Mortgage Lending Made Simple

By Kathleen M. Howley and Dan Levy

Aug. 14 (Bloomberg) — Existing U.S. home sales fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7.6 percent as the real estate recession deepened.

The median price tumbled to $206,500 from $223,500 a year earlier, the Chicago-based National Association of Realtors said today. Sales of single-family houses and condominiums fell 16 percent to 4.913 million at an annualized pace.

Prices are declining with the U.S. on the brink of a recession, consumer prices rising and 30-year fixed mortgage rates at a six year high last month. A third of all sales in the quarter were foreclosures or “short sales,” in which lenders take a loss on a property, the Realtors said. Bank repossessions almost tripled in July from a year earlier, RealtyTrac Inc., a seller of foreclosure data, said in a separate report today.

“It’s getting worse,” Rick Sharga, RealtyTrac’s executive vice president for marketing, said in an interview. “The number of properties that have been foreclosed on by the banks and still haven’t sold is the highest we’ve ever seen.”

U.S. economic growth slowed to 1.8 percent in the second quarter as unemployment rose. Forecasters say home values will drop more. The S&P/Case Shiller home price index that tracks 20 cities may tumble as much as 12 percent this year, McLean, Virginia-based Freddie Mac, the No. 2 mortgage buyer, said in an Aug. 11 report.

California Prices

The biggest declines reported by the Realtors today were in Sacramento, the capital of California, with a 36 percent drop, followed by the metropolitan area around Cape Coral and Ft. Myers, Florida, down 33 percent.

Riverside and San Bernardino, California, tumbled 32.7 percent, and Los Angeles dropped 30 percent, according to the report. The metropolitan New York area, including parts of northern New Jersey and Long Island, fell 5.3 percent, and Boston dropped 11 percent.

Bank seizures of properties in default rose 184 percent to 77,295 in July, according to RealtyTrac. That was the steepest increase since the Irvine, California-based company began reporting data in January 2005.

More than 272,000 properties, or one in 464 U.S. households, got a default notice, were warned of a pending auction or were foreclosed on, RealtyTrac said. Nevada, California and Florida had the highest rates, RealtyTrac said.

Foreclosures Spur Sales

“In many areas with large concentrations of foreclosure sales, homes are being purchased below replacement cost values,” Richard Gaylord, president of the Realtors’ trade group, said in the report.

Price discounts are spurring buyers in some areas of the country, according to the Realtors report. One quarter of the states had price increases in the second quarter when compared with the prior three months.

“Once the inventory is drawn down, price pressure will return because the costs of construction are rising,” Gaylord said.

There were 4.49 million U.S. homes for sale at the end of June, the highest in a year, according the Realtors’ association. At the current sales pace, that represented 11.1 months’ worth, up from 10.8 months’ worth at the end of May, the trade group said in a July 24 report.

Foreclosures are depressing home prices, contributing to job losses and weakening consumption as fewer people borrow against the value of their home, New York-based analysts at Lehman Brothers Holdings Inc. said Aug. 7.

Banks Take Property

U.S. home prices fell 15.8 percent in May, the most since at least 2001, according to S&P/Case-Shiller. One-third of home sellers in the second quarter lost money, Zillow.com, a Seattle- based provider of home valuations, reported this week.

Bank seizures, known as real estate-owned or REO properties, are the “fastest growing segment of foreclosure activity,” James Saccacio, chief executive officer of RealtyTrac, said in the statement. The REO properties in the company’s database represent about 17 percent of the inventory of existing homes reported in June by the National Association of Realtors, he said.

Default notices in July increased 53 percent from a year earlier and auction notices rose 11 percent, RealtyTrac said.

Foreclosures could put 8.4 percent of total U.S. homeowners, or 12.7 percent of homeowners with mortgages, out of their homes, according to New York-based analysts at Credit Suisse. About 53 percent of subprime borrowers, those with poor or incomplete credit histories, will have negative equity in their homes this year, and that percentage will rise to 63 percent next year, the analysts said in an April 23 report.

National legislation is designed to help up to 400,000 homeowners refinance their adjustable-rate mortgages into fixed- rate loans. That bill, backed by the Federal Housing Administration, may help borrowers who take advantage of the state relief. Almost one-third of homeowners who bought in the last five years owe more on their mortgages than their houses are worth, Zillow reported.

As a result of the Housing and Economic Recovery Act, HUD is terminating the use of interested party down payment assistance.  Interested party down payment assistance consists, in whole or in part, of funds provided by any of the following parties before, during or after closing of the property sale:  the seller, or any other person or entity that financially benefits from the transaction; or any 3rd party or entity that is reimbursed directly or indirectly by the seller, or any other person or entity that financially benefits from the transaction.

By now all of you have seen or heard about the new Housing and Economic Recovery Act recently passed by Congress.   One of the results of that act is the elimination of Down Payment assistance by HUD on FHA Loans as outlined above.   It is still acceptable for the Seller to provide closing costs assistance, this change only applies to the practice of using  Programs such as Genesis that allow Sellers to indirectly pay all or part of the Buyers Down Payment.

By Jody Shenn

Aug. 5 (Bloomberg) — Fannie Mae, the largest U.S. mortgage- finance company, will raise a fee that the company charges lenders to buy their mortgages or guarantee home-loan securities, potentially boosting costs for borrowers.

Fannie Mae’s “adverse market delivery charge” introduced earlier this year for all mortgages that the company helps finance will rise to 0.50 percentage point on Oct. 1, from 0.25 percentage point, according to a letter to lenders posted on the Washington-based company’s Web site.

Government-chartered Fannie Mae and Freddie Mac have been tightening standards and raising fees since last year to boost revenues and limit losses amid the worst housing slump since the 1930s. The changes have made it harder for borrowers to get home financing, contributing to deeper price drops, said consultant David Lykken of Mortgage Banking Solutions in Austin, Texas.

“Everyone has to go to Fannie Mae and Freddie Mac right now, as there’s very few alternatives,” Lykken said in a telephone interview. The latest fee increase will “increase loan prices and the housing market is going to get worse.”

Fannie Mae also adjusted what it will pay for, or charge in bond guarantee fees on, mortgages with certain down payments, borrower credit scores or combinations of the two, according to the letter dated Aug. 4. The costs will fall for some loans to consumers with scores greater than 620, out of a possible 850, and loan-to-value ratios of more than 85 percent, while rising for some loans with down payments or home equity of between 15 percent and 25 percent.

Rising Delinquencies

Fannie Mae and Freddie Mac finance about 70 percent of new U.S. home loans. Analysts expect the companies to report net losses through the first quarter of 2009 as home-loan delinquencies rise to the highest on record.

Fannie Mae announced the adverse-market fee in December and put it into effect in March. McLean, Virginia-based Freddie Mac also began charging a similar 0.25 percentage point fee.

“We’re always looking at our fees in light of market developments,” Brad German, a Freddie Mac spokesman, said in a telephone interview today.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

By now most of you have likely read, heard or seen some alarming reports about Wachovia over the last few days. These stories have spurred rumors and misconceptions through out our community. Here is the story, as I know it.

Approximately 2 years ago, Wachovia acquired Golden West Financial. This was driven by the success Golden West had with mortgages from the bank branches. Wachovia began to model its’ mortgage operation after that of Golden West. In doing so, they actually created two mortgage origination teams, one for the banks and one for Realtors and the public. This also created parallel management teams, also known as duplication of expenses.

After approximately two years of diligent work, coupled with the market challenges, Wachovia has decided to return to mortgage banking as it used to be. This eliminates the parallel management.

In addition, Wachovia has closed the wholesale division, which means Wachovia WILL PROCESS AND FUND ONLY LOANS ORIGINATED by WACHOVIA EMPLOYEES, not loans originated by mortgage brokers or other lenders. This is a policy shared by a number of other mortgage industry leaders.

It is these two actions that represent the vast majority of the staff reductions announced by Wachovia.

Wachovia, as is the case with most other mortgage companies, is returning to a mortgage market that is served predominantly by government insured or guaranteed loans. That is, FHA, VA, RD, VHDA and conforming conventional loans.

In the past, as the market grew rapidly, there was great pressure on lenders to expand their product mix to accommodate home buyers who did not fit the standard mold, much like putting a square peg in a round hole. As we have seen, this eventually lead to disappointing results. In a nut shell, that is what caused the mortgage debacle.

There is not a major participant in the mortgage industry that has not been hurt by this fall. The result is an old adage, “Only the strong will survive.” To that end, Wachovia is financially strong, they have a good cash reserve position, without borrowing huge amounts as some other mortgage companies have done.

Yes, there are rumors that another bank will buy Wachovia. Such rumors are always on the street. Those rumors are also not limited to the purchase of Wachovia. They exist for several of the top 15 banks in the country.

In case you were not aware, a bank can not simply go into a community and open a branch, they must have FDIC approval, and in some cases, it is ruled that the community has reached a saturation level and the only way to gain entry into that market is to purchase an existing bank or branch.

I ask that you consider your history with me and my 35 years of history and experience in the local financial community. I have included excerpt from Bob Steel’s memo of 7/22 for your information (see below).

Please do not hesitate to contact me with any questions you may have.

EXCERPTS FROM

FROM:   Bob Steel, CEO

RE:         Second Quarter 2008 Financial Results and Related Actions

Cutting the dividend and eliminating positions were difficult decisions. But both are the right moves for our company at this time. I am confident that these actions, and others we will take in the weeks ahead, will allow us to be good stewards for our company so that we can serve-at the highest level-our shareholders, customers and communities.

Here are some second quarter details for our four core businesses:

• The General Bank posted earnings of $1.1 billion and total revenue of $4.7 billion, which reflects strong sales momentum.
  Wealth Management reported 9 percent growth in year-over-year earnings to a record $98 million on 6 percent revenue growth. Net interest income increased 11 percent on 10 percent loan growth.
  The Corporate and Investment Bank has returned to profitability with earnings of $209 million, reflecting lower market disruption losses compared to the first quarter of 2008.
  Capital Management delivered earnings of $297 million on 29 percent revenue growth from the second quarter of 2007. The group posted an 18 percent increase in net interest income year-over-year, driven by the A.G. Edwards acquisition and solid growth since then.

We are a strong company, as these underlying numbers show, but we still have significant challenges ahead of us. It’s important to recognize the environment may become tougher before it improves. We are taking decisive actions to correct issues, address challenges head on and continue moving forward. We also are focused on our short-term priorities of growing, protecting and preserving our strengths: our capital, our liquidity and our core businesses and the earnings they produce.

After months of rumors of financial troubles Bear Stearns is bought out in a last minute “bargain basement” buy by JPMorgan Chase.   The Fed and the US government approved the purchase over the weekend with an eye towards preventing more market chaos as one of the largest investment banks collapses.

“This is going to go down in very historic terms,” said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. “This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we’re probably heading into a recession.”

JPMorgan purchased Bear Stearns for $236.2 million dollars or approximately $2 per share.  This discounted purchase was made possible by the Fed guaranteeing up to $30 billion of Bear Stearns more risky assets.

In an effort to stabilize the market, the Fed announced additional measures to help hard pressed banks and financial institutions.  The Central Bank slashed rates to 3.25 percent from 3.5 percent.  It also announced a new lending facility to offer short term loans to large investment firms which will accept investment grade mortgage securities as collateral.

Federal Reserve Chairman Ben Bernanke said, “These steps will provide financial institutions with greater assurance of access to funds.” According to the Fed, these steps should “bolster market liquidity and promote orderly market functioning.”

This discount rate cut only effects short term loans that financial institutions get from the Federal Reserve.

I think the following information is very note worthy to all of us in the housing market.  The goal of providing Liquidity should help improve the availability of loan programs in the near future.

Federal Reserve Announces Highly Innovative Move (TSLF)

The Federal Reserve announced today that it will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.  In a statement this morning the central bank plans to make up to $200 billion available through weekly auctions.  This represents a creative angle for the Fed to forge remedy in a non-traditional manner and was choreographed in conjunction w/injections of $45 billion from ECB, BOE, BOC and BOJ into their systems.

The Fed’s monumental, innovative move is designed to reliquify the mortgage market where in recent months it was becoming almost impossible to buy even AAA mortgage paper (i.e. Thornburg Mortgage) as no one had been willing to step up and take the risk.  From a clearing standpoint, the Fed’s newly created Term Securities Lending Facility (TSLF) looks like a futures exchange which, in effect, offers collateral cleansing for mortgage paper.  It’s important to note that the Fed is not monetizing “bad mortgages” or any mortgages for that matter, it is simply willing to take the paper in question and lend Treasuries against it.

I realize most of the attention today is on the equity markets but I want to share with you some “other” takeaways:

• The Federal Reserve’s move should prove to relieve balance sheet pressure on US banks and adds sorely needed liquidity to the mortgage markets.
• With this action the Fed is indicating it wants out of the rate cutting business which has exacerbated dollar currency woes that has led to excessive moves in commodity markets, fanned inflation, while depleting foreign capital out of US markets.  Please note the ECB Chairman Trichet has been talking down the Euro over the last several days, signaling central bank coordination.  The dollar no doubt is the fulcrum for much of our current market conditions.
• The Fed announcement almost assures there will be no interim rate cut prior to March 18 FOMC meeting which had been rumored (Goldman Sachs) over the last couple of days.
• In this non-traditional move the Fed will most likely enable investment banks to make more productive use of capital and will indirectly help hedge funds that have been seized up with illiquidity as they will now be able to “sanitize” their assets.  By taking the troubled mortgage paper and depositing it into Fed vault for 28 days in exchange for T-Bills will allow for the “shoring up” of balance sheets.
• 2yr Treasuries sold off heavily on the announcement producing a 25bp swing up in yield.
• The Fed may be nearing the end of its rate cutting campaign and likelihood of an addl 75bp cut appears to have diminished altogether with this announcement.   A rate cut of 25 to 50bps in Fed Funds may be more realistic for March 18 and may turn out to be the “final round” before the wait begins for signs of economic/market recovery.
• This may turn out to be a noteworthy event over the longer term and may one day be noted as a turning point in the current US economic and market contraction.  Although in the immediate it spelled a sharp sell-off in near term Treasuries (no longer looking for 75bp Fed Funds cut) the longer term benefits may prove to be a freeing up of liquidity/investment capital that could slowly begin to re-energize among others, the real estate market.  Low rates will accompany us for remainder of the year and the yield curve is in banks’ favor.  This appears to be a good move, highly innovative and coordinated with other central banks.  Apart from a 417 point rally in the Dow, there were other reasons to celebrate…

Michael J Haddad
Wachovia Wealth Management

Several Reports have been issued recently suggest that sharply lower home prices are driving faster increase in credit losses and causing lenders to increase reserves for residential real estate secured loans. However, the increase in losses on residential mortgages, we have seen will be compounded by very large increases in Home Equity credit losses.

Home Equity Credit Lines are Second Liens/Mortgages that only get paid after the 1st Mortgage is satisfied during a Foreclosure. Borrowers will in many cases pay their 1st Mortgage and try to negotiate with the Home Equity Lenders in hope of convincing them to take partial payment and forgive the bulk of the 2nd Mortgage, rather than risk loosing the entire loan at Foreclosure to the 1st Mortgage Lender. Credit losses are also likely to rise further in auto loans.

CNN reports that the Foreclosure prevention plans that are before congress right now are under attack for a couple of reasons.  Lenders are claiming that as it increases risk and lowers profit for investors it could ultimately drive interest rates up across the board.  One analyst is predicting as much as a percent and a half increase.  The other criticism is that it will only help a relatively small percentage of those in trouble.   You can read more about it in CNN’s Article on Foreclosure Prevention Plan Under Attack.

While interest rate resets are looming on the horizon for many homeowners, it seems that subprime mortgages are going into default at an alarming rate BEFORE they reset.  CNN reports that 11.2 percent of subprime loans issued in 2007 are in default.  If you watched the flash presentation on A Subprime Primer you may have noticed that they mentioned Liars Loans and CNN’s article on Subprime Loans Defaulting takes a look at why these loans are defaulting. 

If you are considering buying a house, Liz Pulliam Weston at MSN Money has some great advice in her post on 8 Big Mortgage Mistakes And How To Avoid Them.  In particular, her advice on fixing your credit BEFORE you apply for a loan is spot on.  If you have not pulled your credit report, it’s a good idea to do so 3 to 6 months in advance of a major purchase.  This gives you time to resolve any issues and time for your FICO to reflect any changes.  Her advice on shopping for rates and terms is exactly the reason why you will want to work with an experienced loan officer whom you can trust to give you different options and an explanation of why each might be better for you. 

If you are in trouble and think you might lose your home, Save Invest and Retire has some excellent resources to help avoid foreclosure in his post on Walk Away From Your Home Part II Resources.  While many are making a choice to walk away, the consequences that foreclosure will have may be more far reaching than you believe.

This came across my desk recently and I thought it was worth sharing. This is a humorous but accurate look at how the Subprime situation happened.