Archive for October, 2008

Mortgage Interest Rates Rise and Then Tumble In The Midst of Uncertain Economic Times

So I imagine many people are breathing a sigh of relief this week. Last week mortgage rates made one of the largest one week jumps in the last 20 years. 30 year rates rose from 5.94 to 6.46 for over a half point increase. I thought that rates would drop this week since typically after a large move rates readjust in the opposite direction. But instead of a small readjustment rates tumbled back almost to the same position they were at last week. After going from 5.94 to 6.46 last week 30 year rates came back down to 6.04. We saw the same basic thing with 15 year rates. Last week they jumped from 5.63 to 6.14 and this week they fell back down to 5.72. Here are rates for the last 4 weeks for the different mortgage products.

October 23, 2008
30-yr 6.04 15-yr 5.72 5-yr ARM 6.06 1-yr ARM 5.23

October 16, 2008
30-yr 6.46 15-yr 6.14 5-yr ARM 6.14 1-yr ARM 5.16

October 9, 2008
30-yr 5.94 15-yr 5.63 5-yr ARM 5.90 1-yr ARM 5.15

October 2, 2008
30-yr 6.10 15-yr 5.78 5-yr ARM 6.00 1-yr ARM 5.12

The one mortgage product which seems to be operating in its own world is the 1 year arm which rose for the third straight week. As can be see above while 30 and 15 year rates are above what we saw 2 weeks ago they are both below rates we saw 3 weeks ago. Also it’s interesting that for the first time since 2005 (which is as far back as I have data on 5 year arms) the rate for a 5 year arm is higher than the rate on a 30 year loan.

Ok rates are one thing but let’s see what all these rates mean for a monthly mortgage payment. Using our free mortgage calculator we translated the rates into a mortgage payment for a 200k mortgage. We looked at rates for the last 3 weeks.

October 23rd
30-yr 1204.24
15-yr 1657.60
5-yr ARM 1206.82
1-yr ARM 1101.93

October 16th
30-yr $1258.87
15-yr $1702.87
5-yr ARM $1217.16
1-yr ARM $1093.28

October 9th
30-yr $1191.39
15-yr $1647.99
5-yr ARM $1647.99
1-yr ARM $1092.05

As rates jumped up two weeks ago and came down this week we are seeing the same thing with mortgage payments. What stands out is that on a 30 year 200k loan the payment came down from 1258.87 to 1204.24. So if you got a loan last week it might be worth seeing if you can relock at today’s lower rates. Additionally, if you inquired about refinancing last week and found it was not worth it might be worth it to check again.

If you are looking at getting a mortgage the first obvious takeaway is to avoid the 5 year arm. With rates on a 5 year arm there is basically no reason to not get a 30 year mortgage. Even if you think rates are going to drop dramatically over the next year it probably makes more sense to get a 30 year with no points and simply refinance if rates drop more.

Ki writes regularly about the mortgage market. His site provides information on mortgage rate trends. He also provides a free mortgage calculator and a graph of mortgage rates.

National Bank: How to Fix the Housing Crisis for Less than 700 Billion

Recently the news has been dominated by developments with the 700 billion dollar bailout package, and rightfully so. 700 billion is an astronomical sum of money. The first problem is that the 700 billion dollar bailout adds a huge amount of money to the national debt. Not only that, some have hinted that the bailout is so large it could actually lower the US Credit Rating. The second problem is just as serious. There is no guarantee that the bailout will work.

The idea behind the bailout is that by taking on billions of dollars of toxic loans the government hopes to “influence” banks to start lending again. The past attempts of the government to “influence” banks have all failed. The fed lowered the fed rate to influence banks to lower mortgage rates. While the banks were appreciative of lower rates they did not lower mortgage interest rates. In fact after the fed cut rates the banks increased mortgage rates because they saw negative prospects in the housing market. In a similar way, after the US government takes over the toxic loans away from them the banks could continue to see negative prospects in the housing market and therefore would continue to have strict lending practices. The idea of spending 700 billion with no guarantees seems like a poor use of capitol.

When people hear the word “National Bank” the first thoughts are of a socialized banking system. A national bank would not replace the current banking industry. It also does not “introduce” government involvement into the banking industry. With the Fed influencing interest rates and the government rushing in to bailout every bank that runs into problems the government already has a large hand in the banking industry. I don’t want to argue whether the government should have a role in the banking industry. Currently the government already has a significant role in the banking/mortgage industry. My argument is that if the government does have a role it should be effective and cost efficient.

A national bank would be a cheaper and more cost effective way to steady the financial markets. To understand how a national bank would work lets first talk a little more about what is currently causing the housing crisis. The mortgage market operates a little like a basketball game. Lenders go from one extreme to another. For awhile lenders will lend to anyone that walks in the door with a pulse. During these periods lenders accept less and less qualified applicants in an attempt to gain market share. Then the lenders get freaked out (often because someone realizes they have been giving out billions in loans to unqualified applicants that are unlikely to pay their mortgages) and lenders run to the other extreme and practice extremely restrictive lending practices (the insurance industry sees the same cycles but that is another topic). If you haven’t already guessed currently we are in the second scenario with lenders practicing extremely restrictive lending practices. The problem with the second situation is that such extreme changes shocks the housing market and basically causes a financial crisis. The banks are in a catch 22. If collectively the banks don’t lend the housing market will continue to deteriorate. But no one wants to lend because they are worried the housing market will continue to deteriorate because collectively they are not lending. It’s kind of like at a party where you don’t want to be the first person to jump into the pool because if no one else does you look foolish. Substitute looking foolish with going bankrupt and you kind of see where banks are coming from.

The great depression and the S&L crisis were both basically examples of this same problem. Initially during the great depression the conventional logic was the government should not intervene. As the stock market continued to drop (it dropped over 80% in less than a year) and people realized how bad an economy can get (pretty bad) the idea of government intervention seemed more palatable compared to the alternative.

So now during periods where lenders are freaked the government attempts to “influence” lenders. The problem is its extremely expensive. Currently the government is taking on years and years of bad loans in an attempt to “influence” lenders to loosen their current restrictive lending practices for the next 6 months to pull us out of the housing crisis. This is kind of like trying to influence your local school to spend money on new textbooks by building them a new school. Not only is it ridiculously expensive after you build the new school you have no guarantee they will buy the textbooks. It’s not simply a poor use of government funds it’s utterly outlandish.

So how would a national bank operate? During periods where banks are giving out loans to everyone that walked in the door the national bank would practice have average lending restrictions with interest rates slightly higher than what is available at most banks and give out very few loans. When the banks became ultra restrictive the bank would again have average lending restrictions. During these periods it would give out more loans.

So the government would not practice the outlandish lending practices we saw during the boom they would not be as restrictive as the banks are now. In fact this would probably do more to influence banks lending practices than the 700 billion giveaway. Remember how we talked about banks not wanting to lend money because no one else was lending money therefore making them nervous about the prospects of the housing market. Knowing that money would always flow provides some stability to the market. Also it would be much less expensive. Having the government provide some loans over the next 6 months with average restrictions during a low point in the market would be much better than taking on years of crappy loans given out during the peak of the market to very unqualified home buyers.

Would some banks go under? Yes. But you know what they should. Bailing out foolish banks that threw caution to the wind and had wildly risky lending practices almost guarantees that we will be faced with another housing crisis in the future. Instead we should allow some of these banks to die. First it prevents these banks without a sense of risk from causing these problems again. Secondly, it influences other banks to exercise more caution during boom times. The bailout sends a message to banks that during the boom they should ignore caution because the government will come in and take all their bad loans away like some kind of bizarre magical bad loan tooth fairy.

I realize this article might bother people that want the government to have no role in the banking/mortgage market. But if we accept that the government already has a role in the banking industry (the possibility of the government taking itself out is pretty much nill for the next decade) to stabilize markets at the least it should do so in a way that is effective and cost efficient.

Ki works as a realtor in Central Texas. His site has up to date information on the Austin real estate market. It also has a search of the Austin MLS for visitors and a tool that tracks mortgage interest rates.

What I did for my Summer Vacation (aka Citi Residential Lending Sucks)

I got this from a friend of mine recently. I think this illustrates a few points. The downturn was created in part by incompetent lenders giving out foolish loans. But its also made worse by the fact that these same lenders and just as incompetent when they are trying to deal with properties headed into foreclosure. And lastly saving these guys with a bailout is kind of foolish. If we save them from bankruptcy these companies are going to make the same mistakes in the future.

Yeah, that’s right. Citi Residential Lending is no fun to deal. They have the most ridiculous and disorganized organization. I just went through a painful process of trying to get a home sold through the Citi short sale program. Four solid offers and nine months later, the home is going to foreclose, and the lender screwed up all the offers.

Short sales are typically thought of one of those win, win, win situations. The bank does not foreclose so they save on lawyer fees & get a better price. Sellers avoid foreclosure which would greatly hurt their credit. And buyers get a home for under market value.

Here’s the story…

1. The sellers got behind on their payments. Why? Because they had a balloon note that exploded, their payments went up, and they could not keep up. I suggested trying to refinance, but with the tight mortgage market, the loans were no longer easy to get if you have less then good credit scores. So, lenders said: “Too bad. We sold you this loan that was bad for you originally. Now you can’t pay. Your credit went down because you could not pay. And oh well, we cannot help you refinance now. So sad.” I guess I am digressing.

2. Okay, so let’s do a short sale. The owner is willing to loose their equity. The lender will take a hit on what is owed to them. And let’s get this sold quickly. I called the lender, and they need a letter of authorization saying I can speak with them about the loan, understandable. So the seller signs the letter, and faxes it back to them in about 2 days. I called to make sure they received the letter, and somehow they don’t have it “in their system”. It takes “3-5 days” for it to show up “in the system.” What the heck? You know they are backed up when a simple freakin fax takes 3-5 days to get uploaded in the system. Okay, whatever, let’s keep moving forward. Or that is what I thought. I went through the cycle of (1) fax letter to lender (2) call to check on it in 3-5 days (3) they do not have it (4) repeat the process. Finally after 5 times, a miracle happened, and it appeared “in the system.” This wasted 3 weeks!!! To put this in perspective, a seller in a typical transaction responds in 24 hrs, 48 hrs at most.

3. Now we have to wait for 2-3 weeks to get a short sale agent assigned. I apparently got one assigned to me, but she never ever responded. I seriously think she came to work, looked at her pile of 200 plus loans on her desk, and figured: “forget it; I am going to going to a movie.” I never once heard a response from her. We had a good offer that I submitted, and after 2 months of no response and me continually calling every couple days, I just had it. I called every possible 800 phone number and left messages asking to get reassigned to a new agent. A new person sent me a fax about 2 weeks after that. At that point, the first buyer could no longer get a decent loan anymore and withdrew the offer.

4. On to offer 2. At this point, I was just so relieved to have a short sale agent who actually would respond to my faxes within 2 weeks that I thought the next offer would go much smoother. We put it back on the market to give those who had been calling an equal chance at making a bid. The best offer was chosen, and it went pending one more time. This was a cash offer and only $6K less than the asking price, an even better offer than the first one. Not really. After over a month of the lender taking its time to get approval, the buyer withdrew because she felt the market had gone down.

5. At this point, I was pretty disappointed. We still had 2 back-up offers so we submitted the next one. It was also cash, but $11K less. I should explain the cash appeal and why lenders should drewl over cash offers. Basically, it means that it will close. The lending requirements for a loan, which change almost weekly these days, will not prevent the buyer from closing. The lender again took another month, and somehow just 2 days before it was set to foreclose, they came through and accepted it. Awesome, the foreclosure was delayed, and the buyer had his inspection. Note that this whole time the market is getting worse, and every month we wait, the more money the seller owes on taxes, which translates to more money the lender will owe if it forecloses, and the higher offer we need to equal that one we got 8 months earlier.

6. Anyway, that buyer withdrew too. We had one more back-up. Lower again, which ended up being $20K less than the original offer. Since the lender will not counter, we submitted a couple offers. We faxed over the last offer from this last buyer 8 days before it was set to foreclose (for the second time). On the Friday before it is set to foreclose the following Tuesday, Citi says the need some info from me that I had sent 3 times already with the other 3 previous offers. Okay whatever, so I faxed that over.

7. Come foreclosure day, I heard nothing. I sent faxes and left messages with my short sale agent, and no response. What the heck? I got one phone call from someone named Oliva from the “home preservation” department or something at Citi. Apparently, they wanted to make sure the property was being kept up. She asked me about utilities, if the grass was being cut, etc. I was like, “Who are you? Did it foreclose or what is the deal?” She seemed to not be aware that it was supposed to foreclose the same day she calls. They even took some photo 7 days ago and were disappointed that the grass was not green. The grass in Austin is not green in most areas of Austin. It has not rained in months, and gee, the sellers really feel obliged to have a green golf course lawn when Citi doesn’t even bother to ever call us back. It was totally appalling! And to top it off, Olivia says: “Oh good. If it is foreclosing, then we can take that off our list.” I was pretty livid. How much more flippant could you be about the very situation that is messing up the economy and screwing over sellers, buyers, and America. That’s probably a little overstated, but truly, if we could get these properties short-saled more efficiently or with any efficiency at all, it would help relieve all these bad loans.