Archive for July, 2008

Moving at the speed of “stalled”

July 28, 2008

I recently read a quote that said our government has two speeds, “knee jerk” and “stalled.” Well, the overwhelming speed known as “stalled” finally got the Housing Bill through Congress over the weekend. All signs point to it getting to President Bush for his signature before the end of July. Bush has recently changed his stand on this bill from “veto” to “sign.”

The bill has two goals. First, it plans to stabilize Fannie Mae and Freddie Mac. Second, it makes government-backed loans more available to home owners facing foreclosure. Here are some of the important changes taking place once the bill goes into affect.

– At-risk home owners will be allowed to refinance into government backed loans with a big caveat on the current owner of the mortgage, the lender. One of the qualification requirements is the current lender will agree to write down the loan to 90%. Meaning, if the original loan was at 100% financing, the lender will agree to take roughly a 10% loss on the home. It will be interesting to see how this will play out, but it’s better than nothing.

– Down Payment Assistance (DPA) programs in which the seller provides a down payment for the buyer via a “nonprofit company” that “donates” money to borrowers for the required minimum down payment will be eliminated. The maximum Loan To Value on FHA loans will be 96.5%. Meaning, even to qualify for an FHA loan, borrowers will be required to have at least a 3.5% down payment.

– Fannie Mae and Freddie Mac will be protected by this bill to ensure they do not succumb to the current market conditions. There are big numbers being thrown around in regards to how much this will cost. Bottom line, it will cost a lot, and the government will ensure Fannie and Freddie keep on going.

– FHA and Conforming loan limits to be increased to a maximum of $625,000.

– Government grants will be available to states who buy foreclosed properties and rehabilitate them.

– Creating a nationwide loan originator licensing and registration system.

As with all bills, there are parts that are great, some that may not be needed, and some that may cause more harm that good. If nothing else, at least these decisions were not made at the speed of “knee jerk.” That is when real problems can occur!

Get out of the way! I’m on my morning run.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Fannie, Freddie, and you — a Q&A session

July 17, 2008

The headlines are hard to miss… “Stock Prices Fall for Fannie Mae and Freddie Mac,” “Freddie Mac is under Attack,” “Fannie and Freddie’s Extreme Makeover,” … big question, what does this mean for you? Let’s take a look at the who, what, when, where, and why of these two institutions.

What are Fannie Mae and Freddie Mac? – Fannie Mae was created by the US government as part of the New Deal during the Great Depression to provide liquidity for the mortgage market. Freddie Mac, which does the same thing, came about in the 70s.

What do they do? – Fannie and Freddie buy loans from banks. This creates liquidity for banks that is used to originate more loans. This in turn keeps the lending world running smoothly, making it easier for people to buy homes.

What type of loans do they buy? Fannie and Freddie set the guidelines for conforming (prime) loans. These are loans in which the borrower’s credit is reviewed, income verified through pay stubs and/or tax returns, and assets verified through financial statements. These loans do not include the negative amortization, exotic interest-only ARMs, MTA loans, etc. that have plagued the lending and housing markets.

Note that Fannie and Freddie do have some “Alt-A” loans (the gap between prime loans and subprime loans) as well as some subprime loans on their books.  

Should we blame Fannie and Freddie for the mess we are in? There is no real answer to this one. “No” because most of the problems being experienced now were the result of bad subprime loans, no-doc loans, MTA loans, etc. defaulting in large numbers. “Yes” because there is plenty of blame and finger pointing to go around. Even Fannie and Freddie’s guidelines were more lenient a few years ago than they are today, and perhaps 100% financing for any loan program isn’t the best idea in the world.

Why are their stock prices falling? The market is reacting dramatically to any news, and sometimes reactions don’t make a lot of sense. When the public hears news of subprime loans defaulting and banks going out of business or losing literally billions of dollars, the reaction is negative even toward entities that only invest in good, credible loans.

What could happen if Fannie and Freddie failed? The failure of Fannie and Freddie would be disastrous for the lending world, housing market, and the US and World economy. This is why the government plans to support both Fannie and Freddie to prevent them from collapsing.

A quick scenario might look something like this: Fannie and Freddie can no longer buy loans from banks… banks begin to run out of money to lend… it becomes harder for people (even well qualified borrowers) to buy homes… the housing market suffers even more… the housing slump continues its drag on the US economy… when the US economy suffers, so does world’s economy.

How would this directly affect you? Unless you are in the market to buy a home, it wouldn’t directly impact you. BUT the ripples of the collapse would be felt in the economy. A slow economy means less spending and investing… the demand for good and services is down, which results in layoffs and/or a decrease in income… people with reduced or no income are not out spending and investing… the cycle reverberates like feedback in a microphone.

Bottom line:

— Fannie and Freddie are essential to the lending and housing markets by purchasing conventional loans from banks to keep the markets running smoothly.

— Fannie and Freddie may be struggling, but it is not for the same reasons IndyMac and HomeBanc failed — the result of issuing bad loans.

— Some people may not like the government supporting Fannie and Freddie, but if they were to collapse, things would get a lot worse than they are now.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

Déjà Vu – haven’t we been here before?

July 15, 2008

In the words of Neo, “Woah!”

It’s January 2008, and the Federal Reserve finds itself in the precarious position of being between a rock and a hard place. The Feds need to decide between helping to spur the economy through continued cuts to the Federal Funds Rate versus a potential increase in inflation due to those rate cuts.

Fast forward to July 15, 2008 where the Federal Reserve finds itself (once again) in an unenviable position.  The concerns over inflation have been met. The series of rate cuts designed to help stimulate the economy are now hampering it as the Dollar loses value, oil prices are at record levels, energy costs rise, and the cost of food is increasing as well. The year-over-year inflation report had its largest jump in a year-to-year comparison since 1981.  

Why is this happening?  See this previous post for more details, but for a quick summary:

— When the Feds lower rates, the value of the Dollar goes down. A decrease in the value of the Dollar means it takes more Dollars to buy the same amount goods.

— Oil is traded in Dollars and as the value of the Dollar decreases, oil prices go up. We are now seeing record oil prices and gas prices over $4 a gallon.

— A gas prices go up, food costs rise because it costs more money to get food to the local grocery store.

This doesn’t even take into consideration how oil prices are affecting the price of corn. To help reduce gas consumption, ethanol is now being used as an additive to gas. Corn is used to produce ethanol, and corn prices have increased from about $3.50 in 2007 to over $7 in 2008. This increases the cost of feed for cows and chickens, which increases the cost of dairy products.

What can the Feds do to combat inflation? Begin raising the federal funds rate. Easy, right? Well, not exactly.

While rates do need to be increased to combat inflation, increases to the federal funds rate will put more pressure on banks and the lending market. This, in turn, would put more pressure Fannie Mae and Freddie Mac, who are the linchpins for the lending world (more on Fannie and Freddie later this week).

So, what will the Federal Reserve do? Increase rates to fight inflation at the possible cost of putting more pressure on the lending market, or keep rates steady resulting in less pressure on banks but at the potential cost of more inflation.

Either way, the Feds could hurt the economy as they try to help it. Glad this is a decision I don’t have to make.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.