Fannie & Freddie are pushing more loans back to lenders

According to WSJ, Fannie and Freddie are making banks buy back poorly underwritten loans that have soured.

No wonder we have pre-closing audits, pre-funding audits, post-closing audits, post-post closing audits and so on and so forth. The documentation that borrowers must provide almost never ends at this point. Properly prepare borrowers for the onslaught of documentation requests. Banks don't want loans on their books when they could have sold it to Fan/ Fred.

FHA Loosening Condo Approval Guidelines

Haven't posted in awhile. Business has been pretty good lately, despite all the whining I do on this blog.

FHA is changing some of their condo guidelines which should play well in the NYC market. First off, they are lowering the required pre-sales to 30% which will help many of the new developments offer FHA loans until they reach that magic 51-70% threshold needed for FNMA approval. Another nice thing is that they are willing to allow condos with a right of first refusal clause in their by-laws if it's shown that it's not used for discrimination. That will play well in NYC where almost all of the condos have this clause.

There are a few pull backs in the new guidelines as well, such as a 50% concentration limit, and the requirement that the condo be transferred into the hands of the Homeownwer's Association 12 months from the time of the first sale. This doesn't matter as much to existing condo buildings, but new development condos will hate it since they may not be finished with construction within that timeframe.

All in all, I say "thanks."

Is Fannie Taking Another Run at Mortgage Insurance?

I just read this here.

It would great if there was a way to get mortgage insurance for condos and coops with 10% or less down.

Take the Good with the Bad

FHA Mortgagee Letter 2009-19 dated June 12, 2009 has a few good things in it, and a few bad things. I'm not sure if overall it's good for the high rise condo market.

First, I'll mention the good stuff. First off, Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100. That is a major plus for the New York City market where all condos have the Right of First Refusal in the By-Laws. In fact, this has been one of the main reason there are so few NYC condos that are FHA approved. If this goes into effect, there will be an onslaught of condos that are approved.

Next there has been a change in ground up new construction condo approval, in cases where a building permit and a certificate of occupancy (or its equivalent) are issued by a local jurisdiction that performs a minimum of three inspections (typically the footing, framing and final) neither an Early Start Letter nor a HUD approved ten-year warranty plan is required. For those jurisdictions that do not issue a building permit (or its equivalent) prior to construction and a Certificate of Occupancy (or its equivalent) upon completion of construction, a condominium unit that is one year old or less must have either an Early Start Letter (with a minimum of three inspections by an FHA Roster Inspector) or be covered by a HUD-approved ten-year warranty plan (with a final inspection by a FHA Roster Inspector) to be eligible for high-ratio mortgage insurance.
All condominium types are eligible to follow this process (e.g. Multi-family). Projects are still required to be on the FHA-approved condominium list.

This may mean that New York City condos may be approved for the full boat of FHA financing. Any condos in the NYC market that have been applying for FHA approval have been requesting approval for 90% maximum financing due to the expense of the 10 year warranty on all of the units in the building required to go to 96.5% financing. When there are 200 units that warranty can get expensive.

And now for the bad. I'll start off easy with FHA will not accept a temporary Certificate of Occupancy; all units within the building
(where the specific unit that is security for the insured financing is located) must be complete. Developers usually want to start closing as soon as the Temporary Certificate of Occupancy (TCO) is issued. There is usually a significant delay between the TCO and the Certificate of Occupancy that could stretch longer than it should. Remember these are controlled by bureaucracies.

And here's the rub: Transfer of control of the Homeowners Association shall pass to the owners of units within the project no later than the earlier of the following:
1. 120 days after the date by which 75 percent of the units have been conveyed to the unit purchasers, or
2. One year after completion of the project evidence by the first conveyance to a unit purchaser. This means that the entire building needs to sell 51% and be turned over the Homeowners Association (HOA) within 1 year of the first sale. No pre-construction sales for buildings wanted to be FHA approved and with the current market sales velocity, it's hard to say whether a 300 unit condo tower is going to sell enough units in 12 months. This seems to be a deal killer and the builder's associations are fighting the whole mortgagee letter based on it.

It's too bad that we got the acceptance of the Right of First Refusal with this at the same time. We almost had something that saved the NYC condo market.

The media is myopic

I'm watching CNN this Sunday morning, and they've elected to continue their extensive coverage of one of their own's death. Walter Cronkite died the other day, a sad event much as anyone dying is. But a historic event? I think not. The man was a news reporter, perhaps even a good one, though I wouldn't really know being too young to truly remember his reporting style. I've seen less coverage of a statesman dying, or of the thousands that are unjustly dying throughout the world right this very minute. Is CNN covering this? Of course not. They cannot see past their own noses, they think they are newsworthy. I thought the whole point of the reporter was to observe and report. Since when did they become the news? If Mr. Cronkite was the reporter and newsman they are saying he was, would he be embarassed right now?

It's really this bad...

I know the Loan Officers out there may have horror stories of their own, but I need to purge. It seems like between the new regulatory microscope, the everchanging financial picture of the mortgage insurance companies, the constant unsurety of condo and coop building approval guidelines, and the unwillingness to pay for good underwriting staff, it's a miracle that loans actually close.

In New York, where an attorney is required to close on behalf of the bank, you can add to the list bank attorney staff members who think it's OK to treat the borrowers who actually pay their fee rudely.

Here's my day.

Today an underwriter on one of my files decided to call my borrower on a coop refinance and berate him about the way that he prepares his tax returns. The underwriter has a high school education, and my borrower is a corporate tax attorney with 10 years of experience. Net result: I had both of them screaming at me about the other with my manager included. Great.

Our coop approval department, yesterday, asks for the sponsor's cashflow statement if the last amendment to the Coop Offering Plan is over 12 months old. Today he says that he needs both the sponsor's cashflow statement the last amendment dated August of 1999. I'm just trying to get the building approved before the mortgage contingency expires so the borrower doesn't lose his $73,000 contractual deposit if he cannot close his loan. Guess who's yelling at me now: the coop approval guy apparently because he doesn't know his job, the buyer's attorney, the broker, the managing agent of the building and the borrower. Even better.

I finally (who knows how in this environment) get a file to the underwriter to clear to close. She doesn't understand how our condo approval database is set up, or she cannot read, I'm not sure which. So she continually requests condo approval. I don't know this at first, so I keep sending her the condo approval screenshot from the database, which she doesn't know what it says, so she asks for condo approval, and a round and round we go. Meanwhile, it's a Friday, and 4 days before the buyer is contractually obligated to close or forfeit his down payment of $46,000. And who's yelling at me? You got it: the borrower, the underwriter, her manager, my manager, the broker and both attorneys. Yay!

I have one of those Fannie / Freddie prime loan modifications that the Obama adminstriation said was going to help the homeowners. All conditions were submitted with the file. Well, there isn't much to submit other than an application and title. But wait for it...I need a subordination from another major bank. After 2 months and many fruitless faxes, I finally receive the subordination. Now this is a rubber stamp approval and we close, right? Right? Wrong. We are into our second rate lock extension (borrower paid I might add) and I still cannot get the underwriter to approve this file to close. If I ask, I get laughed at, like I'm some kind of idiot to even ask that a refinance that will save our customer hundreds of dollars each month get closed.

This was all before 12pm today, when I couldn't take it anymore and left the office. No, the mortgage industry isn't broken, no way.

Fact is, I could go on and on about issues like these, condo approval wants an appraisal to be amended prior to condo approval, the appraiser (after I go through all the hoops of getting the operations staff to actually submit the request, I've so painstakingly prepared for them in a manner that allows them to quickly review, and push "send" - that's 3 days right there folks) says that the 'as of ' date won't be effective if that is done and thus won't amend the appraisal. Now I'm not taking about a valuation change, nor am I talking about changing anything that isn't on the questionnaire that was completed by the managing agent, reviewed by the developer, signed off on by the developer's attorney and approved by our condo approval department. It's actually not even a change, it's requesting that a box that had "unkn" which is possibly short for "unknown" be marked with the actual data for the purposes of condo project approval. Now if as a commissioned loan originator I'm so bad, fraudulent, and unscrupulous that I cannot be trusted to send a fax to an appraiser (according to HVCC) then why is everyone running this stuff through me? Why doesn't condo project approval reach out the appraiser themselves and request the change. And when the appraiser says "no", make a business decision about what they are going to do. Leave the buyer hanging and add to the housing woes, or go with the questionnaire information and approve the building so that people who want to can buy an apartment and grease the wheels of our sputtering economy.

Bottom line, the loan is going nowhere fast. It doesn't matter where I work because I know people at all major banking institutions who have much, much worse stories to tell. They cannot even pick up their phones anymore. They have run out of excuses, gone past sounding like moron, and are now just weeping...

Oh, and let me end with this one last potshot at the Real Estate Brokers out there. I have a deal that was approved today. I've had the conversation with the broker several times in which I assure him that I'm only paid if the loan closes, I don't get a salary, I'm only paid a commission on closed loans. So today, I say the underwriter told me that it would be approved late yesterday or first thing today. That's literally what the underwriter told me around noon yesterday. Today at around noon, no approval. The broker has the gumption to ask me to ask the underwriter when the approval will be done as if I hadn't spent the morning begging in such a manner as to bring everlasting shame upon my house and family. Is he kidding me?

Man, some people really don't spend much time listening do they? I've told him at least 3 times I don't get a salary and that I'm only paid if the loan closes, what makes him think that I didn't ask the underwriter a thousand times by 9am that morning? He just pressures people because he has no other value to add. People who are good at their jobs are being hammered into bits by the mediocrity of the lending world, there are excellent attorneys, brokers, loan officers, underwriters, closers, buyers, sellers, builders and everyone else out there. At what point do we get to do our jobs?

Morgan Loan Mods are slow like everyone else

I read in the WSJ today that Morgan's servicing unit (Saxon - remember them from the heydays of subprime?) has modiified only 6% of their servicing portfolio. That's not a surprise. Modifications, even the FNMA, Freddie MAC prime loan modifications are put on the back burner at all the major banks that I know of. These loans actually don't require much to close, less than a traditional refinance, but for some reason despite the easy approval process, they take much, much longer to get looked at.

It's odd since it's my understanding that the gross margins are actually pretty good on them. I guess it's just one of those things.

The Condo Approval Morass

It's not enough to qualify and approve the borrower, nor has it ever been, but when someone is buying in a condo or coop, the building must also be approved. This has become increasingly more difficult as condo / coop approval departments are overloaded increasing turn times, but also as Fannie Mae and Freddie Mac begin enforcing rules that up for years were not enforced.

One major hurdle with existing condos and new development condos is a line item in the budget for reserves that equals 10% of the budget. In most, if not all, of the other states in the Union, this is not an issue. But here in New York, it's becoming increasingly more of an issue. New York City has always gotten away without creating a reserve funds for 2 reasons. The first is that the NY Attorney General's office, which approves all condo offering plans, doesn't require it. The second is that here in NY the argument was made that if the budget ran low, or if a capital improvement was needed, there would be a special assessment to pay for it. Fan/ Fred went along with this, but not anymore.

So most budgets on new developments (though they are faster to change, needing the sales) and existing condo project don't have a reserve line item in the budget. They frequently have a contingency line item, but it doesn't add up to anywhere near 10% of the annual budget.

What do you do? Create a reserve analysis, that's what. You'll have to show that the contingency is enough for the capital improvements without a special assessment to the condo owners. This can be done by aggregating the amount that the contingency will accumulate in the next years before any major improvements or repairs need to be done. This is especially useful with new development where the assumption is that since it's newly built, it will be 10-25 years before the building will require a new roof, exterior work or other major expenses or improvements.

Another hot button is the pre-sales requirement for Fannie Mae approval. This has increased to 70% of the units for most developments. This is coupled with a new math in determining the pre-sales in a building as well. Sponsor held units are now counted, whereas before they were not, also any rental units (here in NYC some apartments in a conversion are rent regulated making it difficult to remove tenants) are now counted. Before they were not. Also any investor owned units are not counted. So what you have left is all of the owner occupied and second home units in a building. That can be tricky for areas like Miami, LA, SF, Vegas and NYC. This is on top of an already down market, so it's reducing the deal flow even more, since many banks will not offer financing in a building that is not approved by Fannie Mae. Even if the mortgage is not being sold to them, it's considered the gold standard for condo / coop approval.

If the building is a ground up new construction and less than 200 units, then it's possible to get it approved at 51% pre sold. If it's a conversion of any size then it's more likely to be 70%. There is a process by which Fannie Mae will do a full review of the building and approve it at a lower pre sale, but generally speaking it needs to be at least 51% pre sold (remember these need to be owner occupied or 2nd home buyers) and have good sales velocity. Also the developer needs to pony up a $1200 application fee along with $30 per unit for the review. There is quite a bit of documentation that is needed as well.

If that wasn't enough, the scrutiny of the building's insurance coverage has also gotten a bit tougher. The Fidelity Bond coverage is a bit more restrictive, also if the building's coverage does not cover an individual unit from the studs in, then the homeowner will need to buy insurance to make up the difference.

Managing Agents don't seem to be stepping up to the plate in this changing world either. They aren't completing questionnaires fully so that the building can be properly assessed. This is despite the fact that in NYC, they charge a fee for its completilon, sometimes as high as $125. They need to understand that they are doing their owners a disservice by not completing the questionnaires and providing as much information as they can to help the approval process along. Everyone in the process understands that it's a hassle, but it's not the man on the street's decision, it's much, much higher up than that.

HVCC Sucks

Recently New York Attorney General, in an effort to raise his image, fight corruption and save the American consumer from themselves, went to Fan/Fred and created the Home Valuation Code of Conduct that all mortgage originators (big and small) must abide by. On the surface, it sounds great. Greater appraiser independence, less commissioned individual involvement. Without going into how Mr. Cuomo decided that appraiser's were blameless in the recent fraudulent housing sales (it seems that every fraud ring includes at least one), the fact that the one party, the Loan Officer, who knows everyone in the transaction is completely (and I mean completely) removed from the coordination of the appraisal is crazy. Who do you think everyone, buyer, seller, seller's attorney, buyer's attorney, buyer's agent, seller's agent and even in house operations staff is going to call when the appraisal hasn't been scheduled in a timely manner? You got it...the Loan Officer. The one person who literally can do nothing. The one person who doesn't know who the appraiser is, what is their email address or telephone number or any other information. And the one person that the 3rd party vendor (owned by the banks) won't speak to or include in the process even as a spectator.

The break down is in the logistics. Loan Officers are the 3 monkeys in this case (see no, hear no, speak no). And we are the only party who's sole job is the coordinate all the players in the process. I guess Mr. Cuomo didn't think that through went he ran to Fan/Fred with his brave new idea.

Another aspect to the HVCC, is if there is a mistake on the appraisal, say for instance the appraiser noted that the unit appraised was 4B when it should have been 4FB or E4B. We cannot make a quick call to have it changed, nor can we contact the 3rd party vendor to have it changed, no the (currently overworked, can you say refi boom?) operations staff is the only one who can have it changed. And who fields all of the complaints when this isn't done for 3 weeks? You guessed it, the Loan Officer.

I agree with the gist of the HVCC, Loan Officers (including Mortgage Brokers) shouldn't have leverage over appraisers on the valuation of the home. Appraisers have licenses that can be held over their heads (not to mention felony charges) on these issues. But for the Loan Officer not to have access to even the 3rd party vendor to make a correction, make sure the correct phone is on the order, follow up on a order that is taking 4 weeks, is lunacy. Now the pendulum has swung too far to the other side. If we, as consumers, want to have our purchase and refinance transactions close within our lifetimes, we're going to have to have some Loan Officer input.

Bring back the stated income and 100% mortgage

Though there is an argument (often made by mortgage loan originators) that there must be a minimal risk underwriting box that for stated income and high loant to value products, these loans don't seem to be coming back any time soon.

Self employed borrowers are feeling like victims of banks' current underwriting guidelines when it comes to documenting income. Their Adjusted Gross Income (AGI) is much lower than the money their business brings in. Frequently self employed borrowers taking 2 positions when it comes to what their income is. When they file their tax returns, they use every write-off the IRS allows in order to bring their taxable income to the lowest it can be. That is legal and that is fine, however, know that what is written in the line on the tax return labelled Adjusted Gross Income, is the income that can be used with some slight variations. Often that isn't enough to qualify for a mortgage that the borrower wants.

There can be a few items (paper loss type things) that can be added back to the borrower's income. Items such as, depreciation, and home office use, can be added back to the borrower's income, but other than that, the AGI is the income that is used to qualify self employed borrowers.

We Reward The Risk Takers...

I guess the feeling is that we have to. I just finished an article on Forbes about D. Andrew Beal and Beal Bank. He stayed out of the fray during the go-go years from 2004 until 2008, originating no real estate loans. Now his bank is solvent, capitalized and ready to buy loans from other banks who need the $. And of course, there is no TARP money for him, no Fed assistance of any kind. The ratings people thought his model was unsustainable while greenlighting such winners as Lehman, and Bear.

It boils down to who has the most power.

WSJ Says Mortgage Rates May Be At Their Lowest

According to an article in today's Wall Street Journal, mortgage rates may not go any lower, confounding many borrowers' hope that they will go lower and lower.

Take a look at the article below:


By JAMES R. HAGERTY

The Federal Reserve is going to extraordinary lengths to push down long-term interest rates, including home-mortgage rates. But those hoping mortgage rates will fall sharply from current levels, already historically low, may be disappointed.

Mortgage firms Thursday were quoting rates averaging 4.75% on 30-year fixed-rate mortgages, according to Zillow.com, a real-estate information service. That is down from more than 5% two days ago and about 6% in mid-November. But further big declines will be hard to achieve, partly because the mortgage-lending market has grown less competitive in the past year as hundreds of small banks and independent mortgage lenders have collapsed. The big banks that dominate the market are eager to boost their profits margins, not give deeper bargains to consumers.
Rates for borrowers with the strongest credit are likely to be in a range of roughly 4.5% to 4.75% for the rest of this year, says Mahesh Swaminathan, a mortgage strategist at Credit Suisse in New York.

Others say that is too optimistic. Assuming no big change in government policy, Walter Schmidt, an analyst at FTN Financial Capital Markets, sees a range of 4.75% to 5.5% for most of this year.
The Fed began driving mortgage rates down in late November when it announced plans to buy as much as $500 billion of mortgage securities this year. On Wednesday, the Fed expanded that program, saying it will spend as much as $1.25 trillion on such securities in 2009. That is enough to provide funding for more than half of all home-mortgage loans likely to be made in the U.S. this year.

The Fed also is buying long-term Treasury bonds to drive down rates on those securities, whose pricing affects mortgage rates.

By historical standards, rates look incredibly low. Until recently, 30-year fixed-rate mortgages hadn't been below 5% since the 1950s. For the past couple of months, rates have been bobbing between about 5% and 5.25%. The 30-year rate averaged 4.98% in the week ended March 19, down from 5.03% the prior week, according to Freddie Mac's survey. Fifteen-year fixed-rate mortgages averaged 4.61%, down from 4.64%.
One reason mortgage rates often tick back up after a decline is that a rush of people seeking to refinance quickly causes backlogs at lenders, which frequently don't have enough employees to process all of the applications.

"If lenders are working people overtime to close loans, they don't have an incentive to compete too hard on price," says Arthur Frank, who heads research on mortgage securities at Deutsche Bank in New York.

The situation highlights a conundrum for the government. It wants low rates to spur the housing market, but also wants the banks to make profits on loans so they can return to financial health.
Many of the small mortgage banks that remain are struggling. Mortgage banks, often small, family-owned companies, aren't licensed to take deposits and so lack that source of money for their loans. Instead, they typically borrow money for short periods from so-called warehouse lenders. They use this short-term credit to make loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.

But this warehouse credit is much harder to obtain than it was a year or two ago because many of the big banks and Wall Street firms that used to provide it have exited that business.
Despite these constraints, the Fed's action is "going to be a plus" for the housing market, says Thomas Lawler, an economist in Leesburg, Va. Lower rates make it more likely that home prices will hit bottom in many parts of the country later this year, Mr. Lawler says. The recovery, though, is likely to be gradual, partly because rising unemployment reduces housing demand.
Christopher J. Mayer, a real-estate professor at Columbia Business School in New York, says the Fed's moves to cut rates are "helping to put a floor under the housing market." But he worries that the Fed could face huge losses on the mortgage securities if inflation fears eventually push interest rates much higher.

Still, the consumers who need these low rates the most aren't likely to get much help. Many people can't qualify for these low rates because their credit scores aren't high enough or they can't afford a down payment of 20% or more on a home purchase. Such people will be socked with fees that can drive up their housing costs considerably. Banks also have become far pickier about appraisals and are nixing many purchases as a result.

Others can't qualify for a refinancing because they owe far more on their homes than the estimated current market values. Fannie Mae and Freddie Mac have new refinancing programs that will let some borrowers refinance into lower rates even if they owe as much as 105% of the home value, but only for current loans owned or guaranteed by Fannie or Freddie.

Write to James R. Hagerty at bob.hagerty@wsj.com

Printed in The Wall Street Journal, page C1

Meet the Feds

FED TO BUY ADDITIONAL $750 BLN OF MBS, $100 BLN OF GSE DEBT
FED LEAVES TARGET INTEREST-RATE RANGE UNCHANGED AT 0% TO 0.25%
FED TO PURCHASE UP TO $300 BLN OF LONGER-TERM TREASURIES
FED SAYS INFLATION MAY PERSIST BELOW `BEST' LEVEL
FED SAYS NEAR-TERM ECONOMIC OUTLOOK IS `WEAK'
FED SEES `EXCEPTIONALLY LOW' FUNDS RATE FOR `EXTENDED' PERIOD
FED TO CONTINUE MONITORING BALANCE SHEET SIZE, COMPOSITION
FED VOTE ON MONETARY POLICY IS UNANIMOUS *FED SAYS ECONOMY `CONTINUES TO CONTRACT'
FED TO BUY TOTAL OF UP TO $1.25 TRILLION OF AGENCY MBS IN 2009
FED TO BUY TOTAL OF UP TO $200 BLN OF GSE DEBT IN 2009
FED SAYS TALF TO EXPAND TO INCLUDE OTHER `FINANCIAL ASSETS'
FED SAYS INFLATION WILL REMAIN SUBDUED *FED TO USE `ALL AVAILABLE TOOLS' TO HELP ECONOMY RECOVER

Looks like rates are going lower...

Is Mitt Romney a Racist?

The other day on MSNBC's Morning Joe, Governor Romney continually called the President by his first and last names instead of addressing the office. Instead of saying President Obama, he kept saying "Barak Obama." Even going so far as to call the President by his first name one time.

Is this because Governor Romney is a racist, or because he doesn't believe in our electoral politics?

Rush Limbaugh Wants This Country to Fail

I think Mr. Limbaugh's statements at a political event, are indicative of the Republican Party these days. They'd rather see the President's policies fail so that they can win an election to regain power than do something for this country.

Pathetic. I'd rather both parties try their best to make this country great than spend all of their time setting each other up for failure.

Unemployment is the wild card

With unemployment on the rise, along with documentation of mortgage applications, I'm seeing more concern about the continuation of employment, and thus, income. Income is necessary to pay the loan, no paycheck, no timely payments. Low rates, if unemployment continues its rise, may not matter much.

Goodbye...and thanks for the Pell Grants

Former Rhode Island Senator Claiborne Pell died yesterday at the age of 90. I don't know anything about his politics or how he did as chairman of the Senate Foreign Relations Committee, but I do appreciate the Pell Grant which was a great help in putting me through college.

I'm not sure I could have done it without the Pell Grant. That's what government should be doing for citizens in it's purest form. Giving us the ability to gain an education.

For the Pell Grant and the National Endowment for the Arts and Humanities, I thank you.