Archive for August, 2010

RateWatch 5 August 2010 – FHA Fee Shift?

Welcome to RateWatch for Thursday, August 05, 2010.  Here’s what’s happening:

Employment again is the news of the day, with new claims up another 20,000 or so to 479,000.  Continuing claims were down, though, to 453,700.  That was not as far down as the markets were expecting, however, and that’s meant that bonds have stayed strong.

Not too strong, though.  There really is no upside here.  Unless we get a truly shocking number tomorrow from the unemployment people, showing unemployment at, say 10.5%, there just isn’t any confidence in the bond market to cause a buying wave.

What that means for rates: nothing.  We’re down 6bps, which might just as well be flat.  There is no upside without huge news, and no downside because what news there is is bad.  So we’re hanging out with rates in the 4.5% range.

Anything else?: yep.  Sure is.  The big news today comes out of Washington, surprise surprise, with the Senate passing a bill that changes FHA fees.  Up-front MI will move from the current 2.25% down to 1%, a positive change, but more than made up for by the increase in monthly MI from an annual .55% to .9%, and the FHA gets authority to go all the way to 1.5%.

Bottom line: on a $200,000 loan, you are paying right now $4500 in UFMIP and $91.66/mo in monthly MI.  When these changes take effect, you’ll be paying $2000 UFMIP but $150/mo in MI.  For more commentary on that, see the blog at

I’m Chris Jones, aka Agent Zero.  That’s RateWatch for today.  Until next time, we’ll be watching the rates.

The Right Thing The Wrong Way

Rumors have begun to swirl that the Obama Administration, facing what are very likely to be catastrophic losses in November, have cooked up a last-gasp attempt to prove that they are doing something about the economy.  The plan is to have FNMA/FHLMC (Fannie and Freddie to you and me) forgive billions in mortgage debt owed by homeowners that owe more than their homes are worth.

A few things here.

  1. The number 1 predictor of foreclosure is negative equity.  Those that are underwater in their homes are 3x as likely to walk away as those that are even or have some money in their properties.  Some of the foreclosure wave has been caused by job losses, but as much as 26% of foreclosures are termed “strategic” – that is, homeowners walked away as a financial decision, not because they couldn’t make payments.  So to stem the tide of foreclosure, eliminating underwater mortgages is likely to be a good thing.
  2. Foreclosure decisions are heavily impacted by the amount of the negative equity, not just its existence.  The National Bureau of Economic Research found that 17% of homeowners would default on purpose if their debt overhang was 50% of the value of the house, but almost nobody would if the overhang was 10% or less.  To reduce the volume of foreclosure, then, simply reduce the debt overhang to 10% or less of the home value.
  3. Debt forgiveness is not, by itself, a bad thing.  I have long advocated for banks holding mortgages on underwater properties to forgive part of the principal owed and wipe out the overhang.  Doing this substantially reduces the likelihood of foreclosure and earns incredible goodwill in a time when banks could use it.  But few banks are doing this, and none with any regularity.  We can deduce from this that stopping foreclosure is not necessarily in the banks’ best interests.
  4. When something as nasty as a foreclosure, with its attendant legal fees, loss of capital, and negative impact on home prices, stops being viewed as an unmixed evil, it is certain that something is screwing with the market.  That something is 99.94522% likely to be the government.  In this case, banks have come to understand that what makes for happy regulators and what makes for healthy banks are not necessarily the same thing.  Banks understand that in the event of trouble, they can count on the government to “do something”.
  5. The economy always recovers fastest when government STOPS “doing something”, and leaves things for the markets to sort out.  Uncertainty is the enemy of markets.  In the event that government has to be acting, and it will tell you that’s in pretty much every event, the best thing to do is always reduce regulation and taxes and let people fix things themselves.  Unfortunately, an election year is never a time to expect this kind of restraint.

So if banks should write down mortgage debt, why shouldn’t Fannie and Freddie?  Two reasons.  One, banks are going to make different calculations about whether it makes financial sense for them to do this.  Those calculations are heavily affected by the competition, and what the competition is doing.  The decision to do something or not to do it will be made with reference to the markets and what will be in the best interests of the long-term health of the bank.  Fannie and Freddie have no such calculus.  They have no competition.  They can’t fail – the Treasury Department already said it wouldn’t let that happen, no matter what.  So the decisions will be made by bureaucrats without any requirement for financial sense.  Bad, bad combination.  Isn’t that a major reason we ended up in this mess in the first place?

Second, Fannie and Freddie (and by Fannie and Freddie, I mean Bernanke, Obama, and Geithner, et al.) aren’t playing with private money.  They’re playing with PUBLIC money.  Tax money.  If Chase Bank wants to write down a couple billion in mortgage debt, they’re making a financial calculation that this is going to be good for the company in the future.  If they’re wrong, only they and their shareholders suffer.  If, however, Fannie and Freddie make that same calculation, it will be a political one based on what will be good for the administration in an election year, not necessarily (and some would argue only accidentally) what is in the best interests of the taxpayers.  If Fannie and Freddie miscalculate, it harms the entire country.

The law of unintended consequences is at work here.  Connect the dots:

  • Bank makes loan to home at a high loan-to-value (LTV).
  • Housing market declines, leaving the house underwater.
  • Bank sells loan to Fannie Mae at 100% of face value.
  • Fannie Mae writes down the debt, re-establishing equity using (future) tax money.
  • Mortgage note is now worth 80% of original value.

Pretend for a moment you’re a bank executive.  You can connect the dots, can’t you?  You will in the future make a) fewer high LTV loans or b) more high LTV loans?

Very good.  If you chose b), you are ready to be a bank executive.  Your risk is mitigated strongly by the backstop of tax money that Fannie/Freddie provide.  You make a miscalculation, no problem.  Fannie Mae (a stand-in for Uncle Sam) is there to bail you out.  If Fannie were a private entity, this calculus would be quite different, but the giant mortgage-purchasing behemoths FNMA and FHLMC are pure government now.  And this is only one of the consequences; doubtless there will be more, and even worse ones that I cannot forsee.

I think writing down mortgages is a good idea.  I advocate it.  But like all good ideas, this one can be done by the wrong parties for the wrong reasons, and in those cases the results will almost always be disappointing.

Stay tuned.

Maybe I’ll Just Go Out on My Own…

Economic times are tough.  There are layoffs and threatened branch closings, all sorts of unrest in the labor markets.  The “recovery” hasn’t shown up at your door yet, and you’re considering going to work with your brother and opening that new office selling the supercool widgets he makes.

It might be a great idea.  Can I offer one thing, as a lender in Utah (and the rules are the same everywhere), for you to think about before you go?

If you’re going to refinance or buy a house, do it before you leave your job – before you even mention to anyone that you’re thinking of doing so.  Underwriters are unkind to the self-employed (and even more unkind to those whose verifications of employment come back with “we don’t think he’s staying here very much longer”).  There are no more stated-income loans (well, essentially), so you’re going to have to document all your income, and not with bank statements, either.  It will be tax returns. And those will be verified by an IRS transcript.

You’re going to want to have a long chat with your accountant.  She’ll probably have some suggestions for ways that you can minimize your tax liability while maximizing your adjusted gross income (AGI), and you definitely want to do that.  Underwriting is going to look hard at your AGI, and there are also add-backs for depreciation and amortization, so you can get some tax relief there without hurting your qualifying income.

But the big thing is that if you are self-employed, you have to have two years of tax returns showing this before you can be qualified for a loan under FNMA/FHLMC (Fannie/Freddie) guidelines.  So it’s going to be at least 24 months, and possibly longer, before you’ll qualify, once you leave.  And don’t try to claim that you’re not self-employed just because you get a W2.  If you own more than 25% of the business, you’re self-employed no matter how you get paid.

I’m not saying you shouldn’t do it.  I love self-employment.  I’ve been self-employed for a decade.  Small businesses are the heartbeat of the economy.  But before you go, get your house in order.  Literally.

How to Make a Fan into a Groupie in One Easy Step

Those of you that follow me closely (oh, you poor people, please get out more) know that for some time I have been raving about Simon Sinek’s book Start with Why, and recommending that you watch his excellent TED presentation.  I follow Simon on Twitter.  I read his blog.  Few business development people have ever spoken to me as clearly as Simon does.

An aside here: I’ve read everyone I can get my hands on.  Tony Robbins, Stephen Covey, Napoelon Hill, Tim Ferriss.  Everyone (yes, I know, that’s not everyone, that was meant to be a range).  Some have things that I was improved by (thank you, Jim Collins), and some not.  This really doesn’t mean anything, except to me.  You will find that some systems work for you, and some don’t.  Some women/men are attractive to you, and some not.  My preferences are mine, and your experience may will vary.

I read an excellent post of Simon’s last week and commented on it.  I have checked back a couple times to see if there were responses, since my comment is by far the longest on the post, and even though I wasn’t expecting much.

Aside #2: I LOVE LONG COMMENTS.  I know some people are embarrassed that they write novels, but as long as you’re not threadjacking, I’d rather have a real conversation with you than have you post “Great post!  Keep it up!”  Not that I’ll be sad about those, either, but I like talking with interesting people, even if they don’t agree with me.  So comment away, and don’t spare the electrons.  You will always get a response.

Well, shoot.  Nothing there.  No response from Simon, even though I called myself his biggest fan.  In the comments section of his own blog.

Whoops.  Today I got a response.  He called me.

Right.  As in, on the phone.  Now, my article on the Six Channels of Marketing has not come out yet in the Scotsman Guide (due in September), so I’ve not posted anything on that here for fear of letting the cat out of the bag.  Suffice it to say, then, that the more personal time you invest in a contact, the more powerful it will be.  I hoped (didn’t really expect) that Simon would comment back.  I didn’t even hope that he’d click through to my profile and see who I was.  I never thought he’d email me.  Or visit my website.  And here, he went all the way through the whole thing and then CALLED ME.

In one action, here is how you take a fan and make him a fanatic.  If you thought I was excited about Simon Sinek and the things he has to say before, just wait.  I’m going to review the book, the video, all of it.  First, I think his message is excellent, right on target, and exactly what I needed to hear.  He’s concise, his explanations make sense, and what he says works.  And second, he acts the way he says you should.  If his why really is to change the world, then personal, one-to-one contact is the only way to start.  It is the only way to make a lone nut into a leader of a movement.

Consider me enlisted.  Much more about this as time goes on.  And doesn’t it always?