With rates and programs fairly stable, originators, such as Landmark's Advisors, are focusing on other lending-related topics. Over the past several years, a certain portion of homeowners, both nationwide and in the 580/680 corridors, have elected short sales to avoid foreclosure (obtaining the bank's permission to sell the house for less than what is owed).
With over 370,000 last year (nationwide, not in Landmark's area!), there will inevitably be large numbers of former homeowners re-entering the marketplace in the near future. Whether these "boomerang buyers" will actually be eligible for a mortgage after a short sale will depend on a number of factors. Perhaps the easiest loan to qualify for after a short sale is an FHA loan primarily because it has the shortest post-short sale waiting period.
In fact, it has NO waiting period if you weren't delinquent on your former mortgage during the 12 months preceding the short sale and the proceeds of the sale served as payment in full. Additionally, you must have stayed current on all other installment debts during the same time period, but most owners involved with a short sale didn't stay up-to-date with their mortgage payments. Assuming you did stay up-to-date, you can't buy a similar property within a "reasonable commuting distance" of your old home. In other words, if you sold short just to take advantage of declining property values, you won't be approved for a FHA loan, so only a small percentage of those who pursue short sales will be eligible for a FHA with no waiting period. If you were delinquent when you pursued the short sale, the FHA waiting period is three years, though it can be reduced if you can prove extenuating circumstances (passing of the primary wage earner, a long-term illness, etc.).
For conventional loans, it depends if the new loan is backed by Fannie or Freddie. Fannie Mae is the more lenient of the two, allowing a new loan just two years after the completion date of the short sale, but you must put a hefty 20% down. Again, if you can prove extenuating circumstances, Fannie will allow a loan after two years with as little as 10% down. If you don't have a good excuse, the waiting period is four years for homeowners who put down between 10-20%. For those who aren't able to come up with at least a 10% down payment, the waiting period jumps to a staggering seven years, which is the same waiting period after a foreclosure. For Freddie Mac, the waiting period is four years, regardless of LTV, for what they call "financial mismanagement," or just two years if you can prove extenuating circumstances.
On top of these waiting periods, Landmark Advisors tell clients they must also re-establish credit to meet the minimum score required by the marketplace. Even if you are eligible, your credit score may result in a higher mortgage rate, so there are consequences beyond the waiting period. So even if the credit score impact of both a foreclosure and short sale are similar, the waiting period on a foreclosure alone is pretty important for those looking to get back in the game.
Typically, when someone buys a home, and finances it with a loan, or refinances an existing loan (to obtain a better rate or pull cash out), they see simply the rate and price. There are, however, components that Landmark Advisors tell borrowers make up the rate and price. One component is known as the "guarantee fee," which is a small amount paid to Fannie Mae or Freddie Mac in order to guarantee to the investor that, basically, they money will be paid back.
But just as increasing the gasoline tax results in a higher price at the pump, and increase or decrease in the guarantee fee results in an increase or decrease in the cost of financing to the borrower. And no, the cost is not absorbed by the lender.
This is good to know, especially as Fannie Mae and Freddie Mac's guarantee fees (g-fees) on single-family mortgages are about to go up by an average of 10 basis points. (This equates to 10% of 1%.) The increase was announced by the Federal Housing Finance Agency (FHFA) and will take effect for loans sold for cash on November 1 and for loans exchanged for mortgage-backed securities (MBS) one month later. But although the changes aren't required for a few months, borrowers will feel the impact fairly soon. And it will impact all lenders, including Landmark.
FHFA said the change to the g-fee pricing is intended to encourage greater participation in the mortgage market by private firms. With that in mind, it is not hard to see how, if the government eliminates Freddie and Fannie, rates for borrowers will increase. Yes, the value of the government guarantee provided by Fannie and Freddie is under the market, and this is a step toward correcting that. But once again, it is the borrower that pays.
The Treasury Department is preparing to revamp the terms of its nearly four-year-old financial backing of Fannie Mae and Freddie Mac in a bid to allay investor concerns that the companies could one day exhaust their federal lifelines. What does that mean?
Changing the terms of the Treasury's financial backing for Fannie and Freddie Mac impacts many things. The new terms will accelerate reducing the holdings of the two agency mortgage companies, and will require the companies to pay the government any quarterly profits they earn. Prior to this new system, Fannie and Freddie were paying a 10% quarterly dividend payment to the U.S. Treasury.
This maneuver should be beneficial for mortgage originators, homebuilders and government debt in the near to mid-term, as it will delay more substantial reform of the two giant government-seized firms. This change in policy is likely at least partially designed to promote China's continued purchasing of U.S. Treasury bonds and agency issued residential mortgage backed securities.
But our Landmark Advisors have been asked by their clients, "What does mean for me?" Most believe that the move will help keep Fannie and Freddie in business for a longer period of time, thereby helping mortgage rates. Why would that happen? Foreign investors recognize the names of Fannie and Freddie (and FHA), feel more comfortable owning those securities, and create demand for them. This in turn helps keep rates low.
Returning to the larger picture, while Fannie & Freddie have made profits in recent quarters, they have had to pay such large dividend payments to the Treasury every year-nearly $19 billion between them-that they continue to borrow money from the Treasury in certain periods, even when running a small profit. They lend stability to the market, and that helps. Ask your Landmark Advisor for more information on the role of Freddie Mac and Fannie Mae in today's lending environment.
People usually think of "eminent domain" when the government takes over someone's land in order to put in a road or a damn. But it can apply to other things.
Eminent domain, or compulsory purchase, is a term used to describe a situation in which a state authority seizes private property without the citizens' consent but with due monetary compensation. San Bernardino County has recently generated quite the uproar with a proposal to seize and restructure 150,000 underwater mortgages funded by non-government lenders under eminent domain, and one of the concerns that have been raised is the effect such an action would have on Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
It's not certain how much of the government-sponsored enterprises' holdings are invested private-label securities in San Bernardino County. But it is generally thought to be scores of billions. The 12 Federal Loan Banks, for example, held $17 billion in such securities as of the first quarter of 2012. When compared to the $160 billion in losses incurred by taxpayers to date, then, the actual monetary effects on the GSEs wouldn't be hugely significant.
The real issue is that San Bernardino's use of eminent domain powers would set a precedent for other municipalities to do so, which would stand in stark contrast to the current administration's objective to reduce the government's role in the housing market.
The Federal Housing Finance Agency (FHFA), for one, is not thrilled about the proposal and would most likely sue San Bernardino County for impinging on its role as the sole regulator of Fannie Mae and Freddie Mac. As for private investors, the general consensus is that a lawsuit set in action by the Federal Housing Administration would be likeliest to prevail in court, should the proposal go through. Regardless of what happens, once again the industry will incur more legal fees, and those will be reflected in higher borrowing costs of borrowers.
Fannie Mae and Freddie Mac issued new short sale guidelines recently that mortgage servicers that hold loans backed by these entities must abide by. The guidelines officially went into play on June 15th. What this means is that real estate agents working with distressed homeowners should expect to receive a short sale decision within 30-60 days. This comes as a great relief to those involved in distressed home sales situations, as the process previously took up to 6 months.
Not only is a short sale an effective foreclosure alternative (when a homeowner determines they can no longer retain the home), but it keeps homes occupied which helps to maintain stable communities with less neighborhood blight.
The length of time short sale processes often take stood as the number one complaint from Realtors. As a response, the Federal Housing Finance Agency (FHFA) directed Fannie and Freddie to establish a new uniform set of minimum response times that loan servicers must follow to help facilitate a more efficient process.
So the question I leave you with is if this new directive will help bring more homes to the market to help the ongoing problem of minimal housing inventory? Stay tuned.
The first quarter of 2012 saw more short sales close nationally than foreclosures for the first time, meaning that banks were agreeing to more deals with the current homeowner. Short sales accounted for almost 24% of home purchases versus about 20% for sales of foreclosed homes. This short sales figure is roughly 50% higher than it was than Q1 of 2011.
Depository banks were never designed to be landlords, hold real estate, or voluntarily take on losses on thousands or millions of homes. However these banks can process short sales in much less time AND at significantly less cost than it takes to see a foreclosure all the way through. This ultimately means fewer foreclosures on the market, leading to fewer distressed properties on the market.
That being said, most would agree that the short sale process still takes far longer than it should. This is mainly because there is no uniform way to handle them (each depository bank has their own process). Thankfully helps appears to be on the way.
Fannie Mae issued guidelines to its servicers recently that hopes to improve the timing and methods of handling short sales. The industry said welcomed this news with a "What took so long?" (Fannie Mae completed 70,025 short sales in 2011 and 69,634 in 2010). The new rules apply to all conventional mortgage loans held in Fannie Mae's portfolio or at some point were securitized into Fannie Mae mortgage backed securities (MBS). While not required, servicers are encouraged to follow the guidelines for loans sold to Fannie Mae that are guaranteed or insured by government agencies.
There is plenty of disagreement about when the "financial crisis" began, and what caused it. Some opinions go back ten years or more, when elected officials encouraged Fannie Mae and Freddie Mac to buy loans backed by borrowers who were not traditionally credit worthy. Others say it began in 2007 or 2008, when several large profile companies went bankrupt.
Regardless of when it exactly began, or what exactly caused it, no one disagrees that it is extensive. Federal Reserve Chairman Ben Bernanke believes that the chief cause for the extent of the crisis was not the meltdown in the subprime mortgage market, but a financial system riddled with insufficient regulatory authority and failure to exercise the authority that was available.
The result of the credit "bubble," however, was much different than that of the "dot com bubble" years earlier. The total subprime mortgage market was somewhere in the neighborhood of $1 trillion, plus a few hundred billion in securities tied to those subprime loans. But by most accounts the fall in the dot come stocks took $8 billion in paper wealth out of the economy. It, however, did not result in the size and breadth of the recession that we're coming out of.
The mortgage exposure was centered in a financial system that had grown increasingly reliant on short-term funding, and this short term funding, as companies like Bear Stearns, Countrywide, Lehman Brothers, and others, found out in 2008 that this short-term funding can be extraordinarily fleeting the moment there is a whiff of instability.
Every day lenders, including Landmark Mortgage and its experienced advisors, are grappling with the huge amount of regulation heaped upon the industry due to the crisis, and the resulting Dodd-Frank legislation. Our advisors are well versed in current rules and regulations, unlike other lenders who will suffer the consequences.
Often times our Landmark advisors are asked about the basics of the secondary mortgage market. It seems that Fannie Mae and Freddie Mac are always in the news. But what are they, and why do lenders "sell" them loans?
Mortgages, and specifically liens, are substantial sums of money that are tied up for up to 30 years. While depository institutions, which are chartered by both the Federal and State governments, have the capacity to lend large amounts of capital over long periods of time, mortgage banks don't. Keep in mind that a bank, in theory, can take the money it has in deposits, pool the money together, and lend it out to make home loans.
In order to maintain a sufficient pool of money such that they can continue making loans, mortgage banks such as Landmark, which do not take deposits companies but offer greater program and rate flexibility, "sell off" borrower's mortgages to another institution—often Fannie or Freddie, but also to pension funds, insurance companies, or securities dealers. Along with allowing mortgage banks to do more business, this practice earns mortgage bankers a commission on every loan they sell.
A mortgage has one of two paths it can follow once it enters the secondary market. It can be sold by a lender into one of Freddie, Fannie, or another financial institution's investment portfolios for cash, or it can be pooled with other mortgages in exchange for Mortgage-Backed Securities (MBS). MBS are very liquid investments that are traded on Wall Street through securities dealers, which means that lenders can easily hold or sell them. In turn, these transactions provide capital that can be loaned out to other borrowers.
Landmark Mortgage Group is a division of Opes Advisors and licensed by the CA Dept. of Real Estate, Real Estate Broker license 01458652 and NMLS 235584. Equal Opportunity Lender.