First Ohio Home Finance

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.

President Bush sent his Treasury Secretary out with a proposal yesterday to try to stem the tide of subprime mortgage defaults and foreclosure. The America Securitization Forum, which represents mortgage investors and mortgage servicers, recommends mortgage servicers freeze interest rates for borrowers Read the rest of this entry »

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