact is, they all have the freedom to do the same thing we do.

Take the real estate course
Pass the real estate exam
Get hired by a broker
Invest in promotion and farming for customers
Work your butt off to meet qualified buyers and/or sellers
Work your butt off to get some buyers and/or sellers to settlement
Collect the commission

It’s a free country and I suspect that anyone who can get a job as a loan officer
could get a real estate license and strive for those easy commissions.

It’s a free country.

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Wednesday 7/26, 2008

Well folks.  This has been an exciting read.  I’m not quite caught up yet and may not ever be. 

I just returned from a meeting with a loan officer and his underwriter getting caught up on their processes for approval, etc.  I like to meet with new mortgage company folks to look them in the eye. 

For one thing, it gets my calls answered or returned quickly and my folks get good care.  That’s important because I refer 2-3 buyers to mortgage companies every day. 

I’ve already sent this loan officer about 25 buyers (about 6 have been rejected) and thought it was time we met.  It was a very productive meeting.  But, I won’t be doing his job and he won’t be trying to qualify folks who don’t meet their the guidelines.  I’m not taking those buyers anywhere else. 

My agent and broker partners to whom I refer buyers will benefit from the meeting and communication will be better than if we had not had the meeting. 

The point of this comment is that real estate agents and mortgage loan officers can have a good mutually beneficial relationship working together.  Agents can’t hide their heads in the sand and try to make square pegs fit into round holes.  A buyer is either qualified or they are not. 

However, our competencies are quite different.  I do my job and the mortgage company does theirs. 

It’works very well. 

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Thursday, July 17, 2008

As the pusillanimous “google” points out above, below, thinking he found something incriminating in one of my past posts, I did say “I don’t have a problem with 100% loans.”.  In didn’t when I wrote that post and I don’t now.

And for the record, I don’t have a problem with Alt-A, negative am, pay option, etc. loans.  Exotic?  Sure.  However, used responsibility by loan officers, they open the doors to home financing that would otherwise be closed to many responsible home buyer such as self employed persons, persons who are on an upward mobility track in a professional field like medicine.

However, I do know that the consumer should be provided with an amoritization table so they have actually seen how their payments and mortgage balances will move.  Disclosure and information would have saved a lot of consumer the anguish of foreclosure if they had simply known.  In the past 10 years or so, I have had one, just one, loan officer provide a 10 year amortization table to my buyers.  So I do it.  Am I stepping on the toes of the loan officer?  No.  I’m just letting my buyer who wants to buy a home at the limit of their qualifying range know what to expect. 

We also through the house (along with a wonderful home inspector who agrees to perform this extra service for my buyers) and let them know what to expect in the way of home maintenance and upgrade costs for the next 5-10 years.  If a buyer spends his last dime to buy a home and the air conditioner, while working new, is at the end of it’s useful life, that buyer is at risk if he has to pay $5,000 for a air conditioner and only has sufficient income to meet his mortgage payment. 

So, there is nothing wrong with 100% financing if it gets a family into a home they want and need as long as it can be established at the outset that they are prepared financially to make the mortgage payments. 

It’s very difficult for families (even a family of one) to save cash these days.  However, everyone has to have shelter and if buying a home with 100% financing is an alternative to renting, I’ll help them all I can.  However, I don’t expect loan officers to put my buyers in loans that put that buyer at risk of foreclosure. 

If, on paper, the buyer works two jobs and earns $25,000 W-2 earnings and they are approved for a $500,000 house with a 100% mortgage, that’s not one of my buyers.