MARKET UPDATE - JANUARY 2010

REGULATION RECAP

2009 was a remarkable year for mortgage regulation. It was Government intervention at its finest. In an attempt to curb the evil doings of mortgage companies from years past, the Government proved that over regulation can be just as damaging as a lack of regulation. New laws, new disclosures, and new procedures were cooked up by elected officials with an apparently limited knowledge of how the mortgage industry works. Mortgage brokers and bankers cried out and petitioned the government to reconsider the new regulations, which fell on deaf ears. Now borrowers, real estate agents, title companies and appraisers have joined the fight; maybe a little too late. This is a recap of the new regulation, its intention, and more importantly the outcome to date.

Home Valuation Code of Conduct (HVCC)

Effective Date: 05/01/09

Intent: The government wanted to create separation between the loan officer and/or mortgage company and the appraiser. The intention was to force mortgage companies to order appraisals through Appraisal Management Companies (AMC) which would randomly rotate appraisers and prevent direct contact between loan officer and appraiser. The goal was to prevent appraisal manipulation.

Outcome: Most of the AMCs are owned by the lenders that are ordering the appraisals, creating another profit source for the lenders and eliminating any separation which was the original intention of the HVCC. An appraisal now costs 30%-60% more than prior to the enforcement of the HVCC; a direct cost to the borrower. Appraisals which prior to the HVCC took 24-72 hours to complete, can now take weeks to complete. Appraisals are next to impossible to transfer from lender to lender which is commonplace due to one lender declining a file, and another willing to approve that same file. It is not uncommon for two or three appraisals to be ordered on one transaction.

Update: HR 4173, the Wall Street Reform and Consumer Protection Act of 2009, has passed the House and is on its way to the Senate. It is widely anticipated that this will pass, eliminating the HVCC. Hooray! Once passed, it is likely that the lenders will still require appraisals to be ordered under the HVCC rules. There is just too much profit and control for the lenders to give up. Boo…

Mortgage Disclosure Improvement Act (MDIA)

Effective Date: 07/30/09

Intent: The new Truth in Lending regulations increase the time needed to close loans to ensure that the borrowers understand their options and feel comfortable with the loan.

Outcome: Delayed closings. Borrower now has more time to understand the Annual Percentage Rate (APR). To date: Borrowers still do not understand the APR.

Update: No changes in the MDIA anticipated.

HUD’s Final Rule – RESPA Reform

Effective Date: 01/01/10

Intent: This is the single largest RESPA reform in the history of RESPA. In an attempt to add “transparency” and increased disclosure to the borrower in a mortgage transaction, HUD has officially implemented the new 2010 Good Faith Estimate and new 2010 HUD-1.

Outcome: The Good Faith Estimate (GFE) goes from one simple page, to four (not very “green” of the government). The new GFE fails to disclose total monthly payment and cash needed to close. Why did the government remove two of the most crucial pieces of information from the new GFE? Sorry, at a total lose for words. The new GFE requires disclosure of fees that are actually paid by the seller, but appear on the good faith estimate as a charge to the borrower. Mortgage brokers have to disclosure compensation in a Mickey Mouse fashion of charges and credits to the borrower; but banks do not. The new GFE still has to be disclosed to the borrower within three days of the application with accurate fees, which in many cases can now not be produced (i.e. title fees, inspection fees) within the three day window. Low and zero tolerances in fee changes lead some loan officers to over estimate fees, which will potentially lead to violations of MDIA (read above) creating closing delays.

Update: Too soon to tell. On a positive note, mortgage brokers will be the only institutions that will be required to be at full disclosure on the new good faith estimate. Banks will not be required to disclose all compensation. This may prove to benefit mortgage brokers once the public realizes that “Big Banks” are not required to disclose everything.

S.A.F.E. Act

Effective Date: 07/31/09 – 07/31/10 (varies by state)

Intent: “The new standards, as well as the uniformity and consistency of such standards, directed to be established nationwide by the SAFE Act present a significant step in the effort to increase integrity in the residential mortgage loan market, enhance consumer protections, and reduce fraud. The SAFE Act encourages states to participate in the Nationwide Mortgage Licensing System and Registry, and requires states to have in place, by law or regulation, a system for licensing and registering loan originators that meets the requirements of sections 1505, 1506, and 1508(d) of the SAFE Act.” – HUD

Outcome: The SAFE Act is long over due. We tip our hats to the government for implementing legislation that will in fact make the mortgage industry better. Unfortunately most states are broke and are struggling to implement the SAFE Act.

Update: The SAFE Act has already weeded many loan officers out of the industry. Loan officers that work for the “Big Banks” are not required to be licensed. Once again, if you wish to work with a loan officer who has taken the required education, passed a state and national test, and been officially licensed as a loan officer, you will want to contact us, your local mortgage broker.

EXISTING HOMES SALES SURGE

Fueled by historically low interest rates and the extension of the first time homebuyer tax credit, existing home sales were up 7.4% in November. The National Association of Realtors estimates that 51% of all sales in November were from first time homebuyers.

Existing home sales may see a dip down by the third quarter of 2010 due to higher interest rates and expiration of the first time homebuyer tax credit.

DROP IN FORECLOSURES

“Foreclosure filings fell by 8% in November, making it the fourth consecutive month of improvement in the housing market. There were 306,627 filings last month, according to RealtyTrac, an online marketer of foreclosed properties. That decline follows a 3% drop in October, 4% in September and 1% in August.” – cnnfn.com

Statically foreclosures are down but this is due in large part to market manipulation. Loan modifications and foreclosure moratoriums have influenced foreclosure rates. The drop in foreclosures does shine some positive light on the housing market although the market is a long way from being healthy.

In November 76,701 homes were foreclosed on, bringing the total for the year to a whopping 777,630 (stats from RealtyTrac). “Nevada, Florida, California and Arizona -- continued to amass the largest numbers of foreclosure filings with Nevada the hardest hit state of all. One of every 119 households had a filing in November, nearly four times the national average of one for every 417. Florida had one for every 165 households, California one for every 180, and Arizona one for every 186.” – cnnfn.com

SHORT TERM INTEREST RATES TO REMAIN LOW


Short term interest rates remain low as the Federal Reserve leaves the fed funds rate at an all time low, in hopes of a recovery in the housing and job markets. It is anticipated the FED will not likely change its stance on not raising interest rates for the foreseeable future.
Long term rates have seen a steady increase over the last few weeks, due in part buy the Federal Reserve’s commitment to purchase mortgage backed securities. The FED has stated that it will cease to purchase mortgage backed securities in 2010. To date the FED has purchased more than $1 trillion in mortgages. Wall Street and foreign investors have been hesitant to purchase mortgage backed securities due to poor performance during the housing crisis and it is not known who is going to step in to purchase mortgage backed securities once the FED pulls out of this role. That uncertainty has recently caused a spike in long term rates.