22 April 2009 – The CFO of Freddie Mac was found dead in an apparent suicide. Of course, any death is a tragedy, but this is certainly a sign of the times.

Treasury Secretary Timothy Geithner said Tuesday he believes most banks are liquid enough to survive the current hardships facing them. The Obama administration has ?stress-tested? troubled banks, and plans on releasing the results May 4. This is uncharted territory, because the government has been doing stress tests for a while, and has maintained a ?watch list? for troubled banks, but has not previously released its findings.

It looks like the car companies are going to get some money after all, but not what they were looking for. For those that haven’t been following the story, GM and Chrysler came back with their hands out after the first round of bailout money, but the government said no because they hadn?t completed the milestones the government wanted to see. GM went back, and was apparently preparing to file bankruptcy. Now the money is coming: about $5B for GM and $500 M for Chrysler, so it appears the Obama administration may have been bluffing.

While the federal government has been working feverishly to try to fix our embattled economy, pouring billions of dollars in, they are trying to save money and increase capital in the Post Office. They are raising first-class postage to .44 on May 11, and are having a ?postage sale? on bulk post cards?a first for our postal service. There are also rumors of cutting postal carriers to a 5-day workweek, which would save on wage expenditures.

Federal Home Loan Bank Board Building

Yesterday I wrote about the possible problems of getting a 5% loan. On Wednesday I started to hear about another plan. Maybe you may have heard all the buzz about Republicans wanting a 4% fixed mortgage rate for mortgages. You can read or listen to a good overview of the whole story on NPR. It’s an interesting idea. Let’s take a look at it a little more closely.

Don’t Count On 4% Mortgages…and Here’s Why

Honestly, I don’t think it is going to happen. It’s a HUGE undertaking that will be wildly expensive, and hard to implement, despite what the idea’s proponents are saying. And, you still need Wall Street‘s buy-in. The investments that will make it possible have to get sold, and investors are just too skittish on mortgages right now to go anywhere near dumping the kind of money that would be required to make this system work.

Likely a False Hope That Can Cause Problems

I don’t think I can speak for all mortgage professionals, but for most of us, when news like this comes out, it creates false hope and false anticipation, like when they were talking about 4.5% a couple of months ago. We either get calls saying something like, “Hey, I heard there’s gonna be 4% mortgages, and I want one” or a prospective

client says “Well, I’m gonna wait for now, cuz I think rates will be down near 4% soon.” This is sad and often counter productive?they may be passing on a 5% rate, only to have the rates go up, and the best we can do for them is 5.75%.

Like a lot of government ideas, it’s well-intentioned, but ill-fated.

Agree? Disagree? Let me know in the comments area below. I’d love to hear your thoughts.

Government loan giants Fannie Mae and Freddie Mac, as well as the Federal Housing Authority (FHA), a division of the Dept. of House and Urban Development (HUD), have been slowly, but surely, tightening up guidelines, and making it more difficult for all but the very most qualified borrowers to get the best rates. Sure, the Federal Reserve Bank (the Fed) has cut its funding rate, but that doesn’t directly translate into lower mortgage rates. It does directly affect home equity lines of credit (HELOCs), as well as credit cards and car loans, but mortgage rates are, for better or worse, more influenced by Wall Street than by the Fed.

Here is a list of items that negatively impact interest rates now:

• FICO score or credit score: Lenders will use the middle of three credit scores they pull on you, or they will use the lower of two if only two scores are available. There are progressively worse mortgage rates if your credit score is below 720, then below 700, then below 680, then below 660, and finally below 620.
• Loan-to-value, or LTV: This is how much money is you are borrowing versus how much a home is worth. For example, if the house costs $100,000 and you need to borrow $90,000 (you have $10,000 for a down payment), your LTV is 90%. Once again, the mortgage rate you can find gets progressively worse at: above 60% LTV, above 70% LTV, above 80% LTV, and above 90% LTV. And with home values falling, your LTV will probably be higher than you thought.
• Escrows: Not having your taxes and insurance escrowed (which means including them with your mortgage payment) causes the rate you pay go up, but only by a little.
• Cash out: If you are taking cash out when you close, the rates will be worse. And please note that if you took out a second mortgage or equity line after you purchased your home, and are paying this off, it counts as cash out, even if you are not walking away from the closing with cash in your hands.
• Condos: Lenders consider condo loans a riskier transaction, and pricing for a condo is much worse than for a single family house, probably 3/8 to 1/2 point higher rate.

So next time you see 5.0% on a web site or in the paper, unless you have above a 720 credit score, have 40% equity in your house, are escrowing taxes and insurance, are not taking cash out or paying off a second mortgage, and live in a single family home, don’t expect that’s the rate you can get.

More Tightening of Lending Rules

On top of not being able to get the rate you were hoping for, it is simply more difficult to get a loan at all. Here are a couple of rules that may be tighter these days:

• Mortgage insurance (MI) companies won?t insure condos with a 95% LTV any more. This means lenders cannot lend up to 95% LTV on condos, no matter what.
• Many lenders and mortgage insurance companies are requiring borrowers to have a total debt-to-income (DTI) ratio of 45% or less; they want to make sure you can afford your mortgage.
• Stated income and no income verification programs are a thing of the past. Full documentation, which means copies of W-2s, pay stubs, tax returns, etc., are all required now, regardless of how good your credit is, or how many assets you have.

After years of aggressive lending, we are now back to basics.

No More Talking Between Lenders and Appraisers

How does the new Home Valuation Code of Conduct (HVCC) recently adopted by Freddie Mac and Fannie Mae affect the appraiser and the consumer? Just as there are many layers to an onion, there are many ways to look at the financial mess this country is in. Some blame the banks, some blame the mortgage brokers, some blame the real estate brokers, and others blame the uneducated consumer. Maybe if the consumer knew what they were signing up for we wouldn’t be in this mess? What it all boils down to is . . .we all have ourselves and our need for bigger and better, to blame.

The new HVCC is a bill that mandates that the mortgage broker no longer has contact with the appraiser. A third party will contact an appraiser and order appraisals for the lending institutions.

Pressure

In past years, I have heard complaints from appraisers that mortgage brokers would tell them to come in with their number they needed to make the deal or they would no longer order appraisals from the appraiser. This put many appraisers in a precarious position. Appraisers are upheld by a code of conduct entitled Uniform Standards of Paraprofessional Appraisal Practice, or USPAP for short. These standards are strict and require that the appraiser be a Disinterested Third Party to the valuation process. When told that they need to come in with a predetermined number for the deal to go through, the appraiser is no longer Objective. Not only that, the pressure of losing business had to be hard for some. Therefore, some appraisers are thrilled with the new mandate. Others are worried about customer service.

Some Potential Problems

With Third Party Appraisal Services ordering appraisals, the banks will not know if the appraiser even understands the particular market they are appraising. For instance, a person who lives in the city probably does not understand a suburban market as well as an appraiser who lives in that particular suburb. I do have a specific territory, and I am not comfortable appraising outside of my it. Is it possible to do so? Yes, it is, but it will take much more time to complete the report to do the proper research to get familiar with the neighborhood.

From a client perspective, having a relationship with the appraiser helps to ensure the reports are completed in a timely fashion. The client also understands what neighborhoods the appraiser works in and knows the quality of reports the appraiser completes. With a third Third Party Appraisal Service none of the previously mentioned concerns will apply. Not only that, Third Party Appraisal Services could demand expedited service from the appraiser or they will not order again from that appraiser. Again adding pressure to complete a report that is not necessarily quality. Without quality the values could and more than likely will be skewed.

Federal Reserve Bought Mortgage-Backed Securities to Try to Reduce Mortgage Rate

Bloomberg.com is reporting that the Federal Reserve has bought $10.2 billion of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities. According to the New York Fed’s Web site they bought $6.9 billion of Freddie Mac securities, $2.9 billion of Fannie Mae bonds and $450 million of Ginnie Mae debt.

Mortgage-backed securities are bundles of mortgages. The value of these securities comes from the flow of payments being made on the principal and the interest of the mortgages in the bundle. Many people, facing a combination of personal economic problems and rising payments on their adjustable-rate mortgages are not able to make their payments. This results in the securities being worth far less and the institutions that hold them unable to do anything.

The $10.2 billion purchase is one of the steps taken this week in a program attempting to lower mortgage rates. It appears that the program is working. It is being widely reported (WSJ, MSNBC, Reuters, NYT…) that mortgage rates are falling, and are currently at around 5%. Many experts are predicting that the rates will go as low as 4.5%