Clouds On The Horizon?

The Mortgage Industry Is struggling; National Mortgage News reported today profitability of the industry for Q4 2013 was down 7% from a year ago. Increased competition, as well as increased compliance costs were the big reasons for the large drop in profit per loan originated in the fourth quarter. The average profit of $150 per loan is the lowest since the Mortgage Bankers Association started keeping track in 2008. The MBA reports the average is down from $743 in the third quarter and $2,256 in the fourth quarter of 2012. This is a drastic decline by anyone’s measure.

What does this mean for you? At the moment, no real impact. You can expect major cost cutting from all lenders, re; layoffs and office closures.  In the future, fewer choices as company’s disappear or consolidate could put pressure on rates, regardless of easing or the economy.

Home Sales Continue To Slide; NAR reported pending home sales were down 0.8% as expected. This is the lowest level of pending sales since Oct 2008. Pending sales have been declining for 8 consecutive months. Many believe this national trend was magnified by the harsh winter. I think this is so. However, residential real estate is local and national trends don’t mean a thing in your local market.

What do you do if you are on the fence about whether to list, buy, remodel, expand or do nothing? Consult your local real estate professional. If they are pro’s they will know what is going on n your local market and can give great advice you can trust.

New Afghanistan

Bin Laden is dead, and we are coming up on ten years of engagement in Afghanistan with no clear solution in sight. I believe we need to try something different.

This is my solution for bringing peace to Afghanistan:

  • Divide the country into the Southern 2/3rd and the Northern 1/3,
  • Round up all the men, every one;
  • Move the men to the northern third, assure them they are still in charge as they presumed and name their country  Af-Man-Is-Tan;
  • Send the women and children to the southern 2/3rds,  put the women in charge and call it New Afghanistan – it will be a Taliban free country;
  • Build a wall, fortress style, between the two countries just like the Great Wall of China but call it the Great Wall of Change, US troops and their allies will secure the wall, built as a fortress to keep them as safe as possible;
  • Mandate a free market for New Afghanistan and Af-Man-Is-Tan and the means to create, acquire and finance private property;
  • With the women in charge of New Afghanistan we will sell them the resources to create their own government, economy and culture – they are in charge of everything;
  • Do the same for the men;

After functional government and economic infrastructure has been established in New Afghanistan the men will be allowed to petition for integration into New Afghanistan.  The women will decide who is allowed to immigrate based on their own rules, created and enforced by them.  The same will be true for women wishing to immigrate to Af-Man-Is-Tan. While it is obvious why men would want to immigrate to New Afghanistan, you can be certain there will be women who will petition to immigrate to Af-Man-Is-Tan.  Think Tina Turner as Aunt Entity in “Mad Max Beyond Thunderdome.”

My theory is this – the women will create a balanced, productive society and I doubt Af-Man-Is-
Tan will survive.  I predict Af-Man-Is-Stan will quickly embrace traditional ways and devolve into a nation of warring tribes.

There are undoubtedly thousands of good Afghan men who could go into their wilderness with a pocket knife and a magnifying glass and create a shopping mall.  But the women will more quickly organize, work cooperatively, build a better shopping mall and everything will be on sale!

Does this sound stupid?  Maybe not.  The British, Russians and now us (so far) have failed miserably in the region.  I say we put the women in charge and get out of their way.

I call it Lysistrata 2011

PS  I read this to a very dear friend of great intellect and she asked, why can’t we do this in our country.  I quickly replied, ‘no!”  The overwhelming majority of men in this country are good, mean well and in no way, shape or form do they resemble the Taliban.

PPS  Who would I send as envoy’s from the United States to assist New Afghanistan in their new venture? May I suggest a team from the Women’s Council of the National Association of Realtors.  They know how to get thing done and they have a great national leader in Margo Willis.

Stranglehold baby, stranglehold.

1903 Craftsman Mail Order Bungalow
Just think how easy life would be if we could buy a kit house from the internet for under $2,000.  Life was good in 1903.
Fast forward to right now and things seem very different.  Or, are they?
You see, in 1903 the average price of a home was $2,200.  But wait, the average annual income was $700.  When you apply a traditional benchmark of home affordabitliy, that $700 transalates to a home price of $1,750.  This is very close to the kit price of the above home.  Add the cost of the dirt and of course, labor and you have a home that would have a cost of at least $2,200.  One thing we can learn from this is housing was expensive in 1903.  If you were making $700 a year how long would it take you to save $2,200?  This is why we were a nation of renters at the turn of the last century. 
Getting back to right now how do things compare?  Well, the median price of a home sold in Seattle is about $345,000.  Today’s median household income is well under $100,000.  Housing is still expensive yet we are a nation of homeowners with over 65% of our population living in owner occupied homes.
What is the difference from 1903 and today?  Financing.  We had a great system to create home ownership for the majority of our citizens by offering safe and sound terms across the down payment spectrum up through the early part of this century.  Then Wall Street and BigBank greed got a stranglehold on the mortgage industry and their lust for quick money ruined everything.  The bubble burst.
Now we are at a crossroads and in my opinion the bureaucrats have the stranglehold. They are making grave errors in judgement with new policy, restrictions and regulations that are hindering any nuance of a housing recovery.  Who are they listening to, and why? 

The Sweet Spot

There is a phenomenon happening here in Seattle that is likely being repeated around the country.   The median price of a home sold is about 10% BELOW what the median income in the region would predict.

I believe this clearly shows the general population is holding back on buying.  In my mind this means normal market forces (or pent up demand) will have a significant impact on the lowest priced homes in the area.  As buyers grow weary of recession fatigue and start to move forward, the lower priced homes will be the first to see a surge in price.  I don’t believe this will cause the price point for the higher priced homes to follow.  Why?  Many of the homes available to first time home buyers are foreclosures or short sales, meaning the sellers are not using proceeds to buy a larger or more expensive home.   The residential housing market is a bottom up game and until the lower priced inventory is absorbed, the rest of the market will drift along.

What does this mean for the first time homebuyer?  It could mean that those who get in now, in front of a possible surge could be the first ones out and buying into the “move up” housing market before it too starts to surge.

Is this a lock? No.  But the sweet spot is here and who knows how long it will last. It rarely hurts to take advantage of the sweet spot.

For the record, I am routinely quoting loans with Note rates below 5% that qualify for a lender credit at this time.  That too is a sweet spot.

FHA and Vegas, Baby. Connect the Dots.

FHA Lifts Anti-Flipping Ban – According to National Mortgage News, effective February 1 FHA is temporarily lifting their “anti-flipping” rule that prohibits FHA financing on purchase transactions where the seller has owned the property for only 90 days. HUD found this policy blocked potential FHA borrowers from taking advantage of quick resales of real estate owned. Savvy REO sellers are reticent to sell to FHA borrowers because of holding cost and vandalism risk during the 90-day holding period. FHA is lifting the 90-day rule for one year. All sales must be arms-length transactions with no evidence of flipping in the previous 12 months. If the resale price is 20% higher than the REO sales price, the lender has to provide supporting documentation and a second appraisal in some cases.

Big Banks’ Big Las Vegas Adventure – Bank of America expects to release about 6,000 foreclosed properties into the Nevada housing market in 2010, or about 500 a month, according to a report in the The Las Vegas Review-Journal. The homes are part of a “phantom inventory” of foreclosed units being held by banks as they work through loan modifications and negotiate short sales.

What do you think this will do to home prices in Las Vegas?

Countrywide, it is estimated B of A will be taking back at least 11,000 homes per month the early part of this year with predictions of over 40,000 homes taken back in  November and a similar number in December.

What does this mean for you? Expect home prices in the hardest hit regions to stay where they are or take another dip.  It could many years for all foreclosed  and distressed property to be absorbed and residential real estate values to return to something more normal.

Bottom line, now is a good time to buy a house.

Does anyone besides me see a correlation between Big Banks’ REO dilemma and the lifting of the FHA ban on flipping?

Banks’ Buybacks of Loans up 373%

According to National Mortgage News banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter. JPMorgan Chase and Bank of America led the field followed by Citibank, National City, Wells Fargo and SunTrust.

What does this mean for you?  Further tightening of underwriting standards and larger down payment requirements are coming.  The next wave of changes hits in mid-December.

Average 30-Year Freddie Mac Rate Matches Record Low

The average Freddie Mac rate for a 30-year fixed-rate mortgage has matched a record low last seen earlier this year.   Borrower’s who qualify can get 30-year, fixed rate conforming loans with note rates in the mid 4’s.

New Home Sales Bump Up– Big Deal

New home sales rebounded 6.2% in October after a slight 2.4% dip in the previous month, while the inventory of newly constructed homes plunged to a 38-year low. The U.S. Census Bureau found that the new home inventory fell to a 6.2-month supply during the month, down from a 12-month supply in January.  Still, according to the chart below from new home sales are seriously below annual averages for the last ten years.

According to National Mortgage News, real estate analyst Mike Larson of Weiss Research says this is a sign builders need to start swinging their hammers.  Mike Larson is wrong unless you believe more bankrupt builders and banks in trouble are a good thing.  Until this economy creates jobs and the current and hidden inventory of existing homes held by banks are moved off their balance sheets, builders need to be hyper-cautious.  Actually, builders don’t need to be hyper cautious because banks are not lending.

How does a builder create a small fortune in housing in this market?  Start with a large one……


First-Time Homebuyer’s Tax Credit: Part Two?

 According to the Assoiciated Press there are two versions of an extension of the First-Time Homebuyer’s Tax Credit being circulating in the Senate. Both versions are targeted to be put in place by an amendment to the larger bill extending unemployment benefits. One version extends the credit through the end of March, 2010, allows move-up homebuyers to also get a credit and contracts written by the end of March have 90 days to close. It seems somebody in the senate actually understands the current state of affairs in the housing industry. The other version apparently keeps the current credit in place but drops the maximum credit by $2,000 each quarter with full expiration at the end of 2010. According to AP, both versions face a key vote next Tuesday. Google “first time homebuyer’s tax credit” and the search should bring up the most recent stories.

Underwater Homeowner’s Tax Deduction

Big Bank gets big bucks.  Big Auto gets big bucks.  Big Insurance gets big bucks. What about Jane & John Homeowner?  You know, clients like yours’ and mine, quietly paying their mortgage every month on a home worth far less than they paid a year or two or three ago.  Often, their mortgage is greater than the home’s present value.  There are likely millions of homeowners who fall into this category.  They are struggling like the rest of us.  Who is looking out for them?  From what I can see, no one is.

Why not an Underwater Homeowner’s Tax Deduction?  Why not allow the homeowner to take a tax loss on their home based on an independent appraisal?  I think it is an idea worth exploring.  In a nutshell the program could work like this:

  • The homeowner gets an independent appraisal (HVCC perhaps)
  • The present appraised value is deducted from the original sales price
  • The loss is taken all at once or over a 2-3 year period, taxpayer’s choice
  • The new basis for the home is the new appraised value
  • Future gains are based on the new basis

I propose this Tax Deduction be applied only to the taxpayer’s primary residence but would love to hear other idea’s.

Think about it, potentially millions of homeowner’s could get immediate tax relief which will directly benefit their household economy.  The tax effect is targeted directly where it is long overdue, for Jane and John Homeowner.  Do you know an elected representative who is willing to create and sponsor this legislation?

For the record, I was having a conversation with Debbie Taylor , a loan officer in Puyallup, Washington and she came up with this great idea.  She said it was ok with her if I wrote about it.  It is too good of an idea to keep below the surface.

Are Rates Heading Up This Spring?

We have experienced a whole season of ultra-low mortgage rates.  Borrower’s who qualify, who own or are purchasing a property that qualifies have been able to cement sub-5% interest rates for up to 30-years. 

Why are rates so low?  First, we are in a recession.  Real unemployment is over 16%.  Regrettably, there is nothing on the horizon to dispel consumer jitters about their jobs or the future so the typical paths to recovery, housing and consumer spending offer no relief.

Second; inflation is not a fear, deflation is the fear, most notably in the housing market.  These two factors alone are enough to foster a low mortgage rate environment as long as energy prices remain in check.

There is a third factor at play.  The Federal Reserve and the Treasury have been plowing through the issues of mortgage backed securities.  According to the Mortgage Bankers Association, the Federal Reserve purchased almost 80% of available product in August.  The Treasury stepped in for another 9%.   You don’t need a Nobel Peace Prize in economics to imagine where rates would  be if the combined total of the two were less than 50% of the available product.  According to Jay Brinkman, Chief Economist for the MBA the government might be overpaying for mortgage backed securities (the higher the price, the lower the rate) and they are keeping the usual investors on the sidelines.

When will this end?  The conventional wisdom is the Federal Reserve plans to wean themselves off buying mortgage backed securities this Spring.  If the above analysis is right, expect rates to rise this Spring, just in time to throw cold water on the buying season.  And if the economy shows any signs of recovery or if energy prices rise (i.e. inflation) expect rates to leap high enough to punch housing in the stomach, getting us shovel-ready for stagflation.

My advice, buy now, pray later.

Note: today was a typical day for the bottom seekers.  Rates blipped up a tad and many have regrets.  “You should have locked yesterday.”

Mortgage Disclosure Improvement Act – You Get What You Order

Pre Amble

Today, new disclosure requirements are in effect.  These requirements are being issued by the Federal Reserve, under Reg Z as mandated by the MDIA (July, 2008) as an amendment to the Truth in Lending Act.

The application of the Act leaves some guidelines unchanged, creates addition disclosure and timeline requirements and mandates new language be added to our disclosures.

If you want to read every word of the Rules and Regulations, they are published in the Federal Register, Vol.74. No. 95, dated Tuesday, May 19, 2009. It is specifically published under the Federal Reserve System, 12 CFR, Regulation Z, Docket No.-R-1340, Truth in Lending. 

Transactions Affected – All mortgage transactions on 1-4 family dwellings regardless of occupancy with one exception.  A specific exception is any mortgage transaction for a rental property that is not owner-occupied (the owner does not expect to live more than 14 days during the coming year).

Early Disclosures

A Good Faith Estimate and TIL (early disclosures) must be delivered or mailed no later than three business days after receipt of an application.  No advance deposit can be collected from the consumer prior to delivery of the early disclosures for any expense other than for the actual cost of a credit report(s).  Delivery has been defined as “three business days after mailing (or any other delivery method) unless delivered in a face-to-face interview.  If the creditor has proof of receipt (i.e. email acknowledgement of receipt, courier receipt) then the date of receipt of acknowledgement can be deemed the date the three day waiting period begins.  The same credit card can be used for the appraisal with a specific request to and acknowledgement from the consumer after the waiting period has passed.  In practice, most appraisal orders will be delayed until the seventh day after initial disclosures are mailed or on the fourth day from the date of an email or courier receipt of disclosures is dated.


For any transaction that qualifies for Early Disclosure, re-disclosure is mandated any time the initial terms disclosed are changed to the point where the APR calculation is changed (higher or lower) more than .125% for a fixed rate transaction and .150% for any other transaction.

Any loan subject to redisclosure cannot be consummated prior to three business days from the date the creditor delivers the re-disclosures.  Refer to the Early Disclosure paragraph for clarification of delivery. 

Seven Day Rule

No loan can close sooner than seven days from early disclosure.  The determination for seven business days is defined as when the early disclosures are either delivered or placed in the mail. The final rule also stipulates the transaction can close on the seventh business day. 

Note 1:  In theory, based on the new guidelines a purchase or refinance transaction could close on the seventh business day after the receipt of an application, presuming there is no trigger for re-disclosure. 

Definition of a Business Day

For purposes of all disclosure requirements a business day is defined by this new regulation as all calendar days except Sundays and legal federal holidays.  Whether an office is open or closed does not affect the definition of a business day. 

Consumer’s Waiver of Waiting Period Before Consummation

The new regulation allows for the waiver of the waiting period prior to consummation of the transaction to expedite consummation based on a “bona fide personal financial emergency.”  On brokered transactions the wholesale lender will make the final determination as to whether a waiver is warranted based on a “bona fide personal financial emergency.”  As a matter of policy, it is doubtful any lender will allow a waiver for any reason. 

New Disclosure Language

There is a new requirement that the early disclosures contain a clear and conspicuous notice containing the following statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” 


This  description of the MDIA is based on an actual reading of the act.  You can expect varied approaches to compliance based on the lender selected.  The month of August will be a “shake out” month as the ramifications and unintended consequences of the new regulation are realized with implementation. 

Choose your loan originator wisely.  You will need a diligent, seasoned, ethical professional with experience sheparding transactions through the maze of existing regulations to manage the new changes.

Hope and change, baby.  Hope and change.

Creating clarity in the complex world of residential real estate and real estate finance. Written by Craig Goebbel.