Those who pay their bills on time will cringe at how people can work the system successfully. Hat tip to SM who sent in this story told by a mortgage rep in Orange County:
My client had both a first and second mortgage on his Southern California home. He fell on hard times back around the Great Recession days. He filed for Chapter 7 bankruptcy in 2011.
Meanwhile, he got back on his feet income wise and credit wise. He made timely payments on the first trust deed, but never paid one penny of his remaining $250,000 second trust deed balance in eight years.
He contacted me about refinancing both his first and second loans into a single new loan. He also had negotiated a $140,000 reduction of the second. So, $250,000 owed turned into a $110,000 second mortgage payoff.
A very sharp underwriter looked more closely at the circumstances of this file. She was able to approve my client on a new Fannie Mae fixed-rate loan with a whopping $545 lower house payment because Fannie’s loan had an interest rate that was 1.875 percent lower than the non-prime loan we were seeking. Hallelujah!
It used to be that mortgage underwriting guidelines were absolutely against any borrower who was perceived as somehow stiffing the lender. In this instance, non-payment and a reduced payoff.
“I’m pleased to see a lightening of the guidelines,” said Susan Ashton, sales manager at Plaza Home Mortgage. “It’s really a positive thing.”
So, let’s dig a little deeper.
While bankruptcy discharge protects borrowers from having to reimburse lenders for missed house payments, it doesn’t protect them from foreclosure, according to Newport Beach bankruptcy attorney Michael Nicastro. Hence, borrowers typically continue to make their required house payments.
Mortgage lenders cannot demand payment on unpaid debts. So, post-bankruptcy, lenders do not report borrower late payments or delinquencies to credit bureaus.
Often the second mortgages are underwater — meaning the value of the house is less than the sum of the first, second, and accrued interest, etc. So, there is no point in foreclosing.
Those lenders typically sell the non-performing seconds for pennies on the dollar to what is known as “scratch-and-dent” investors. These scratch-and-dent investors hope to collect when the property value comes back.
Nicastro points out that the lender can send to the borrower a 1099-C (Cancellation of Debt), reporting the unpaid balance as income to the IRS.
“Check with your CPA,” Nicastro said. “If debt is canceled in bankruptcy, it’s possible that there is no taxable impact.”
Appreciation is slowing down, and though it looks like San Diego slammed the brakes on between February and December last year, it’s nothing compared to San Jose where sellers went through the windshield, figuratively.
The year-over-year increase in our December Case-Shiller Index was +2.3%, and with Black Knight’s at 1.7%, let’s average and predict 2% appreciation for San Diego in 2019. It means 1/2% per quarter, which sounds pretty flat.
Earlier this week CoreLogic reported that the annual rate of appreciation in January, 4.2 percent, was exactly two-thirds the rate in January 2018. The Black Knight Mortgage Monitor essentially confirms that deceleration, reporting price increases dropping from 6.8 percent last February to 4.6 percent at year end.
Ben Graboske, president of Black Knight’s Data & Analytics division, explained that while home prices are still up year-over-year in all 50 states and the nation’s 100 largest markets, slowing is noticeable nationwide and – combined with recent interest rate reductions – is helping to improve the overall affordability outlook.
“At the end of December, home prices at the national level had fallen 0.3 percent from November for their fourth consecutive monthly decline,” he said. “As a result, the average home has lost more than $2,400 in value since the summer of 2018. And while home prices are still up on an annual basis, the slowdown continues nationwide and, importantly, is not being driven by seasonal effects. December marked the 10th straight month of slowing annual home price appreciation.”
He added, “With more than 50 percent of areas reporting, early numbers for January suggest we’re likely to see more of the same. That said, it’s important to keep in mind that annual growth is still outpacing the 25-year average of 3.9 percent – although the gap is closing quickly. Also, it’s yet to be seen what impact the recent pullback in interest rates may have on the national home price growth rate.
The slowdown has been especially apparent in the West. While some interior states are still seeing large gains – Nevada, Idaho, and Utah saw the greatest increases in the nation with Nevada still in the double digits – large metro areas on the coast have seen appreciation rates plummet.
Black Knight looked at the 10 largest markets in California and at Seattle and found that eight of them had seen their appreciation rate cut in half over the previous 10 months and by 70 percent in five of them. While prices in Washington State as a whole are still increasing by 5.7 percent, Seattle’s several year double digit run has evaporated. The annual rate is now 3.1 percent.
Provident Savings Bank, the largest community bank in Riverside County, is discontinuing its mortgage banking operation, the company said in a statement.
The decision, announced by the bank’s board of directors Feb. 4, was based on a lack of profitability given the current financial environment. The operations are scheduled to cease on or before June 30.
Layoffs of 133 employees, of which 83 are in Riverside, were posted this week on the California WARN Act website, which requires layoffs to be publically reported. The others were at satellite offices in Brea, San Bernardino, Glendora, Carlsbad, Placer County and Northern California.
HomeStreet announced Friday that it is planning to sell off its entire retail mortgage operation, which includes 72 home loan centers in five states, as well as nearly all of the mortgage servicing rights associated with loans originated in those retail outlets.
According to HomeStreet’s website, the company has 72 home loan centers: 37 in Washington, 16 in California, six in Hawaii, five in Idaho, and eight in Oregon.
According to the bank, it is making this move due to the “persistent challenges facing the mortgage banking industry.” The bank cites “the increasing interest rate environment,” which has reduced the demand for refinances, and higher home prices that have decreased the affordability of homes.
The mortgage business thrives on refinances in the ultra-low rate environment, but once rates rise, those refis dry up in a hurry.
A long-time local lender told me this week that two years ago there were 8,000 licensed mortgage originators in San Diego County, and today it’s 4,200!
We speculated that many of them became agents – another industry that is overdue for constriction. There are over 15,000 realtors in San Diego County, and last month we sold 1,770 houses, condos, and mobile homes countywide.
Everyone who is financing a home purchase should strongly consider the standard 30-year fixed-rate mortgage.
Though I recommend you move every 6 to 12 months (it’s good for business) these days most people are in it for the long-term. Even if you knew it wasn’t going to be a lifetime house, consider keeping it as a rental when you move.
But for those who have very strong income, or know they have an inheritance coming, a business or property to sell, or know their lucky Lottery numbers are going to pay off sooner or later, you may want to consider today’s version of exotic financing.
You should only take an alternative to the 30-year fixed rate if you had a solid plan to pay it off early. Don’t get an ARM thinking you’ll refinance someday, because it’s likely you’ll never get around to it – the fixed rate loan will have a higher payment, and you’ll shrug it off.
Here’s a choice today for mortgages up to $1,500,000:
3.875% fixed rate at 1.25 points, or
4.375% interest-only for ten years, no points.
Let’s say you want to finance $1,500,000:
The 30-year fixed option is $7,054 per month, and will cost $18,750 up front.
The ten-year ARM is $5,469 per month for ten years, with no points.
A benefit of the regular 30-year fixed-rate mortgage is the principal reduction every month – it’s a forced savings plan. After ten years, you will only owe $1,137,917, instead of the full $1,500,000 with the interest-only loan.
The ARM will feel like a fixed-rate loan with no payment change for ten years – which could lull you to sleep, and come back to haunt you 8-9 years from now.
Don’t take the 10-year deal just to get a lower payment. Take it because you know you have the ability to pay it off in the next ten years.
It sounds like mortgage rates will be rangebound for the foreseeable future, which is good for buyers – but not necessarily for sellers. Without the threat of rates going higher, buyers will be even more patient:
It’s true that markets were already expecting a dovish Fed announcement. This created an asymmetric risk that the Fed would only be as friendly as they needed to be and that rates would have been positioned too low for such a thing. As it happened, however, the Fed was noticeably friendlier than most anyone guessed.
They dropped their verbiage pertaining to additional rate hikes. This effectively begins an era where rates will remain at current levels until economic data or other considerations motivate a change. Big news indeed!
They also dropped the reference to economic risks being balanced. The only way to be any friendlier to bonds would have been to say that economic risks had tilted to the downside (which can already be inferred from this change).
They also said they were prepared to adjust the balance sheet normalization policy if needed (i.e. they could start buying MBS again). Unsurprisingly, MBS liked this news and improved at a faster clip than 10yr Treasuries. Part of the 10yr’s problem was the big advantage the Fed’s announcement provided for shorter maturity Treasuries. In other words, traders were buying Treasuries, but most of the love went to the 2-5yr sector.
In the bigger picture, this is just another decently-sized green day for 10yr Treasuries, but reading between the lines, there’s a bit more to like. For MBS, it was easily the best day since January 4th. Not only that, but there’s a chance we look back at this as the day the Fed confirmed the end of the rising rate environment of the past 2 years. Granted, the past 2.5 months already did quite a bit in that regard, but it’s going to take a bit more time and stability to get comfortable with that idea.
Aryanna Hering didn’t have pay stubs or tax forms to document her income when she shopped around for a mortgage last year—a problem that made it tough for her to get a loan.
But the nursing student who works part time providing home care for children and the elderly eventually hit pay dirt: For a roughly $610,000 home loan, a mortgage company let her verify her earnings with 12 months of bank statements and letters from clients.
Ms. Hering’s case highlights how a flavor of mortgage once panned for its role in the housing meltdown a decade ago is making a comeback. These loans, aimed at buyers with unusual circumstances such as those who can’t provide the standard proofs of income, are growing rapidly even as rising interest rates and higher home prices crimp demand for mortgages.
Lenders issued $34 billion of these unconventional mortgages in the first three quarters of 2018, a 24% increase from the same period a year earlier, according to Inside Mortgage Finance, an industry research group. While that makes up less than 3% of the $1.3 trillion of mortgage originations over that period, the growth is notable because it came as traditional home loans declined. Those originations fell 1.2% over the same period and were on track for a second down year in 2018.
Tom Jessop, the loan consultant at New American Funding who handled Ms. Hering’s loan, said he has seen demand for unconventional loans double over the past 18 months and they currently makes up more than one-third of his business. “I think it’s just catering to an audience that’s been neglected for years,” Mr. Jessop said. “Now they have an opportunity to get financing finally.”
At the same time, Wall Street investors who buy home loans are scooping up unconventional mortgages that have been packaged into bonds, edging back into a corner of the market that is riskier but provides higher returns. There were $12.3 billion of such residential-mortgage-backed securities sold in 2018, nearly quadruple from a year earlier, according to credit-rating firm DBRS Inc.
Nick also put it on twitter, where I responded:
Back in 2006-2007, Countrywide was funding neg-am mortgages up to $1,500,000 with no money down and just a decent credit score – the example given is far from that.
The mortgage industry needs to find a balance in between – it’s not out of line to finance a borrower who can show income via bank statements and has substantial equity/skin in the game.
After today’s NFP report, we can say that 5% mortgage rates (no points) have arrived – sellers can offer to buy down the rate to help ease the pain for buyers. Yesterday’s thoughts from MND:
So is it possible for bonds to see such a reversal? Yes, but it’s equally possible that the pain continues. Either way, it will likely be up to the market’s reaction to the big jobs report in the morning. Traders aren’t necessarily as interested in the payroll count and unemployment rate as they are in the average hourly earnings data–the ingredient that lit the match on September’s rising rate powder keg.
Loan Originator Perspective:
Bonds’ “truly terrible, traumatic week” continued today with further losses ahead of September’s NFP report. If that report shows strong job/wage growth, there’s no telling how much more rates will rise. Conversely, it would take a staggeringly disappointing report to dissuade bond buyers. It truly requires a pronounced penchant for risk to float here, and I, for one, don’t have that. Lock now or relinquish your right to complain about high rates later if you don’t. –Ted Rood, Senior Originator
Higher prices, higher rates, slowing sales, and now easing loan guidelines? On non-owner-occupied properties? Buying a rental property with 5% down is unheard of, and even with higher rents they are likely to negative cash flow:
Freddie Mac is consolidating its Home Possible program with its Home Possible Advantage Mortgages program. These programs offer greater flexibility and higher loan-to-value ratios (LTVs) than traditional mortgage programs.
The combined product will be called Home Possible Mortgages, and will closely align with the purpose and requirements of the previously-named Home Possible Advantage program, with some changes.
Beginning October 29, 2018, lenders will be able to offer Home Possible Mortgages to buyers with limited down payment funds. Under the consolidated program, eligible homebuyers will include:
non-occupant buyers for mortgages secured by one-unit properties with LTVs no higher than:
95% for Loan Product Advisor Mortgages; or
90% for manually underwritten mortgages (non-occupant buyers were previously excluded from the programs);
those who own other properties (buyers who own other properties were previously limited);
buyers with super conforming mortgages (mortgages with high maximum mortgage limits for homes located in high-cost areas) when the mortgage:
is submitted and receives an “Accept Risk” classification through the Loan Product Advisor; and
has an LTV no higher than 95% (super conforming mortgages were previously not permitted);
buyers with secondary financing, including home equity lines of credit (HELOCs), for most cases when the mortgage’s LTV is no higher than 97% (secondary financing was previously limited to 95% LTV);
buyers using adjustable rate mortgages (ARMs), when the LTV is no higher than 75% (ARMs were previously not permitted); and
buyers with a maximum 45% DTI for manually underwritten mortgages.
These changes are meant to both widen the pool of qualified homebuyers, and streamline programs for lenders’ ease of use.
Housing market risks broaden
By loosening the requirements for its Home Possible Mortgage programs, Freddie Mac’s hope is to encourage lenders to qualify more applicants, thereby increasing homeownership opportunities nationwide.
However, loosening requirements by allowing high LTVs, DTIs and ARMs makes lending — and by extension the housing market — riskier. For veteran real estate professionals, a growing presence of dangerous mortgage products and loose lending restrictions will sound familiar, as they all increased during the Millennium Boom and ultimately played a big part in the cause of the housing crash and 2008 recession.
Restoring compensation levels was one of the first and most urgent priorities of the bailout. Bonuses on the street were back to normal within six months. Goldman, which needed billions in public funds, paid an astonishing $16.9 billion in compensation just a year after the crash, a company record.
Even better is the on-going discussion of particular details on twitter:
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