Happy Columbus Day from Seattle – oh snap, I mean Happy Indigenous People’s Day. Regardless of which holiday you chose to celebrate, today is a Federal holiday and many offices are closed, including recording offices (no closings will be taking place today). Our office is open and I’m happy to help you with your mortgage needs. As today is a holiday, markets are closed. Here are some of the economic indicators scheduled to be released the rest of this week:
How much this government shut down impacts mortgage loans depends on several factors, including what stage your mortgage is in processing, what type of mortgage it is and who the investor is. It’s possible that it may not impact your transaction at all. The more time our government is shut down, it may become more difficult or require more time to process a mortgage loan. The shutdown in 1995 lasted for a very long 21 days – let’s hope our representatives can get this resolved soon!
Did you watch the Presidential debate last Wednesday? At one point, President Obama and Mitt Romney discussed regulations that are impacting getting a mortgage – namely: Dodd Frank. When you hear media discussing that some borrowers are having a difficult time qualifying for a mortgage or that the process is cumbersome, odds are it’s regulations like those you’ll find in Dodd Frank that are the cause.
Here’s a bit from the debate:
…the reason we have been in such a enormous economic crisis was prompted by reckless behavior across the board. Now, it wasn’t just on Wall Street. You had…loan officers…giving loans and mortgages that really shouldn’t have been given, because they’re — the folks didn’t qualify. You had people who were borrowing money to buy a house that they couldn’t afford. You had credit agencies that were stamping these as A-1 (plus) great investments when they weren’t. But you also had banks making money hand-over-fist, churning out products that the bankers themselves didn’t even understand in order to make big profits, but knowing that it made the entire system vulnerable.
So what did we do? We stepped in and had the toughest reforms on Wall Street since the 1930s. We said you’ve got — banks, you’ve got to raise your capital requirements. You can’t engage in some of this risky behavior that is putting Main Street at risk. We’re going to make sure that you’ve got to have a living will, so — so we can know how you’re going to wind things down if you make a bad bet so we don’t have other taxpayer bailouts.
Let me mention another regulation of Dodd-Frank. You say we were giving mortgages to people who weren’t qualified. That’s exactly right. It’s one of the reasons for the great financial calamity we had. And so Dodd-Frank correctly says we need to… have qualified mortgages, and if you give a mortgage that’s not qualified, there are big penalties. Except they didn’t ever go on to define what a qualified mortgage was…
It’s been two years. We don’t know what a qualified mortgage is yet. So banks are reluctant to make loans, mortgages. Try and get a mortgage these days. It’s hurt the housing market…because Dodd-Frank didn’t anticipate putting in place the kinds of regulations you have to have. It’s not that Dodd- Frank always was wrong with too much regulation. Sometimes they didn’t come out with a clear regulation.
I was actually surprised to hear “qualified mortgages” (also referred to as QRM or qualified residential mortgage) brought up in the debate. Banks have been waiting for the definition of what constitutes a QRM for some time. One of the biggest concerns is if the government uses loan to value (how much down payment or home equity) to qualify as a QRM
It’s quite possible that in order for a mortgage to be classified as a QRM, a home buyer may have to come up with 10 or even 20% down payment when they’re buying a home. I would imagine that mortgages that fall outside of the QRM criteria will have much higher rates to compensate for the risk that bank will be taking. First time home buyers or those without larger down payments (assuming loan to value is one of the factors) will be penalized. Obviously this would not help the housing market’s recovery nor help our economy.
QRM mortgages requiring a 10% down payment would lock 40% of all creditworthy borrowers out of the market. A 20% down payment would exclude 60% of creditworthy borrowers.
In my opinion, it’s time to move forward with common sense underwriting. We don’t need the government creating underwriting guidelines for those who are wanting to buy or refinance their home (the flaws with “net tangible benefit” requirements illustrates this).
This subject has been gnawing at me for a while and I’m actually surprised I haven’t written about it here before. In order for the housing market to really start recovering, I believe that the underwriting guidelines need to relax. Whoa–you say, isn’t that what got us into this mess in the first place? Well, I’ll argue that it was more of folks being able to buy more than they could afford (via stated income) that drove up prices and put them into homes where they could never afford the the payments over folks who used home equity by consolidating debts or doing who knows what with the cash (hopefully they banked it…in a safe place).
Helping someone keep their home by taking advantage of the lower interest rates prevents a foreclosure or short sale. Yes, we have the Home Affordable Refinance Programs (HARP) thanks to President Obama–but many don’t qualify and many who do are not taking advantage of this temporary program. FHA Streamline refinances now require an appraisal OR no closing costs can be financed–how is that better for American home owners during this time?
If it were up to me, I would make it possible for home owners who have demonstrated they pay their mortgage and debts on time and who have documented steady employment to have their appraisals waived and closing costs financed so they don’t have to dip into their hard earned savings to finance their refinance. Now this does happen sometimes with Fannie Mae’s HARP program…but not with Freddie Mac (which requires an appraisal and limits closing costs) and not with FHA.
Why penalize home owners who’s property values have plummeted because their neighbors sold their homes via short sale, lost it due to a legitimate foreclosure or plain walked away from their obligations? Why punish home owners who have been making their payments and who qualify on every other point EXCEPT the appraised value? If their payment is being reduced, it helps stabilize the neighborhood and reduces the risk of default for the mortgage servicer. Loan to values need to be eliminated on rate-term refinances where a tangible benefit for the home owner exists.
We also need to eliminate the securitization factors of when Fannie or Freddie bought the existing mortgage for it to be eligible for a HARP refi. I recently had a client where it showed on Fannie Mae’s site that he indeed has a mortgage owned by Fannie Mae–it was not until we received an error message trying to underwrite it through DU (the automated underwriting system) that we called Fannie Mae to discover that the loan had been securitized (purchased by Fannie Mae) one day too late to qualify (March 1, 2009). This person’s loan closed in December 2008, was sold the the bank and then took months for Fannie Mae to purchase. This means this upside-down home owner does not qualify to reduce his payment by $250 per month. Imagine what the $250 a month would do for him and/or the economy. It gives him some probably needed monthly financial wiggle room and he just might spend a little more which helps our economy too. (Loans need to be purchased/securitized by Freddie Mac no later than May 31, 2009 to qualify).
These are just a few thoughts that have been a bee in my bonnet… or worse! Don’t get me started on home owners with existing mortgages that have private mortgage insurance hitting a brick wall when trying to do a HARP refi (most pmi companies are not cooperating) or not being able to include second mortgages (even “purchase money”) in a HARP refi. Or how FHA insured loans will soon be more expensive for borrowers seeking to refinance or purchase with the increase of the annual mortgage insurance premium.
Please contact your elected officials in Congress if you have had issues with obtaining financing…they are making originating loans tougher and tougher as I write this post.
I’m afraid it’s going to get worse before it will get better. Many people who need help and who would qualify for the refinance with exception of the appraisal…are not able to get it. Many don’t want to risk the cost of the apprasial (around $500) to attempt a refinance in these economic times.