The Subprime Market Fiasco Part XVIII

Punxsutawney Phil has seen his shadow and only six more weeks of winter remain. It also appears that the housing market is beginning to thaw with the spring market beginning early – most likely due to the first time home buyer credit which is scheduled to expire in June.

This issue covers mortgage underwriting and the need to have an expert loan officer working for you; the real estate market; and interest rates.

Underwriting

Many of you have heard horror stories over the past six to twelve months about obtaining a purchase or refinance mortgage. Some of you may have been outright declined, or felt like you were pulled through a meat grinder with request after request for more documentation and endless delays in closing your loan. The reason is simple – as Fannie Mae, Freddie Mac and other mortgage holders are hit with more and more loan defaults, they are auditing their loan pools and looking for mistakes, lies or omissions that entitle them to return the loans to the originators.

Reasons for returning loans are various and many – from misstating occupancy to poor documentation of income or assets. According to the Wall Street Journal and Barclays Capital, banks repurchased about $14.2 billion in loans from holders of mortgage-backed securities in the first nine months of last year, up from $3.6 billion in 2008. That certainly makes a dent in banks profits. Underwriters are the gatekeepers to loans that are sold, and they are making sure that all the “i”’s are dotted and “t”’s crossed. If any aspect of a loan is questionable, they will err on the side of caution and deny it.

Much, if not all of the underwriting heartaches and headaches can be prevented if you have a good loan officer that can navigate underwriting landmines. This begins with providing the underwriter a good loan package. I have often bemoaned the fact that in the mortgage business I do not utilize my MBA and background in accounting, taxation, and corporate finance. This experience is now invaluable when I take a new application and collect customer documents. Spending an hour to provide a detailed credit write up prevents hours of problem solving and may even save the mortgage from being declined. The write up includes an analysis of various forms of income when necessary, breaks down yearly income trends and averages, explains tax returns and self-employment income when necessary, and provides the underwriter a road map to the clients creditworthiness.

The pendulum has swung from the days of 100% no documentation financing to the other extreme. While this presents a more difficult environment, with good organization and proper documentation, it should not be a problem.

For those of you who have been declined, following you will find a link to a recent CNN article. It shows that even millionaires can be declined…..often because they did not have the right loan officer working their file. http://money.cnn.com/2010/01/20/real_estate/mortgage_woes_for_wealthy/

The Real Estate Market.

Stable? Improving? Tepid? Lackluster? Optimistic? Theses are the mixed messages used to describe the housing market in the past month. And since real estate is local, all the adjectives are accurate depending upon the locale and the type of housing. The coastal areas of California such as San Francisco, LA, and San Diego are improving, while inland California continues to suffer.

According to the S&P Case-Shiller Home Price Indices, one strong positive is that even in cities that showed a decline in value from October to November, the rate of decline compared to 2008 is far slower. Their Ten City and Twenty City indices are down 4.5% and 5.3% respectively, for November compared to 2008. An interesting aspect of the indices is that while there has been overall broad improvement, in November only five cities showed month over month improvement, and four cities – Tampa, Seattle, Charlotte and Las Vegas hit new four year lows. Conversely, Denver, Dallas, San Francisco and San Diego have values that are higher than one year ago. It is also important to note that November is a seasonal month, and when seasonably adjusted the numbers improved.

To view the city indices and related article, visit http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----#

The Economist, one of my favorite magazines (which for some reason is referred to in England as a “newspaper”) also had an interesting article on the world and US housing markets. The magazine has developed a fair-value measure for property based on the ratio of house prices to rents. The gauge is much like the price/earnings ratio used by stock market analysts. Just as the worth of a share is determined by the present value of future earnings, house prices should reflect the expected value of benefits that come from home ownership. These benefits are captured by the rents earned by property investors, which are equivalent to the tenancy costs saved by owner-occupiers.

Using this measure on the Case-Shiller numbers, The Economist believes the US housing market is back to the level where buying should be favored over renting. You can view the entire article at
http://www.economist.com/businessfinance/displayStory.cfm?story_id=15179388

A separate article in the Economist cites a Goldman Sachs analyst’s estimates that government intervention over the past year has raised the value of houses about 5% above where they otherwise would be. These interventions included the bailout of Fannie Mae and Freddie Mac, the purchase of $1.25 trillion of mortgage backed securities by the Fed, and the first time home buyers credit. The hope is that better underlying housing fundamentals such as sales price vs. rent, better economic output and an improving employment picture will off set the loss of some of these interventions and other factors weighing on the market such as new foreclosures.

Rates

The Wall Street Journal had an interesting piece earlier this month opining that if the Federal Reserve stopped purchasing mortgage backed securities at the end of March, as they have stated, that interest rates would increase and put a damper on the housing recovery. They believe that rates are already .25% higher on anticipation of such. Since the article was written on May 8th, rates bumped along and then increased immediately when the Fed reiterated last week they were ending the program. They eventually eased back when the stock market had several days of losses and investors fled for the safety of bonds. Some positive economic news yesterday and today have caused a slight up-tick.

While interest rates remain very low, I anticipate some day to day volatility. The bond and interest rate market move on any economic news. I expect any small downward movement in the near term to be far over shadowed by future upward direction. It is well recognized that the Federal Reserve has been keeping rates artificially low to help support the housing market. When/if they end this program, it is a near certainty that rates will rise with the private market purchasing mortgages at market prices. To view the WSJ article, see http://online.wsj.com/article/SB126291088200220743.html#printMode

What this means to you.

Not much different from last month. For many people, their home is their largest asset, and their mortgage their largest liability. Take the time to analyze your situation. Are you likely to move within the next 5 years and therefore can switch to a lower rate fixed adjustable rate? Are you in an adjustable rate mortgage which may expire in the next few years when rates are likely to be high and will adjust upward? Do you want the security of a fixed mortgage? In short, do you know your options?
• Purchases - If you are thinking about purchasing a home, real estate prices have shown stabilization in most areas. Do your research on your particular locale. In my opinion, the cost of higher interest rates in the future is more significant than the threat of fallen prices due to more foreclosures.
• Refinances – Act now. As predicted last report, rates are beginning to increase. You should always know your options. Look at the difference in interest savings and payment with different amortization options.
• Contact me – I am happy to provide you a pre-approval letter or prepare a refinance analysis for you. It is more important than ever to have a competent mortgage lender like me in your corner.

Please feel free to forward this newsletter to anyone you would like. I also welcome your opinions or comments, and will answer any questions you or your colleagues may have. I can provide mortgages in all 50 states.

Kind regards,

- Greg