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This morning I read my weekly ?Outside the Box?newsletter from financial analyst John Mauldin. He discussed in some detail the history of the mortgage crisis and the benefits to the average citizen that refinancing would bring?especially the additional disposable income that could be spent and thus stimulate the economy. He pointed out that Fannie, Freddie, and the big institutional investors that own the existing mortgage backed paper do not want to see a surge in prepayments that could result from the Federal Reserve?s low interest rate policies. The investment losses from prepaying all those six percent mortgages they hold would be quite extraordinary. And since Fannie and Freddie are owned by us taxpayers, the bailout cost would increase dramatically. Mr. Mauldin quoted colleagues who went so far as to suggest that the tightened credit standards might be a premeditated way to control the rate of prepayments.
Policy makers, especially those up for re-election soon, feel the need to do something. And just as clearly Fannie, Freddie and the investment community want to avoid massive prepayments. I?m not certain how these competing interests will play out, but my vote would be to find a way to increase the availability of refinancing opportunities to more homeowners. The resulting lower payments would enable consumers to increase spending. This spending would stimulate the economy more than any other idea that?s been suggested.
~John Bethell
?Three Rules of Work: Out of clutter find simplicity; from discord find harmony; in the middle of difficulty lies opportunity.? ~ Albert Einstein
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?During the last three years we?ve been introduced to many new concepts. Mortgage modifications, robo-signers, qualified residential mortgages, Appraisal Vendor misManagement firms, mortgage backed security put backs, TARP and HAFA immediately come to mind. We?ve dealt with new RESPA regulations, new TILA regulations (several times), and coming soon new rules from the Consumer Finance Protection Bureau. Somewhere, amid all the change, there must be opportunities, right?
?One opportunity that we?ve pursued involves short sales. That?s when the seller?s mortgage holder agrees to take less than what is owed on the loan but still releases their mortgage. We?ve dealt with short sales for about five years. By and large, they?ve been very disruptive to our closing business. Each one was a fire drill and no one involved was ever happy with the process. Last winter we decided that there must be a better way.?
?That better way we call ISSAC?Improving Short Sale Approvals and Closings. The goal of ISSAC is to help Realtors? and their clients by prequalifying short sale sellers, submitting complete short sale packages to lenders for approval, and closing the transaction in a reasonable time frame. (Reasonable for most short sales is sixty to seventy-five days.) Kara Oltman, our Vice-President, Settlement Services is in charge of the program. Both Kara and I completed extensive training and earned professional designations as Certified Default Resolution Closing Specialists. ?
?So how many potential short sales are there? To get an idea, look at the Mortgages under $50,000 chart in our report. Several years ago thousands of home equity and piggy back mortgages were made in Monroe County. Some banks lent to 125% of assessed valuation. Although locally our values haven?t cratered like some markets, there still are a number of upside down homeowners in our community.
?The ISSAC program includes a two hour training session in our office, currently conducted once a month. Short sales applications are similar to mortgage loan applications. There are a number of details and contingencies that must be accounted for. The training session covers all of that. After the training Realtors? are better equipped to represent their clients on either side of a short sale transaction.
?We feel that ISSAC benefits the entire community. Each approved short sale is one less home lost to foreclosure; Sellers get to move on and start over; Buyers get the home they want; the neighborhood avoids an abandoned house with three feet of weeds and broken windows.
?We?re excited to offer our assistance. Contact Kara, Tammy Walker or me for further details.
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~John Bethell
?Good news and bad news in the May numbers.
Commercial lending is slowly showing improvement. There were twelve commercial mortgages securing loans in excess of one million dollars recorded in May. More broadly, there were thirty mortgages over $500,000 recorded in April and May of this year. Last year in April and May there were only fourteen such mortgages. This increase confirms anecdotal evidence that I?ve heard. Some banks?but not all banks?are making commercial loans in well qualified situations. A welcome sign of improvement.
The residential side of the market is still very soft. Our mainstay barometer of market activity is recorded mortgages securing between $50,000 and $500,000, as these most often represent residential first mortgage transactions. Only 497 such mortgages were recorded in the last two months. This is the lowest April/May total in the fifteen years that we?ve been providing our report. We seem to be in yet another ?interest rates will never be this low again? market. Yet, consumers are not paying attention. Or more likely, they may be unable to qualify under today?s standards.
The oppressive effect of regulatory and underwriting excesses is clearly taking its toll. According to a recent article in the Wall Street Journal, loan application rejections increased to 26.8% of all applications at the nation?s ten largest mortgage lenders in 2010. It would be hard to argue that increased rejection rates are not reflected in our own market. The numbers don?t lie. Hopefully, at some point, government officials and regulators will come to their senses. Without a strong housing sector, there?s little hope of the country enjoying a robust economic recovery.
On a more positive note, our acquisition of Meridian Title?s Bloomington office is transitioning well. I?ve attached a recent update for those who may have missed it. At this point, I can?t imagine how things could be going better. Thank you to all who offered their congratulations and well wishes. All of us here at John Bethell Title truly appreciate that.
~John Bethell
?The four basis premises of writing: clarity, brevity, simplicity, and humanity.?
~ William Zinsser
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This week the Consumer Finance Protection Bureau released two samples of its proposed combination Good Faith Estimate (GFE) and Truth in Lending Disclosure (TIL). I must say that I?m surprised and impressed. Each of the two page samples are huge improvements over the present combination of a three page long GFE, a two page long TIL and a one or two page cash to close worksheet. I?ve included copies of each of the proposed forms (one from Ficus Bank and one from Pecan Bank) with this month?s report.??
The Pecan Bank disclosure is the one that I?d choose if it were up to me. Buyers typically want to know what their cash to close is, what their payment is and what their rate is. The Pecan disclosure gives them the cash to close number first. The payment information is right next to it. You?ve got to hunt for the rate a bit, but I wouldn?t characterize it as buried or hidden.??
I also like the way the actual costs of the loan over five years are clearly stated. This seems a much more meaningful and easy to comprehend number than the algorithm used to compute the APR.
I also like the CFPB?s tag line??Know Before You Owe.? I appreciate the subtle implication that the borrower has some responsibility to know what they?re signing up for.?
If you?d like to receive updates from the CFPB or comment on the form, you can sign up at the CFPB?s website. Here?s the url: http://www.consumerfinance.gov/You can comment on the form by following the link to the newsroom tab at the bottom of the page.
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~John Bethell
?For every problem there is a solution which is simple, clean, and wrong.?
~ H. L. Mencken
Banks and other mortgage investors are still struggling with the effects of a bad business model. A model where more than ten percent of the people they were lending money to are not paying them back. For some mortgages, like sub-prime, a third or more of the loans are not being repaid.
To prevent banks from making such a poor business decision in the future, the proposed regulatory solution is to deny many first time homebuyers access to the housing market. Risk retention rules will reduce the number of their choices. Higher rates will be charged by those lenders that remain resulting in fewer borrowers qualifying. And if the indiscriminate application of excessively conservative down payment requirements and credit worthiness algorithms continues, the field of eligible first time homeowners will be even smaller.
It?s hard for me to see how this is a win for anyone but big banks. They can afford the risk retention whereas many smaller competitors can?t. And they can use the new regulatory scheme to justify charging higher margins.
I?ve included with this month?s report a white paper prepared by several real estate and mortgage finance organizations. The paper analyzes the effect that the proposed Qualifying Residential Mortgage rules will have on the ability of first time home buyers to enter the market. Whether or not you agree, the paper does a good job of identifying the issues.
Quick takes about the first quarter of 2011:
Recorded sales in the period are about the same as each of 2009 and 2010 first quarters. Is this really a sign that the market is improved since there are currently no significant federal home buyer incentive programs driving activity? I think so.
Although mortgage originations are up, January was the by far the best month. In our office, refinances have returned to the normal fifteen to twenty percent of originations.
New foreclosures started and recorded sheriff?s deeds both continue to show declines. This trend is about six months old. It?s either a sign that the foreclosure problem locally is in remission or that the process since Robo-signer-gate is messed up beyond belief.
~John Bethell
?To simplify complications is the first essential of success? ~ George Earle Buckle
The Good Faith Estimate (GFE) mandated fourteen months ago is in my opinion creating more and not less uncertainty for consumers. The GFE just doesn?t tell them what they want to know. The form tells them what the lender is going to charge. The form tells them what the seller might pay for title insurance. The form tells them what other settlement service providers might charge. The rule that created the form results in some lenders grossly over estimating settlement costs. That avoids cutting the dreaded out of tolerance check at closing but seriously, how does that help the consumer?
The consumer wants to know ?What will my total payment be?? The GFE gives them some of the parts of the payment, but not everything, like the tax escrow amount. The consumer wants to know ?How much money will I have to bring to the closing?? There?s nothing remotely close to that answer on the form. The GFE does tell them their interest rate, which they want to know for comparison purposes. But by itself that information doesn?t help them complete their transaction.
One of the mandates of the new federal Bureau of Consumer Finance Protection (CFP) is to combine the Good Faith Estimate disclosure form with the even less useful Truth in Lending Disclosure. What might such a single form look like?
The American Land Title Association, the title industry?s national trade group, (ALTA) suggested a form of disclosure which it is currently discussing with the CFP. I think it?s a pretty good form and I?ve attached a sample at the end of this month?s report.
The current TIL and GFE forms total six pages. The ALTA?s form gets all the same information plus some more into three easy to understand pages. The three important questions?payment, rate, and cash to close?are all right there on the first page. Any seller?s contributions to the buyer?s costs, another omission in the current GFE, are clearly stated. The itemization of charges on page two looks remarkably similar to the actual HUD-1 closing statement. That will further minimize confusion. And instead of providing a shopping list format that few consumers use or pay attention to, it contains enough instruction to direct the engaged borrower to effectively comparison shop.
I think that the ALTA has done a great job. Hopefully their recommendations will be carefully considered by the CFP.
What?s your favorite indicator of where the market it going? Each month I publish a variety of Monroe County statistics hoping to lend perspective to our local real estate and mortgage finance markets. Mortgage and deed recordings, transfers, foreclosures started and finished just to name a few. I slice them, dice them and try to put them in meaningful relationships with a cool graph or two.
The Monthly Mortgage Market Share report reflects my unfulfilled desire to find the holy grail of market indicators. The one stat that above all others would tell me when the market would turn, how vigorous it would be and when it would end. Were I able to find such a metric, I?d be forever free from the anxiety of living or dying with daily order counts?a curse I?ve endured for over thirty years.
My job would be easy. My confidence would soar. I?d know exactly what decisions to make and I?d always be right. Staffing, capital expenditures, expansion would all be easy considerations. Alas, my search continues. I do know if asked that ?Well, we?re busy in the summer, and slow in the winter.? But that?s about it. Anything else I can add is history; what happened last month, quarter or year.
So I still form my opinions about the future from anecdotal evidence that over the years I?ve learned to trust. For example, I mentally track the number of new for-sale signs between home and the office every week. Before email and Adobe? attachments became common place, I could tell how things were going by how much fax paper we used every day. More than a ream and I knew that we?d be rocking soon.
One of my favorite market predictors is the weekend parking lot indicator. It?s quite simple. On any Saturday or Sunday, I just look out my office window and across the street to Re/Max Professionals? parking lot. When it?s empty, I know that few of my friends are schlepping buyers around looking for dream houses. When it?s full though, especially with cars I don?t recognize, get ready. The market will be turning soon. Make sure there?s paper in the fax. Right now this indicator is pretty darn bullish.
What?s your favorite market indicator? I?ve posted this commentary on my blog here:? https://www.johnbtitle.com/category/blog/
Leave a comment and let the world know. You?re probably more insightful than you give yourself credit for.
~John Bethell
This is not the end. It is not even the beginning of the end. But it is perhaps, the end of the beginning. ~ Winston Churchill
There are encouraging signs for the Monroe County real estate and mortgage finance markets. Commercial loans showed signs of life in December. Residential sales in the higher price ranges improved over the last six months of the year. Neither of these developments appears to be the result of any artificial stimulus, such as home buyer tax credits. That?s good news.
The twenty mortgages securing loans over $500,000 (see detail) made in December is the highest total in Monroe County since July 2008?the month when the sub-prime crisis became obvious. Most of these loans appear to be commercial in nature which is a positive indicator for the 2011 market. I?ll be watching closely the next few months in hopes that this is a trend, and not a year-end aberration.
Sales of properties for use as a primary residence (see chart) also displayed an upbeat trend. Although the total sales in the second half of 2010 were down compared to the 2009 period, sales in the upper price ranges were actually higher?a lot higher. Second half sales with a stated sales price in excess of $200,000 increased over forty percent over 2009?from 178 to 251! These sales are less driven by tax credits and artificial stimulus. The drivers are more likely low interest rates and buyers feeling financially confident about making a change.
The last trend to keep an eye on is mortgage foreclosures. The number of new foreclosures started and the number of recorded Sheriff?s deeds (foreclosures finished) both continued to drop in Monroe County. Is this drop is real or is it just a pause as a result of the robo-signer-gate revelations in the fourth quarter? Let?s hope it?s the beginning of a return to normal.
The market still has a long way back. The ever increasing overhead of regulation and compliance certainly will retard its progress. Nevertheless, signs of improvement should be celebrated.
~John Bethell
“We’ll take the best ones, test them on consumers, and then soon be able to unveil a new, easy-to-understand, federal disclosure form,”
~Treasury Secretary Timothy Geithner speaking about combining the TILA and GFE forms
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I?ve suggested here on occasion that Compliance Officer might be the hot career track in mortgage finance. This past year left no doubt about that. If dealing with the Home Valuation Code of Conduct, RESPA, TILA, and endless new loan guidelines from Fannie, Freddie and FHA weren?t enough, we enter 2011 riding the wave of Robo-signer-gate to where Dodd-Frank Financial Reform awaits.
According to the New York Times, the newly created Bureau of Consumer Financial Protection (just the name alone makes me feel safer!) will oversee the writing of 243 financial rules and conduct 67 studies that I?m sure will find the necessity for even more rules. We?re going to need a compliance army, not just an officer. And politicians wonder why everyone is afraid to buy, borrow or lend.
Although many believe the regulation and compliance emphasis is going overboard, it?s awfully hard to argue against it when the banks, loan servicers and foreclosure attorneys can?t stay out of their own way in the foreclosure mess. Each week seems to bring a new revelation; lost promissory notes, foreclosing on the wrong property, waltzing home owners around the mortgage modification dance floor only to pull the rug out by foreclosing, “technical error? is the new legal term for falsified affidavit. Each disclosed bungle is naturally followed by politicians convening televised hearings and calling for even more regulation.
All we can do is get ready for more of the same. We?re destined for more regulations to ensure that the age of irresponsible borrowing never occurs again. And if responsible borrowing is a casualty, as our local originations clearly show, then so be it.
And to Secretary Geithner I have but four words. Good luck with that!
~John Bethell
“I would tell you that we?re probably there,?we are probably tighter than we need to be.?
~ William Emerson, CEO Quicken Loans, Inc.
In case you haven?t noticed, the purchase market is quite soft. July through October deed recordings were down a whopping twenty-nine percent compared to the same four months in 2009. (757 to 540) How quickly things change. After the first six months of 2010 that number was up seventeen percent. Now, after ten months the comparisons show a total market decline of five percent. (1561 to 1482)
Clearly all the homebuyer tax credits achieved was to accelerate business into the second quarter that probably would have closed in the third quarter. There?s no evidence that the credits brought new buyers into the market. By year end the decline will be even greater since homebuyer tax credits were driving business at the end of last year.
In an interview with Al Yoon of Reuters? last week, William Emerson said what we all know. The credit pendulum has swung too far to the conservative side. And he doesn?t see that changing for another two years. That?s worrisome.
In a related matter, J.D. Powers and Associates reported November 18th that the length of time from loan application to closing has increased again to 52.1 days?the third year in a row. Not surprisingly, consumer satisfaction with the mortgage origination process continues to decline over the same period. Consumer satisfaction with big banks scored even worse on servicing issues. Here are links if you want to take a look. ?Origination Survey. Servicing Survey.
So, fewer people are buying. More people don?t qualify. For those that do the process takes longer, is less satisfying and the experience tends to get worse if you have to deal with the bank on a servicing issue.
And big banks wonder why no one will believe their characterization of problems with foreclosure affidavits as ?technical.?
Despite the challenges of the market place, 2010 has been a great year for our company. Everyone here at the World Headquarters wishes to extend many thanks to all our clients and associates for your confidence in us. We all hope that you have a wonderful holiday season and come back renewed and refreshed to pursue the opportunities that await us in 2011.
~John Bethell