Mortgage Payment Program

The Federal Reserve continued their long string of lowering rates and recently lowered rates again. The question I have been getting asked a lot lately is “Will this reduction lower mortgage rates and help with the mortgage crisis?” My answer to them is “Not so much.”

For those who watch mortgage rates closely have noticed that mortgage rates have actually risen slightly after of few of the recent Fed rate drops. Why? The rates that the Federal Reserve has been lowering are the rates at which banks borrow money. In a simple world, if the bank has access to cheaper funds that should mean that it trickles down to the consumers and drives down our cost to access funds in the form of loans. The mortgage market is much more complicated than that with access to funds, and the rates, driven mostly by Wall Street and their demand to buy and sell mortgage backed securities. This demand still remains low largely due to the still existing issues around declining home values and the still rising delinquency and foreclosure rates.

So, if the drop in rates by the Fed isn’t going to help the current mortgage and housing climate, what will? The best answer I can offer is time. At some point the inventory of houses will begin to shrink and home values will stabilize and the housing market will begin to recover. The silver lining? For those people who have equity in their homes – either from buying at a low point or paying down the principal balance faster – or cash to put down on a home there are a lot of bargains in the market to be had.

We are starting to see the ripples of change come from the mortgage crisis. (See the blog on Mortgage Meltdown). One of the changes is that mortgage lenders are changing how they compensate brokers for the loans the broker originates. Since brokers have been a party to nearly 7 out of 10 mortgage transactions, any impact to brokers is likely to trickle down to the consumers getting loans. The question up for debate is how will these changes impact consumers who are trying to get mortgages.

Some quick background in case you are unfamiliar with the roles of lenders and brokers. Mortgage brokers act as independent sales agents in the transaction. They sell lender’s loan products and use funds from the lender or a line of credit from a mortgage banker in order to fund the loan. The broker is paid a commission for their role in the transaction. The commission the broker earns is based on (1) fees paid by the borrower including points and junk fees, (2) the rate the broker charges the borrower (in some cases the rate is higher than market rates and the broker earns a yield spread premium commission), and (3) pre-paid penalties (if any) often earn additional commissions. Typically people with lower credit scores, or who have had bankruptcy and/or foreclosures (those classified as subprime) will payer higher points, higher rates, and be subject to pre-payment penalties – a trifecta for brokers looking to maximize their commissions.

New mortgage broker requirements have been adopted by a number of lenders in response to the subprime crisis. Companies such as Wells Fargo & Co. and Provident Funding Associates LP both mandating that brokers disclose upfront how much borrowers will pay in fees as well as the yield-spread premium to be paid by the lender. Additionally, Countrywide Financial Corp. lowered its maximum broker compensation to 4 percent of the mortgage amount, down one percentage point.

How will these changes impact consumers? The disclosure requirements should make the fees charged clearer to the borrowers, especially fees, like yield spread premiums, that were difficult for borrowers to identify. The lower cap on fees paid may bring mixed results to borrowers. On the one hand there, it reduces the maximum fees a borrower will have to paid to obtain a loan making the loan more affordable. On the other hand it reduces the brokers incentive to help borrowers in smaller loans. Since many of these loans are the result of consumers identified using data sets for direct marketing campaigns, brokers may raise their minimum loan requirements on these data sets meaning many of these consumers will have to proactively seek out loans on their own rather than get offers via phone and mail. It could also increase the brokers sales attempts to raise the loan amount by selling the borrowers on paying off more debt and taking out more cash than they need to in order for the broker to make an acceptable commission.

We are already seeing a drop in the percent of loans created by brokers – down now to approximately 40% of all mortgage closed. Less broker loans could mean less competition which, as the theory goes, could mean higher fees to consumers. Only time will tell if these changes are moving things in the right direction for consumers or not.

The mortgage crisis seems to be headline news on a daily basis now. What seems to be driving the free fall? There are two key factors in play. First is the number of loans that are adjusting upwards. Many people took out adjustable rate mortgages with low “teaser rates” that are adjusting to market rates. Even though interest rates are low, the regular rate is still higher than the teaser rate that is causing “payment shock” for many homeowners. The second reason is that home values in many markets continue to decline. These markets are flooded with foreclosures and people looking to get out of a home they can no longer afford. This growing supply of homes far outweighs the current demand that is causing prices and values to fall.

What is a homeowner to do? Pay down your principal balance before your payment jumps up! Paying down your balance on an adjustable rate mortgage will lower the amount of your new mortgage payment when your rate adjusts – often times lowering your payment amount even when rates move up. Paying down your balance also helps to maintain equity in your home.

No one knows for sure how long this poor mortgage market will last, but it will not last forever. When markets finally adjust to normal growth rates, those who have paid down the principal will benefit most by having more available equity to use on moving up to a bigger home or leverage for significant expenses like college or home improvements.

Equity Plus is a great, safe, and easy way to significantly reduce the principal in your home. The program can be tailored to exactly meet your personal budgets and meet your financial goals and objectives. To find out how you can reduce the risk of a bad market by using Equity Plus, visit www.equityplus.net or call 1-800-251-1315.

So, what’s behind the mortgage crisis? Who is to blame? The current mortgage crisis was caused by a series of things that all went wrong and in a chain reaction continued to cause problems throughout the entire industry. It is hard to find a single area of blame – instead errors were made by most of the players in the mortgage transaction. Here is just one example of many where things went wrong.

One of the biggest culprits to the current crisis was the use of reduced document loan programs – specifically the Stated Income, Stated Asset (SISA) products. The underwriting requirements for these products allow borrowers to state their income and asset but did not require the lender to confirm them with pay stubs and tax returns. This left open the possibility for loans to get approved for people who would not otherwise qualify for them. In many cases it was crafty Loan Officers who gamed the system by taking the application and filling in the income and assets required to get the loan approved. Sometimes borrowers were complicit in allowing this to happen so they could get the loan and in other cases the borrowers were unaware because they didn’t carefully review the huge stack of documents they were signing.

But these SISA loan products existed because there was a market place for them. Mortgage Insurance companies would insure them, the ratings agency’s would rate them high enough to be marketable, and Wall Street was buying and selling them. How could they possibly understand the true risk without having all the information necessary to assess it? Hindsight being 20/20 tells us they really couldn’t. But when everyone in the process was making money along the way, it is hard to shut something down that “seems” to be profitable. And in many cases they were making money again and again with many borrowers continuing to refinance to pull out cash and keep teaser rates as home values continued to climb. That is until values started to drop and they could not refinance any more. Today we see a lot of the SISA loans originated in the last three years going into foreclosure and a return to stringent documentation requirements on loans.