Feb272013
Ponzis want another chance at free mortgage money
The desire for home ownership is stronger than ever. There are many emotional reasons to covet home ownership, and these are valid reasons to buy a house. However, over the last 30 years, the desire to own a home for family and security has been darkened and twisted by the desire to make outsized profits on imagined appreciation. Although would-be buyers who are prudent and conservative were shaken by the collapse of housing prices, the Ponzis benefited greatly from the price volatility, and their desire for real estate has grown. The moral hazard of the housing bust and bailouts has ensured the Ponzis will want another crack at it, and now the FHA is giving loans to Ponzis to reenter the housing market.
They Bailed On Their Homes — Now They Want Back In
CNBCBy Diana Olick | CNBC — February 22, 2013
… These so-called, “strategic defaulters,” some of them investors and some owner-occupants, are coming back to the market, despite damaged credit, and apparently the market is welcoming them back.
A new survey of past clients by YouWalkAway.com, a website that assists borrowers in the legal pitfalls of strategic default, found that nearly 80 percent expressed a desire to buy a home again within the next twelve months.
Desire is not demand. They may want back in, but most won’t have the credit score or the down payment necessary to get back in. It’s poetic justice that delinquent mortgage squatters will miss the recovery rally.
It also cites data by Moody’s analytics, showing that the number of eligible home buyers who have had a previous foreclosure will be 1.5 million by the first quarter of 2014.
Crashing home prices and sketchy mortgage products caused millions of Americans to default on their loans and eventually lose their homes. For some, it was a tragic fight to the end to keep their single largest investment; for others it was a conscious decision to walk away from their mortgage commitments, given the real fact that they would likely not see home equity again for many years to come.
Financially, this was the proper choice. I have written numerous articles on strategic default, and it was clear from the beginning that the shortest path to equity was through strategic default.
Some saw this as morally reprehensible, others as a sensible business decision.
(Read More: Fewer Borrowers Are Behind on Mortgages, but for How Long?)
… Coming back to home ownership may not be as difficult as some think. Consumers who only defaulted on their mortgage during the recent recession were far better risks than those who went delinquent on multiple credit accounts, like credit cards and auto loans, according to a 2011 study by TransUnion.
“There appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit in the study release. “This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.”
People who strategically defaulted on their loans are probably good credit risks, particularly those that kept their other debts current. For them default was the wiser financial choice. It shows they have superior financial analysis skills.
(Read More: Americans Are Using Their Houses as ATMs Again)
Not surprisingly, given this potential, YouWalkAway.com is launching the “AfterForeclosure.com Pass/Fail App,” which claims to tell potential borrowers in just one minute, “if they have a shot at home ownership.”
“We want people to know that it’s possible and, in a lot of cases, it’s advantageous,” says Jon Maddux, former CEO and co-founder of YouWalkAway.com.
If you want to check out this new site, please click below.
It is possible, but mortgage underwriting is far more strict today than during the housing boom, and there are varying waiting periods before former homeowners who went through foreclosure can qualify for a new loan. The Federal Housing Administration, the government insurer of home loans which now backs just over 20 percent of new loan originations, requires a three-year wait. Fannie Mae and Freddie Mac, which own or guarantee the bulk of the remaining new loan originations, require up to seven years for a strategic defaulter to qualify again for a mortgage.
There should be a waiting period, and these buyers should not be given access to low down payment loans. They’re a proven credit risk, and with no skin in the game, they won’t hesitate to default again if the market turns south. Strategic default may have been the best option available to them, but there still needs to be consequences for doing it.
Most former owners don’t buy again
Despite the “feel good” stories like the one that follows, statistically less than one third of those who went through foreclosure ever come back to the housing market. From Pent-up demand from boomerang buyers may not materialize:
A big part of the bullish sentiment toward real estate is the believe that former owners who lost their houses in foreclosure will return in droves to mop up the supply of shadow inventory and push prices higher. … A recent study from the federal reserve suggests this may be the case. Almost 75% of those who lost their homes to foreclosure may never return. … Indeed, 12 years after a termination, just above 35% of borrowers with no prior defaults have taken out new mortgages. … Only about 10% of those who terminated their mortgages through default — which means both short sales and foreclosures — return to the market within 12 years.
The data is what it is. People who go through foreclosure or complete a short sale don’t come back in large numbers. Perhaps it will be different this time, right?
Boomerang buyers making a comeback
By JEFF COLLINS / ORANGE COUNTY REGISTER — Published: Feb. 15, 2013 Updated: 6:46 p.m.
Andreea Stucker thought she made a good investment when she bought a Huntington Beach condo with her boyfriend in December 2005.
But then she and her boyfriend split up. He moved out just as the housing market crashed, leaving Stucker broken hearted and broke.
With her own income down at least 60 percent, the real estate agent was unable to make the $4,400-a-month mortgage payments on her own, even after taking in room-mates.
A real estate agent who thought a condo was a good investment in 2005. I’m having trouble suppressing my giggles.
“I begged the bank for over seven months to grant me a loan modification to reduce my payments, because I was rapidly going through my savings,” Stucker, 34, recalled.
And why should the bank have given her a reduction? She obviously couldn’t afford the condo. She needed to sell it or strategically default. Either way, she needed to stop making payments.
“I ended up completing a short sale on my home, and my credit took a huge hit.”
Three years later, Stucker has mended both her heart and her credit score. She has a new husband and, “miraculously,” a new house.
Stucker is among the emerging ranks of boomerang buyers — people who bounce back from foreclosures or short sales to become homeowners again.
Generally, buyers must wait at least three years after a foreclosure or short sale to qualify for a government-backed Federal Housing Administration mortgage. It can take seven years to get a conventional loan backed by Fannie Mae or Freddie Mac.
It’s been 4 1/2 years since the foreclosure crisis peaked, and real estate industry observers say they have seen boomerang buyers gradually returning to the Orange County market for at least a year.
“I think over three-fourths of these folks will take a stab at the comeback trail,” said Paul Scheper, division manager for Greenlight Financial in Irvine. “Even though some are coming off a bitter experience, most will be looking to regain the American Dream.”
Did he make that up? This is not particularly responsible reporting. The main takeaway most readers will get from this article is that boomerang buyers are returning to the market in large numbers based on the statement from the “expert” above. A little research would have exposed his statement as unsubstantiated fantasy. The authoritative study on the matter, Credit Access Following a Mortgage Default, clearly shows that nowhere near three quarters come back. About one quarter to one third ever successfully buy again.
Three to five people who went through a foreclosure or short sale show up each month at the Credit Counseling Service’s homeownership courses in Santa Ana and Irvine, or up to 20 percent of the attendees, said Sahara Garcia, the agency’s director of education. She first noticed the boomerangers in late 2011.
“They’re out there,” Garcia said.
Personally, I believe there is intelligent life in outer space too, but that doesn’t mean they’ll stop by for a visit or that they’re looking for a new home.
For each boomerang buyer there are two or three that never come back.
Kicked when you’re down
After 3 ½ years, Stucker still cries at the memory of losing her Huntington Beach condo.
She and her ex-boyfriend paid $613,000 with no money down
It’s an oxymoron to claim someone paid with no money down. She “paid” nothing. She rented money to be on title so she could get more free money if prices went up and dodge responsibility if prices went down. It was a win-win for her.
for a two-level condo with cathedral ceilings and skylights, two bedrooms, two bathrooms and a spacious loft less than two miles from the beach.
They spent $40,000 more installing granite countertops, hardwood and travertine floors, new bathroom vanities recessed lighting and other upgrades.
They got a HELOC to pimp the place out to their liking.
What astonishes me is that people believed the system was supposed to work this way. How can people get free houses, then have the house pay for its own renovation costs to suit the buyers tastes? Doesn’t that sound a little too good to be true? Shouldn’t common sense kick in at some point and say “this is going to end badly?” In my opinion it takes willful ignorance to participate in a mania like that.
But it turns out that the real estate game isn’t just about location, location, location. It’s also about timing. …
(Please see Timing the housing market is important)
It shouldn’t be about timing. If we had stable house prices, if we didn’t inflate housing bubble and stoke these manias, then timing wouldn’t matter at all. Unfortunately, that’s not the world we live in.
“It was probably nine months that I fought for that home,” Stucker said. “I loved my house, and I wanted to stay.”In hindsight, she says she should have cut her losses before dipping into her savings.
It’s hindsight now, but it was foresight when I was telling people to strategically default from 2007 on.
But she kept thinking the market would turn around, and she’d be able to afford the home again.
Delusion and denial are every loanowners best friends.
“It’s like getting kicked when you’re down,” Stucker recalled. “You’re going through this awful breakup with this person you thought you had a future with, (and) your income is crap even though you’re working full time. … It was tough.” …
Because of the experience, Stucker thinks she’s a better real estate agent.
Clients going through their own short sales worry they’ll never be able to buy a home again. She knows what they’re going through, emotionally and financially, and shares her experience.
“In retrospect, it was a mistake to buy a house with no money down at the height of the market. But who knew it was the height of the market?” Stucker said.
I did. And I tried to warn as many people as I could. Mass ignorance and delusion is no excuse.
“(But) no matter how far you’ve fallen, there’s always up. There’s always the possibility that you can own again.”
Let’s just hope there is no possibility that people will be given free houses to pimp out as they wish on taxpayer-backed loans.
Bernanke Outlines Folly of Federal Reserve Policy
There are several potential risks involved, one of which is the possibility of rising inflation.
“For example, if further expansion of the Federal Reserve’s balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC’s price-stability objective at risk,” he said.
Another concern is the possibility low interest rates could over time “impair financial stability” if portfolio managers become dissatisfied with low returns and respond by taking on more risk.
While certain types of risk-taking might occur, Bernanke added in some ways, risk is reduced by “encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses.”
Another concern is that as the economy continues to strengthen, remittances to Treasury, which have tripled in recent years, according to Bernanke, will decline as policy accommodation is reduced.
Bernanke also addressed challenges of reducing the federal budget and warned of the potential impact of automatic spending cuts scheduled March 1.
“[A] substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery,” he said.
From ZeroHedge:
When Bernanke was asked about how savers are taking a hit he responded that the stock market has doubled. What a tool.
“he responded that the stock market has doubled”
To which some reporter should have asked, “What does that have to do with savers?”
Well, if he could be completely honest and forthright with Congress and the media, he would say:
“The wealthiest demographic group by far, and it’s not even close, is seniors. To the extent those seniors who have large savings accounts (not in bonds or equities) are losing interest income due to the Fed’s policies, well, that’s a trade-off we’ll gladly accept. Seniors receive the vast majority of federal dollars through Social Security and Medicare payments. Those seniors who also have large savings accounts are then fairly chosen to contribute, in lost interest, to this recovery.”
That’s a truth that is never spoken publicly. Well stated.
Hello Perspective…while seniors may be wealthy as a group, that does not apply to every senior – especially to those who need interest income off of their savings to supplant medical/living expenses not covered by social security and medicare. Widows especially (a big part of the senior population) struggle because they may not have enough wage employment to qualify for full social security and may have to get by on survivor’s benefits.
One of the downsides of all the easy credit, low interest rate, QE philosophy embraced by the Fed is that it does the opposite of what we should be doing – ENCOURAGING people to save. It discourages savings.
It would also be good for Chairman Ben to note, at some point, how he will exit us from the long season of easy money. He himself noted that if the markets lose confidence in the FED’s ability to make this transition that could put pressure on prices…so, Mr. Chairman, how exactly is this going to work?
I hear you Will. There are winners & losers if government does nothing, as well as winners/losers when they do something. I believe the Fed’s current moves are doing the greatest good for the greatest number of people. I know many here disagree.
If government discourages saving by manipulating the savings rate down 400 bps, then what is it doing when it taxes wage income at marginal rates in the 30s and many want it taxed higher? What are they discouraging when two people earning six figures want to marry, and then learn their tax liability will increase by thousands once married?
My point is, our government’s efforts encourage a lot of bad things and punish good things. It ain’t perfect by any means…
Sort of like the weekend Post in which the Fed will own 25% of the residential mortgage debt by 2016
From ZeroHedge:
Bernanke says it may take until 2016 before unemployment falls to 6%. At which point the Fed will own 50%+ of all ten year bond equivalents
And Bernanke believes he can unwind a position like that without negative effects on the economy? I don’t think so.
that which is unsustainable ends.
What Bernanke Didn’t Say About Housing
One of the more interesting exchanges at Ben Bernanke’s testimony to the Financial Services Committee today was the one between the Federal Reserve chairman and Representative Scott Garrett, a Republican from New Jersey.
Citing Bernanke’s assertion that one of the benefits of QE had been the rise in home prices, Garrett said the following:
“Previously you have said that the Fed’s monetary policy actions earlier this decade, 2003 to 2005, did not contribute to the housing bubble in the U.S. So which is it? Is monetary policy by the Fed not a cause of inflationary prices of housing, as you said in the past? Or is it a cause of inflating prices of housing? Can you have it both ways?”
“Yes,” Bernanke said, much to Garrett’s surprise. The increase in home prices now is justified by the low level of mortgage rates, he said. On the other hand, those rates averaged 6 percent in the early part of the last decade and “can’t explain why house prices rose as much as they did.”
What he didn’t say was that the percentage of adjustable-rate mortgages soared to a record 37 percent of total mortgage volume in 2005. From mid-2003 to mid-2006, ARM volume averaged 30 percent. The interest rate on ARMs is priced off the Fed’s overnight rate. It was this type of loan that witnessed the most egregious underwriting abuses and the highest delinquency and foreclosure rates.
Garrett 1, Bernanke 0.
Garrett wasn’t finished. He asked Bernanke about another presumed benefit of QE: higher stock prices.
“I’m sure you’re familiar with Milton Friedman’s work that says that people only really consume off of their permanent income, which basically means that you don’t consume — increase consumption — because your stocks have gone up in the marketplace,” Garrett said, before wandering off into areas such as how seniors should invest, “risk-taking” and “price discovery” in a market distorted by the Fed.
Pressure on Appraisers Results in More Mortgage Fraud
In the fourth quarter of last year, the risk of mortgage fraud elevated to the highest level since 2009, Interthinx reported Tuesday.
According to the company’s Mortgage Fraud Risk Report, the mortgage fraud risk index climbed to 159, representing a 16 percent increase from Q3 2012 and 9 percent increase from Q4 2011.
Interthinx pinpointed the source of the increase to a surge in property valuation fraud risk, which rose 25 percent from Q3. Property valuation fraud occurs when property values are manipulated to create equity. Interthinx explained investor activity in recovering metro areas creates rapid price changes and opportunities for value manipulation.
The other types of fraud the index tracks are identity, occupancy, and employment/income.
Reflecting the national trend, the number of “very high risk” metros spiked from 70 in Q3 to an unprecedented 125 this quarter, the report revealed.
Five states contributed at least five more high risk metros to the list. Ohio bumped up the Q4 figure by adding 8 metros, the most out of any other state, while California, Georgia, and Michigan added 6, and South Carolina added 5 metros.
In addition, 26 states have at least one newly added “very high risk” metro not seen on the Q3 list.
In Q4, the riskiest metros were located in Florida or California, with Lakeland-Winter Haven recording the highest value, 292. Other metros in the top five were Merced, California (288); Tampa-St. Petersburg-Clearwater (286); Yuba City, California (285); and Jacksonville (285).
Florida and Nevada remained as the top two riskiest states after posting respective index values of 246 and 239. The other states identified in the top five were New Jersey, Connecticut, and Ohio. Historically high-risk states Arizona and California took the No. 7 and No. 8 spots, respectively.
Instead of throwing these guys in jail, we give them millions of dollars.
Taxpayers Over-Compensate Pirates Who Caused Financial Crisis
Following a recent report from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which charged that Treasury has not appropriately limited compensation for executives at companies bailed out by TARP, a House subcommittee held a hearing on the matter.
House Representatives heard from Special Inspector General Christy Romero and Acting Special Master for TARP Executive Compensation at the Treasury, Patricia Geoghegan.
“While taxpayers struggle to overcome the recent financial crisis and look to the U.S. Government to put a lid on compensation for executive firms whose missteps nearly crippled the U.S. financial system, Treasury continues to allow excessive executive pay,” Romero stated in her testimony.
She pointed to flaws in the Special Master’s approval process for executive compensation packages and decried the Special Master for not following recommendations from her office or the guidelines set forth by Treasury.
Kenneth R. Feinberg, who previously served as Special Master, set forth in his compensation guidelines, “base cash salaries should rarely exceed $500,000, and only then for good cause shown, and should be, in many cases, well under $500,000.”
However, both Feinberg and Geoghegan have continued to approve executive pay packages that far exceed this amount.
The Special Master previously approved executive pay at seven companies. Today, the office is responsible for just two companies—Ally Financial and GM.
Most recently, the Special Master approved compensation packages exceeding $500,000 for 23 executives at Ally and GM.
Romero also complained the Special Master “did not independently analyze the basis for awarding cash salaries greater than $500,000,” but instead relied heavily on justification from the companies themselves.
I hope these new QM rules will keep most of the Ponzi out, because the affordibility products will not be eligible. If you REALLY want to keep them out have a Texas style refinance law. Banks can not lend more than 80% Loan to Value on a refinance in Texas. I believe if it’s a government sponsored purchase they are exempted. But even those should require 20%, because look at the financial condition of FHA.
By far the best and most effective way to prevent more housing bubbles is to take away the real-time spending power from the increase in price. Ponzis won’t be motivated to buy at any price because they won’t receive a pot of gold when the next Ponzi comes along and bids prices even higher.
Excellent post.
Keep in mind there is an awakening currently underway….. many former OC homedebtors who were forced to become renters have discovered a newfound wonderful world of living a mort-free/excessive debt-free, prop-tax free, maintenence-free, SFR burden-free life, who even despite the free mort money, don’t want another chance.
As a result, should this go mainstream, pent-up demand to sell (that’s already sky-high) will go parabolic.
“many former OC homedebtors who were forced to become renters have discovered a newfound wonderful world of living a mort-free/excessive debt-free, prop-tax free, maintenence-free, SFR burden-free life, who even despite the free mort money, don’t want another chance. ”
Which is stronger, the desire to have freedom and happiness or the lure of free Ponzi loan money? The answer will determine the strength of demand going forward.
Well, the dilapidated couch (equivalent of free ponzi money
) you see parked out in front of someones driveway with a ‘free’ sign attached usually gets picked-up pretty quick, so there will always be takers.
A week doesn’t go by without at least one phone call that goes like this:
Buyer: “Hi there. Got your name from my realtor. We’ve been out looking at properties and I’m ready to make an offer. I need an approval letter right away!”.
SGIP “Wow, with so few properties for sale, good to see you found one to buy. Has anyone recently pulled your credit report? If so, what did it say?”
Buyer. “Well…. My score is about 710 (1st sign of trouble BTW) and it’s better than it used to be (confirmation of trouble) so I think I can buy!”
SGIP: “Hmmm. A 710 score is still very good, but it’s not just the score lenders look at. Why do you feel the score is below 740, the threshold today for getting best rates?”
Buyer. “Around 2009 I had a short sale. My house lost value and I decided to give it back to the bank. (Strike 3) That won’t be a problem, will it?
I recognize there are compelling reasons to short sale homes, however I’ve always wanted to bookend the conversation with:
SGIP “Yes, a great deal of people gave their homes up back then. Let me ask you this: When you got married, your spouse was beautiful, wasn’t she?. So two years later when the glory faded, is acceptable to dump your spouse because she “lost value?”
Buyer: “Whut, err. Um… click”
Out of every ten calls, one to two of them have real stories to tell. They should be given an honest review and second chance. The rest are either “I got over my head” or my favorite – “the lender screwed me”. These are the buyers trying to re-ponzi their way back with 3.5% down and a post closing HELOC. Yes, they will ask how soon they can get a line of credit because it worked out so well for them the first time around.
Thanks for affirming the central point of this post. At some point, lenders will stop caring about the past behavior of borrowers, and we’ll start the mania all over again.
Low rates and rising prices will erase all memory of the past.
Particularly if lenders can pass the risk to the taxpayer.
“And why should the bank have given her a reduction? She obviously couldn’t afford the condo. She needed to sell it or strategically default. Either way, she needed to stop making payments.”
Technically, this chick wasn’t in a position to “strategically” default. She had no choice but to default due to the massive loss of income. Had she held on long enough, maybe she would have qualified for a government program, or she could have enjoyed the benefits of home squatting. Again, she wasn’t very strategic about this.
As for her ability to re-enter the market, it might have more to do with the credit and income of her new husband than anything she’s been able to do. Self-employed folks are still having a doozy of a time getting qualified for mortgages these days, and I doubt she’s making anything close to what she was in 2005.
” it might have more to do with the credit and income of her new husband than anything she’s been able to do”
Probably true, and notably left out of the story in the OC Register.
I’d like to see IR bring back the term ‘knife catcher’. This newlywed couple of morons fit the bill.
I would just like to know what kind of house she bought. Was it another $600k+ beach-close condo with travertine and granite, or something a little more humble this time?
It’s granite counter tops a right under the CA Homeowner’s Bill of Rights?
Whatever she bought, it was probably at the limit of what she could finance. That’s the pattern here.
Jumbo mortgages are back, but at far from 2007 levels
By Linda Stern WASHINGTON | Tue Feb 26, 2013 4:45pm EST
(Reuters) – Home sales and prices are rising briskly in those neighborhoods where the well-heeled like to plant their mailboxes: along Chicago’s north shore, in the San Francisco Bay area and in the haute Hamptons.
Sales of properties worth between $750,000 and $1 million are up 38.7 percent over a year ago; $1 million-plus property sales are up 25.7 percent, according to the National Association of Realtors.
The luxury real estate revival is being fueled, in part, by another resurgence: so-called jumbo mortgages – those loans, typically over $417,000, that are too big to qualify for purchase by federal agencies, namely Fannie Mae and Freddie Mac.
Jumbo loans are returning to the mortgage market after almost disappearing entirely in the wake of the credit crisis of 2008 and the real estate meltdown. Most lenders stopped making new jumbo loans when the private secondary market dried up in the credit crunch.
Now the credit markets are comparatively stable. Lenders, who are only making these big loans to the most highly qualified borrowers, now see jumbos as a safe and profitable way to make money on their low-cost deposits. And secondary market investors are starting to regain their taste for these comparatively high-yielding loans. Moreover, once-pricey jumbo loans are being offered at interest rates that are barely higher than conventional mortgages.
“The jumbo market may fare better than the overall mortgage market in 2013,” Guy Cecala, publisher of Inside Mortgage Finance said.
But he and other observers question whether the jumbo loan market can return to its past size without a full recovery in the secondary market, which is a fraction of its former self. And new mortgage regulations could limit lenders starting in 2014.
“We are definitely enthusiastic,” says Tom Wind, executive vice president of residential and consumer lending at EverBank Financial Corp. in Jacksonville, Florida. He sees growing investor demand for these loans allowing the market to grow. At current rates – roughly 0.23 percentage points above conventional mortgages – they provide nice yields for banks who want to keep the loans in their portfolios, too.
For the four weeks ending February 22, new jumbo activity was up 60 percent from the same period a year ago, according to Mortgage Daily, a trade publication that has been consistently reporting year-over-year increases in jumbo activity.
Even though loan volume is increasing, it is nowhere near 2007 levels, when the industry made $348 billion in jumbo loans. Last year, roughly $200 billion of jumbo mortgages were made, and Cecala says that he expects total 2013 volume to approach $220 billion.
In some expensive markets, loans don’t start being classified as jumbo until they exceed $625,500; that limit was even higher for part of 2007, meaning that the 2007 figure represents a smaller potential jumbo market and isn’t directly comparable.
Mortgage market leader Wells Fargo has increased its jumbo loan volume for three years straight, said Greg Gwizdz, an executive vice-president. In 2010, Wells Fargo issued a total of $10 billion in jumbo loans. That rose to $27 billion in 2011 and to $41 billion in 2012, with the average loan at $1 million, Gwizdz said.
Less than half of jumbos tend to go to refinancings, while almost three quarters of conventional mortgages were for refinancings last year, Cecala said. That, too, should boost jumbo activity in 2013 as refis taper off and the housing market picks up.
BETTER DEALS, NARROWING SPREADS
Interest rates on jumbos have been approaching those of the so-called conforming loans, even though they don’t have agency backing. In mid-February, for example, the average rate on 30-year fixed-rate jumbo loans was 3.98 percent while the average rate for 30-year conventional loans was 3.75 percent, making the spread between them just 0.23 percentage points, the Mortgage Bankers Association said.
Pre-crisis, rates on jumbo loans were typically around 0.25 percentage points higher than those on conventional loans, says Keith Gumbinger of HSH Associates, a mortgage research firm in Pompton Plains, New Jersey. At the height of the financial crisis in December 2008, it hit 1.8 percentage points.
“I just locked in a $900,000 loan at 3.5 percent,” said Amy Slotnick, vice president of Fairway Independent Mortgage Corp., in Needham, Massachusetts. “I can’t even get a conforming loan at that rate.”
Jumbos loans are priced well now because only the most qualified borrowers can get them. Lending standards, which were notoriously lax pre-crisis, have intensified as the loans have returned to market.
“At one point all you needed was a pulse” says Matt Silver, director of the Chicago Association of Realtors, and a real estate agent who specializes in high end Chicago properties. “Now you have to have all of your ducks in a row.”
Those standards will get even more restrictive in 2014, when Consumer Financial Protection Bureau rules take effect. The CFPB rules are likely to kill the market for interest-only mortgages that had made up roughly 10 percent of the jumbo market, according to the Mortgage Bankers of America.
The rules also offer lawsuit protection for lenders who require that borrowers keep their debt payments at 43 percent or less of monthly income. Rick Sharga, of Carrington Mortgage Holdings in Greenwich, Connecticut, said that could be problematic for the jumbo market, because many high-income and high net worth borrowers don’t fit that guideline but still have plenty of money on hand to repay their loans.
Today a borrower typically needs to put up 30 percent of equity, show a FICO credit score topping 760, provide years of tax records and prove that he or she has a year of mortgage payments in the bank. After meeting that stringent criteria, the typical jumbo borrower is probably a reasonable bet for a lender.
“Not just a good risk,” says Slotnick. “A great risk.”
“Jumbos loans are priced well now because only the most qualified borrowers can get them. Lending standards, which were notoriously lax pre-crisis, have intensified as the loans have returned to market.
“At one point all you needed was a pulse” says Matt Silver, director of the Chicago Association of Realtors, and a real estate agent who specializes in high end Chicago properties. “Now you have to have all of your ducks in a row.””
As it should be.
“Today a borrower typically needs to put up 30 percent of equity, show a FICO credit score topping 760, provide years of tax records and prove that he or she has a year of mortgage payments in the bank.”
This is what it would take for private securitization to make a comeback in the conforming segment of the market. It’s no wonder that GSE/FHA loans are still dominant.
Still, the only real barrier is the downpayment – whether 20% or 30%. A 760 credit score is a gimme and “a year of mortgage payments in the bank” is as easy as having a decent 401k or two – they’ll consider retirement savings after discounting it ~30% or so.
I agree. Taken individually, none of these is a huge barrier other than the DP. Problem is it only takes one of these factors to disqualify somebody. I don’t think my FICO is > 760 simply because I don’t borrow enough money to get my score that high. Also, 2-3 years of tax returns could be a problem given the unsteady employment of many individuals over the past few years.
“This is what it would take for private securitization to make a comeback in the conforming segment of the market. It’s no wonder that GSE/FHA loans are still dominant.”
And if the qualified residential mortgage rules allow down payments of less than 20%, the dominance of the GSEs will be perpetual.
“the dominance of the GSEs will be perpetual.”
I’m getting the feeling history will repeat itself, for example the way Fannie and Freddie roles were expanded to cover more mortgages. They will establish these new QRM rules next year. Then to stimulate Jumbo borrowing they will be Jumbo QRM rules sometime later along with GSE Jumbo programs. It will still be harder than a QRM/GSE non-Jumbo, but you won’t have to put down 30%.
A GSE jumbo program would only benefit blue states. So the Left would love it, regardless, and the Right would have another reason to hate it.
But this begs the question – Why doesn’t the Right support elimination of the MID? It really only benefits higher-earners in high cost housing areas, which are all blue states. These households voted for Obama by a 10+ point margin too. Why not stick it to them by eliminating their MID on their mcmansions and vacation homes?
For whatever reason, constituents in red states support it too. It doesn’t make much sense to me either, but they do. I imagine some Republicans would love to eliminate the HMID, but as long as their constituents support it, whether they use it or not, they will not eliminate it.
Many people don’t understand the standard deduction. They just know that some guy will fill out the tax forms for them if they hand over a few hundred bucks. Many people probably assume they are benefiting when in reality they aren’t.
MR: This is what it would take for private securitization to make a comeback in conforming
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Au contraire, since low rates denote a low value for capital, it’s not about better underwriting, it’s about HIGHER RATES and that mi amigo is what’s needed to spark a full-on PL comeback.
Oh wait, rates can’t go up because the whole house of cards comes a tumbling down. So you see, the fed really is trapped in a box.
Fire Away
Bernanke: Housing Market Has Hit Bottom, Is Recovering
Published February 27, 2013Dow Jones Newswires
Federal Reserve chief Ben Bernanke gave a cautiously optimistic view of the U.S. housing market on Wednesday, saying evidence suggested that the market had hit the bottom over the last year and was recovering.
Testifying before the House Financial Services Committee, Mr. Bernanke said that the Fed’s bond buying program appeared to have be having a positive early impact on the housing market, helping homeowners refinance existing loans or buy new homes.
Mr. Bernanke’s panel appearance was the second in two days as part of a semi-annual trip to Capitol Hill to face questioning from lawmakers. On Tuesday, he spoke before the Senate Banking Committee.
The central banker said that house prices across the country had dropped 30% or more from their peak since the beginning of the financial crisis.
He said that house prices had crept up over the last year, and that there had been significant improvement in new housing construction.
Mr. Bernanke said the numbers of foreclosures, while still too high, are declining as were the number of homeowners who are underwater, a term meaning they owe more on their mortgages than their homes are now worth.
He said the continuing improvement in the housing market would have a positive impact on the employment picture, both by directly creating more jobs in home construction and factories that make home goods, and also indirectly by improving peoples’ sense of wealth.
Under questioning from Democratic Rep. Carolyn Maloney of New York, Mr. Bernanke conceded that compensation to homeowners affected by the so-called robo-signing foreclosure scandal had been too slow in being paid out, while too much money had been paid to private-sector consultants investigating claims of foreclosure errors.
He said that final legal documents from a January agreement with mortgage servicers caught up in the scandal would be announced within days, and that checks to homeowners would be going out within weeks.
Mr. Bernanke said prior to payments to private consultants investigating compensation claims being halted, those payments had been on track to be many multiples higher than the compensation paid to borrowers.
Ohmygod, I like totally bought a sweet condo in Huntington f-ing Beach for over $600k with no money down and then I like borrowed a bunch more money to like totally renovate it, and it was like so awesome cuz I’m a Realtor and I totally know my shit. But then my a-hole boyfriend like totally dumped me and I was like “I want to keep my condo” but then I was like going broke you know? So I like totally short sold it and now I’m all like “Why can’t I do that all over again? You’re like totally kicking me when I’m down!”
Ha!
LOL! You nailed it!
Why Should Taxpayers Give Big Banks $83 Billion a Year?
On television, in interviews and in meetings with investors, executives of the biggest U.S. banks — notably JPMorgan Chase & Co. Chief Executive Jamie Dimon — make the case that size is a competitive advantage. It helps them lower costs and vie for customers on an international scale. Limiting it, they warn, would impair profitability and weaken the country’s position in global finance.
So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?
Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.
Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.
Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers — Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz — put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.
Big Difference
Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.
The top five banks — JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. – – account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.
Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy. The result is a bloated financial sector and recurring credit gluts. Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009.
Regulators can change the game by paring down the subsidy. One option is to make banks fund their activities with more equity from shareholders, a measure that would make them less likely to need bailouts (we recommend $1 of equity for each $5 of assets, far more than the 1-to-33 ratio that new global rules require). Another idea is to shock creditors out of complacency by making some of them take losses when banks run into trouble. A third is to prevent banks from using the subsidy to finance speculative trading, the aim of the Volcker rule in the U.S. and financial ring-fencing in the U.K.
Once shareholders fully recognized how poorly the biggest banks perform without government support, they would be motivated to demand better. This could entail anything from cutting pay packages to breaking down financial juggernauts into more manageable units. The market discipline might not please executives, but it would certainly be an improvement over paying banks to put us in danger.
How else will they get their well deserved bonus? j/k
[…] The Ponzis aren’t fed up. Ponzis want another chance at free mortgage money. For the rest of humanity, the lingering fears of another crash should keep expectations of […]