First Ohio Home Finance

We heard recently from one of the lenders we deal with that Fannie Mae is killing its broad declining market policy. Before you celebrate, though, read on to see what plans they have for real estate!As recently as January 2008, Fannie Mae decided that labeling entire zip codes or counties – even states like California and Florida – as declining markets was a good idea to protect their interest in residential real estate. The blanket designation could not be appealed or overturned by specific underwriters.

As the GSEs like Fannie, Freddie and FHA’s Ginnie steer away from blanket designations, they are going to a 20-point appraisal review system. This will allow underwriters more authority to review each file and grade the property appraisals.

If the appraisal has comparable sales outside of the time or location guidelines, excessive adjustments to value or other problems, the value would be cut or the appraisal rejected.

We are having to fight harder and work more closely with our approved appraisers to keep deals afloat. I am still trying to get my hands on the specific guidelines. When I do, I’ll let you know.

A further complication is the Fannie and Freddie guideline that, as of January 2009, employees involved in loan production will not be allowed to order appraisals or choose an appraiser. Appraisals will be ordered by non-production employees or the end lender AND only from a handful of national appraisal management companies or AMCs (think Old Republic, Land America, etc).

So what does all that mean?

Consumer’s cost for residential financing will be driven higher and higher as AMCs that get government blessing will have a monopoly and charge higher and higher prices. This, in turn, will engender new regulations called price controls. National appraisal companies already charge 40% more than the typical $350 conventional appraisal.

Regulation also has a way of forcing small business out of the market (the ones to best know local markets) as it aggregates power and control higher and higher. That goes for everyone involved in loan origination – appraisers, local brokers and correspondent lenders, title companies, etc.

Since this new regulation does not yet apply to FHA, it also means that more financing will be FHA-insured loans. That can be a good thing for both borrowers and FHA-approved lenders. The downside is that FHA guidelines are fairly cut and dry – unimaginative, if you will. That means the pool of borrowers – such as the self-employed who write-off expenses, fixed income seniors with high DTI ratios, bruised credit borrowers, etc - will become smaller and smaller.

Bottom line: good for major banks, bad for consumers and small business.

I go to a number of networking events each week, some with the Chamber of Commerce, smaller groups, or dedicated Young Professionals. It never ceases to amaze me how, upon learning that I work in the mortgage industry, these people look at me sadly as empathy washes over their face. They say something like, Oooh, that must be hard now!

I usually explain how it’s becoming a fun challenge! That’s not because I am coming from a position of phony bravado, sheer ignorance, or unrealistic confidence. I truly see the current market as a positive place to be. We have less competition, a reasonable selection of conventional and government loan products, and steady number of clients wanting those products.

I also explain that most of the bad news you read is from Realtors and sellers, frustrated with waves of competition in the marketplace.

According to a recent report from the NAR, the average Realtor is having a tough go. The report showed that the average Realtor is a 50-year old who works more than 40 hours each week, and made less than $40,000 in 2007. It also shows only 82% use cell phones and 27% use digital cameras.

While the overall statistic is not a huge vote of confidence for the sales side of real estate, it illustrates the need to do business with the very best. Now more than ever. There are great Realtors out there who have amazing teams, the latest technology, broad experience, and a deep pool of clients and contacts.

If you are considering selling your home, heard rumors about a transfer, or can see that you would want to refinance in the coming 12 months, call us today. Many people are still refinancing out of adjustable rate mortgages, for home improvements now that they expect to be in their home awhile, or for major expenses like college tuition.  We can get a team of professionals in lending, real estate, tax, and financial planning to support you as you make critical decisions for your family.

As inflation fears eased on Wall Street, mortgage rates fell this week. It seems a new equilibrium is being reached in financial markets as the US dollar finds a bottom.

Credit guidelines are still tight but we are not seeing the rapid tightening that occurred through the winter and spring months. Some examples of the changing guidelines include the end of many subprime and 0-down programs, the end of 100% LTV lender-paid mortgage insurance, and a stronger scrutiny of most appraisals.

There are doors opening, too. Get this; you can now buy a HUD-owned home with only a $100 down payment AND use the FHA rehab program (loan amounts up to $340,000) to roll in as much as $35,000 in repairs!

Turn your nose up at HUD homes? Not so fast. There are more than 75 short sale or bank owned homes listed in Westerville now OVER $300,000! You can buy a mighty nice home with very little down.

If you have a substantial down payment for a large home, you can still get a jumbo adjustable below 6%, too.

I know the market is slower than sellers and professionals would like. But the bright side really is quite remarkable right now.

I promised to update you on the recent Save Our Homes statewide summit held last week, and it was definitely an eye-opening event. The takeaway was the need to tell all Ohioans:

IF YOU ARE BEHIND ON YOUR HOUSE PAYMENTS, THE WORST CHOICE YOU CAN MAKE IS TO DO NOTHING

The experts say, If you do nothing, there is nearly a 100% chance you will lose your home. Meanwhile homeowners who take basic steps like opening your mail and reaching out for help gives almost an 80% chance of staying in their home.

“We are going to have to keep at it,” said Cordray to the crowd of county officials, industry insiders, and non-profit workers. “People ask me all the time – and I don’t have the answer for them – how long is this going to keep on?”

Maybe you think foreclosure could never happen to you but are finding yourself more and more delinquent on property taxes, utility payments, or other debt service. Especially if you have an adjustable or balloon mortgage - now is the time to learn what options and assistance there is.

A number of cutting-edge programs have been rolled out in Ohio – far ahead of the rest of the nation. Ohio Treasurer Richard Cordray is showing a great deal of leadership in this effort, along with Chief Justice Thomas A. Moyer. Other states and the federal government are actively inquiring into Ohio’s efforts after recognizing them as among the most proactive and responsible.

One front of this endeavor to stop foreclosures is a Foreclosure Mediation Program. This option requires the lender and the borrower to sit down and discuss measures to avoid foreclosure. Some reach agreements like cutting the house payment for X months if the homeowner keeps the property in good condition. This allows the borrower time to find other housing, while reducing the cost of maintenance and repair for the lender.

There are other groups simply advocating on behalf of distressed homeowners. The ESOP group in Cleveland shared about successful protests of bank branches to gain the attention of the lender and stop a sheriff sale. While the manpower for such an event is enormous, the success rate is also high.

Loan servicers are softening as more and more homes burden banks not equipped to own so many foreclosed homes.Other resources include grants and loans to catch up on your mortgage, personal finance counseling, 7 Steps to Smart Homeownership seminars, public television call nights, and financial literacy education.

Remember, only you can prevent foreclosures!

I have been involved recently in a surprisingly cooperative effort to find solutions to the residential real estate slowdown. I won’t call it a bust, because it hasn’t been catastrophic in the central Ohio market. It really is becoming – and will continue to be - more difficult to find loans for buyers with a poor history of paying their bills and for marginal investors. But by and large, the market is moving on. There are a solid number of buyers in the market, and more than enough sellers.

Every week, one of the top news stories is the steady rise in home foreclosures here in Ohio. The issue is affecting our local economy and, more importantly, the lives of real people in our own neighborhoods.

State executives - including the governor, attorney general, treasurer, chief justice and others – seem to be really worried about housing in Ohio. Executives have been touring the state with news conferences and collaborative meetings. Foreclosures are quite common in some neighborhoods of Cleveland and Toledo, which unfortunately leads to theft, vandalism and general deterioration of communities.

Among the solutions being rolled out:

• Lenient property tax payment plans by county treasurers around Ohio
• A new foreclosure mediation program headed by the state Supreme Court
• Increased legislation to subsidize borrowers and regulate mortgage brokers
• Increased education from and interest in public and private educational programs
• Pressure on lenders to help homeowners – including subordinating 100+% LTV second loans, easy negotiating for short sales, even partial mortgage forgiveness when a helpful refinance is held up due to appraisal problems.

The local group I am involved is the Save Our Homes Taskforce (site currently down). A task force is really a simple name for a loose group of people working toward a specific goal. This particular group, meeting on East Broad Street, is attended by non-profit educational groups, county leaders, and some lender representatives. Many of our company’s loan officers will be attending a statewide summit on April 23rd to refresh our best practices and learn about some of the above efforts.

Some of the initiatives our task force include identifying community resources, conducting homeowner and professional seminars, exploring ways to deliver foreclosure counseling, and lender remediation. The idea is catching on across the state, thanks to Ohio Treasurer Richard Cordray.

Now some people may be cynical of these efforts by politicians to intervene in the market. While I share some of those sentiments, I appreciate the interest and leadership as long as the solutions are mindful of the free market and participation is voluntary.

Here at First Ohio Home Finance, we are spending tremendous resources to reach out to those with adjustable and subprime loans. We believe Ohioans who are not under the direct and regular advice of a financial planner should move as fast as possible into fixed and affordable mortgage payments. That means you need the advice of a professional loan officer who can advise you on the best mortgage product for your needs.

I’ll let you know how the Save Our Homes Summit at the end of this month goes.

The state’s Department of Financial Institutions (DFI) audited our company’s mortgage practice last month with little notice.

I’d be lying if I didn’t admit the audit – before, during, and after – made me feel unsettled, mistrustful, and maybe even confused. We’ve all heard stories about new Ohio Attorney General Marc Dann, and I’m sure some of them get blown out of proportion – you know, the mythical $50,000 fine for having a file’s paperwork in the wrong order.

Even as we knew most of our files were in order, one concern was the additional mortgage disclosures which became required starting in January 2007. The paperwork and attending regulations tend to be confusing to borrowers and loan officers. The changes ushered in by S.B. 185 required a new Mortgage Loan Origination Disclosure Statement (MLODS), as well as re-disclosure of certain documents if the terms, payment, closing costs payable to us, or escrow changes.

The burdensome part of the new law is this re-disclosure is required 24 hours before closing. While it sounds like a common sense requirement, in the reality of our broader real estate industry it can be an aggravation to the very people it is supposed to protect.

In one humorous situation last year, we had a purchase closing scheduled during the summer. One of our borrowers happened to be a DFI employee. When the settlement statement was completed and approved by all the parties the morning of closing, it was discovered that the closing costs had changed - by less than $100. The borrower understood and agreed to the change. However, we were required to delay the closing until the following week in order to have a re-disclosure signed by the borrower. The borrower had to re-schedule his moving company, and the Realtor had a delay in their paycheck.

Needless to say, the borrower was not happy with us or the law. But they understoood – and we’d rather stay in business and help more Ohioans find the right mortgage product for their needs.

Another cause for concern was stated income mortgages – or in the current environment, called ‘liar’s loans.’ In making a loan, it is very important for loan officers not to lead borrowers to state a specific income. It is also unethical to leave that issue out of the loan application and later ‘back in’ the level of income that an underwriter would approve. Without internal auditing of every closing (which a small business like ours only does in a cursory way), we did not know what the state auditors would find.

The two state employees were unexpectedly thorough, spending 4 days occupying our conference room instead of the 2 they had asked for when first announcing their assignment. But they were courteous enough.
The result in our office was immediate. After getting an in-person clarification about new regulations, company owners called a meeting and made the requirements very clear.

All in all, I think the audit was positive in that it reinforced the need for more assertive management and record keeping if we are to stay out of ‘QC jail.’ But I know the company will be in the game - for another few decades at least!

The Federal Reserve Bank cut the federal funds rate to 3.5% this morning before markets opened. This was obviously and openly in response to stock markets around the world ‘in panic’ or ‘crashing’ over the last four days.

Here’s how the Fed couched it’s latest action (emphasis mine):

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

Fed Policy Statement on Surprise 75BP Rate Cut

What those who have an interest in real estate should remember is the Fed controls short-term interbank rates - not mortgage rates. While there is a trickle-down effect to consumers with variable rate consumer debt (think credit cards and home equity lines), Fed rate cuts generally send mortgage rates higher.

Surprisingly, mortgage bond trading has been positive, though. Retail fixed rates for prime borrowers have been reported as low as 5.5%. So the combined effect right now is positive as borrowers have lower debt service and lower mortgage rates. Time will tell, but I firmly believe pricing will worsen as the market digest this unusual move. The news is extremely inflationary and will eventually send rates higher.

The other piece of the puzzle that I think will send rates higher is that the domestic bond market relies heavily on foreign central banks and investors. If those banks are rushing to save their own markets/economies, how much will they have to invest in US markets that are conservatively described as defective? So if demand falls, prices fall and yields/mortgage rates are forced upward.

Congress and the Federal Reserve Bank are both hard at work in working to stem the tide of foreclosure in our country. They have proposed increased regulation and disclosure to attempt to persuade homeowners and home buyers from the current mortgage system.

On one front, the Federal Reserve governors have issued the most sweeping reforms of the HOEPA in decades in an attempt to reduce losses. These reforms speak ONLY to high-cost loans, although most of the media is translating that to ’subprime.’ The underlying change is re-defining high-cost as an APR 5% above a similar Treasury bill. For example, a 30-year fixed rate loan would fall in this category if the APR topped 9.6% today, or a 5/1 ARM topped 8.6%. Clearly these ARE high-cost loans, since conventional borrowers are finding APRs in the 6.5-7.5% range.

Essentially, the bankers want to end stated-income lending, mandate escrow of taxes and insurance, halt prepayment penalties before an adjustable loan resets, and disclose to borrowers dollar-specific compensation that would go from a lender to a broker. Furthermore, the lender would have to “consider” a borrower’s ability to repay.

Another important point consumers need to be aware of is more and more conventional borrowers are becoming subprime or non-conventional because of a decline in available mortgage products. This is b/c credit score requirements are being raised - you’ve probably already heard that 720 is the new 680. As you can imagine, this is EVEN more true for subprime and alternative credit loans.

So, what would these changes mean for the average conventional borrower? What would the changes mean for the average subprime borrower?

For conventional borrowers, the only change would be the upfront disclosure of compensation. Most of the controversy surrounding this issue is b/c most brokers have not chosen a lender or locked an interest rate at the time of initial disclosures. To require them to disclose is essentially a requirement to estimate and then re-disclose later in the process. Bottom line, more paperwork and more consumer eyes-glazed-over.

For subprime borrowers, there will be devastating consequences. As hundreds of lenders have hit the fan in the last 12 months, finding an appropriate, reasonably-priced subprime product is very difficult. When you kick out prepayment penalties, end stated income, and require escrows, there will be fewer loans available for those with bruised credit or unusual circumstances. That means fewer homeowners among those with low-income or not particularly financially savvy - the opposite of what the establishment wants.

All in all, the solution is not more government intrusion. Financial institutions have successfully facilitated American home ownership for decades.

The current web of crises are directly linked to the Federal Reserve keeping low short-term interest rates for TOO LONG following the dot-com bust of 2000, which led to a warping of the world economy. Ending the manipulation of financial markets is the ideal answer.