Trying to Hit a Moving Target

Roger Schlesinger
Posted: Jul 24, 2009 3:18 PM

This title might suggest this is a militaristic column or worse, as in terrorism of some sort. So let me put your mind at ease and confess this is only about the mortgage industry, which in reality makes the first two topics G-rated in comparison. In the first two topics, you simply identify the good guys and have them take care of, or eradicate the bad guys. Hint: the good guys generally wear white hats. In the mortgage market, the good guys are readily exchangeable for the bad guys, hats and all.

Let me explain. First we have the politicians: Barney Frank, Chuck Schumer and Andrew Cuomo.

All guys who will insist they only wear white hats. Barney was the congressman activist who championed the CRA loans (Community Redevelopment Act) which helped bring more people into home ownership, unfortunately, probably a few more people than should have gotten there. But have no fear that Barney might be castigated by his peers. In no time, not only did he profess innocence, he also was no longer able to spell Fannie Mae.

Chuck Schumer was so concerned that people could be hurt by the weakening condition of IndyMac Bank that he wrote a letter to the Office of Thrift Supervision, telling them of his fears about IndyMac. They weren't moving fast enough for his taste, so he sent the letter to the media and simply caused a run on the bank, making his prophecy come true. When pressed about that, he dismissed the criticism by showing that the bank was indeed defunct.

Andrew Cuomo felt that we hadn't put enough safe guards in the appraisal process in this country, so he designed and promoted a "pin the tail on the donkey" method of appraising. This has worked so well that several congressman are authoring a bill to end this silliness after one month of a trial period. The National Association of Realtors pointed directly to the new appraisal "game" as the reason more homes didn't sell: the appraisals came in too low.

The above examples were simply three of the literally hundreds of examples of political buffoonery that we must smile through on a daily basis, and not what some people would feel are examples from the fringe of the industry to excite the reader.

Now let's look at the companies who are the backbone of the mortgage industry. Fannie Mae and Freddie Mac at one time were Government Sponsored Enterprises (GSE) and are now owned by the government. They purchase about half of all the mortgages in this country. Therefore, you can expect nothing but the best from these two behemoths. What we got was everything but the best, as they have gone out of their way to make up for all of their losses by surcharging the weakest among us. If you have a credit score over 740, or a loan under 60% loan-to-value, you are fine. If you’re not fine, put simply, you are in a world of hurt!

Suppose you have a 675 credit score (used to be considered good) and you want a cash-out loan between 75% and 80% loan to value. For just taking a loan that is longer than 15 years, you will be charged 2.50% in fees and another 1.5% for taking cash out. That's a 4% charge and on a $250,000 loan, it is $10,000, which doesn't include closing costs or buying down an interest rate.

They decided that changing the rules in the middle of the game was also okay. Self-employed people with loan-to-values of less than 60%, credit scores over 740, and reserves in excess of the loan balance they were seeking could no longer get a home mortgage with those credentials, they also needed to prove their earnings with tax returns. On the other hand, the employees of Lehman Brothers, Mervyns and Aloha Airlines could have a credit score 100 points lower, a loan to value 20% higher, and reserves only equal to six months payments of principal, interest, taxes and insurance instead of assets equal to the loan amount. All they needed was to qualify with their W-2's and current pay stubs and the loan was theirs. Now that all three of those companies are out of business, there is a good chance the loan and the property now belong to the lender.

Add to the above the whims of the government, the movement of the stock and bond market, the nervousness and greed of the remaining banks who increase their profit margins on the Fannie and Freddie money, and you have quite a perilous environment to navigate.

I end with the quirkiness of the consumer (borrower) who has a rate on the current loan 2.5% higher than the market but won't lock the loan until the rate drops 1/8% or 1/4% more. They are nonchalant about the chance of missing the rate; the chance of a foreclosure to pop up in their neighborhood which can negate the appraisal, or the fact that their information is expiring and might face a lower credit score if it had to be redone.

Each day brings new rates, new rules, new regulations and new responsibilities to our clients to make what we have work and get them the best possible loan, even if they just bought a new car over the weekend and their qualifying ratios have exceeded the guidelines. And you think a small thing like a moving target is hard to hit! Blindfolded, left handed, in my sleep.