Talk about unintended consequences. The following is significant insight from the street level. This is especially important for those of you thinking that these low mortgage rates will lead housing and the consumer to the Promised Land.
Everyone wants to refinance right now – that’s a fact. Home owners and loan officers around the nation have not been this excited in years over the low rates. Purchases are far and few in between and require solid relationships, so most loan officers love a good refi boom – they are the easy pickens (until now). The media are actually quoting mortgage rates non-stop, which is a complete story in and of itself.
Loan officers and banks are very busy taking loan applications, as reflected in the faulty MBA loan application survey data (Mr Mortgage story out next week). Loan approval times at some banks is at three to four weeks making for a two month start to finish process. Fall-out will be extreme over the near-term as brokers and borrowers switch banks three and four times trying to get the lowest rate available. Trying to hedge this chaotic mess is a mortgage secondary marketing manager’s worst nightmare and can lead to significant losses.
Along side of being one of the biggest consumer ‘bait and switches’ of all time, this drop in rates should set the stage for a significant leg-up in mortgage loan defaults and leg down in house values and consumer / homeowner sentiment.
In my opinion, the government artificially pushing rates down this quickly not only will cost the originators plenty but quickens the pace at which the Alt-A, Jumbo Prime, and ‘Prime’ implosions could begin in earnest.
Please note that 4.5% never really existed unless the borrower wanted to pay thousands of dollars to buy that rate through points, which is rare. For a perfect borrower with a 740 credit score, 80% loan to value and no second mortgage attached the lowest that rates got were roughly 4.875%. Since then they are hovering around 5.25% to 5.50%. This, from 6% before rates took their dive. I am not a believer that rates can sustain these low levels without .gov permanently ‘fixing’ them somehow. Left up to the mortgage bond market and there are just too many sellers over the past several months, especially on well bid days.
In the past the mortgage process involved getting a completed loan application, ordering the credit report and appraisal and processing the loan. In a couple of weeks when the appraisal came back from the appraiser, the loan was submitted into underwriting for approval. Everything went smoothly because the appraisal always came at or above borrower’s estimates.
These days the process has changed a bit. Now the first thing done after the loan application is taken is to call the appraiser for a comparable sale check to see if the value at which the home owner states the house is worth is on target.
Therein lays the rub.
From early reports since rates fell sharply in early December, 80% of the loan applications are not getting out of the starting gate easily. Loan officers are all saying the same thing — that appraisals are not coming at value due because ‘all of the foreclosures and REO sales have taken the value down’. In the majority of these cases, this kills the loan.
The loan officer then notifies the borrower of the news and they are in disbelief. All home owners think that their home is worth the most on the block and I have been told that this is a tough pill to swallow. This brings the crisis home instantly.
Everyone trying to refinance into lower rates at once should hasten the national reality that the largest portion of the home owner’s net worth has evaporated in the past year. One loan officer I spoke with equated this call to a Doctor notifying a patient that they had a terminal illness.
The other three top reasons that loans are not making it out of the application phase are because of credit scores coming in too low, interest rates not really being what the borrowers are hearing hyped and Jumbo money is near all-time highs.
With respect to scores, many have been negatively affected by creditors bringing revolving lines down sharply over the past several months. If the outstanding balance is over the 30% and/or 50% threshold of the available credit it negatively affects the score. Lately, banks have been dropping available credit to just above the outstanding balance, which is over 50% and a large credit score hit.
With respect to rates, most borrowers do not have a perfect 740+ score and 80% and below loan-to-value meaning they do not get the rates being advertised. Even a small deviation in borrower profile such as a subordinated second mortgage, 700 credit score or 90% loan-to-value can result in a 100bps rate spike at least. Only a year ago the latter profile would have been considered ‘Prime’ — their 90% loan-to-value today would have been 50% equity back then.
Lastly, Jumbo money both Agency Jumbo from $417k to $625k and bank portfolio over $625k are priced terribly in the 6.5% to 7% and 7.5% to 9% ranges respectively. That is if they can even get the loan made. The problem with this is once you get out of the Subprime universe, a large percentage of Alt-A and Prime loans are over $417k. The Alt-A, Jumbo Prime and Prime universes are on very shaky ground right now and these are the borrowers who could really benefit from a low fixed rate right now.
This harsh reality could spur a new wave of defaults and walk-aways from borrowers that were not considered at-risk before. This takes the crisis into the ’Prime’ universe very quickly because Prime borrowers represent the majority of new refi applicants. This new wrinkle brings the Prime Implosion to the forefront much quicker than my original, more linear time-line of Subprime to Alt-A to Jumbo Prime then Prime with some overlap.
Additionally, when borrowers with Jumbo loan amounts over $417k find out that 30-year fixed rates are anywhere from 6.5% to ‘unavailable’ the reality that that they are stuck in that loan and likely that home indefinitely will set in. The macro-economic effects of this are unknowable.
With underwater or ‘near’ underwater home owners that are unable to sell or refi totaling 42% nationally and about 65% to 70% in the bubble states, this news is not surprising. However, it likely will be surprising to the media, analysts and markets when the facts get out in a couple of months.
In a nutshell those that don’t need the credit can get it and those that do can’t. This is the perfect credit crisis storm – one which low rates can’t fix.
The only thing that can be done to get money into borrower’s hands quickly is to waive appraisals for Agency and FHA loans as Lockhart has suggested. That is of course if the borrowers are ignorant enough to consider this option. “James Lockhart, Fannie and Freddie’s regulator, said last week they were considering waiving the requirement to get new home price appraisals before refinancing loans they hold – a move that could greatly increase the scope for refinancing.”
I see ‘no-appraisal’ refi’s as devastating as the Fannie/Freddie loan mod push going on right now, which I wrote about a couple of weeks ago.
‘No appraisal’ refi’s are a disaster that takes the housing crisis to an entirely different level because now the tax payer will be on the hook for trillions in mortgages that are essentially very risky, underwater, unsecured credit lines. Nobody will ever buy these loans or securities derived from them.
That being said, given all of the reasons above why no major refi-boom will ensue as rates drop and how panicked the politicians, banks and regulators are over housing my money is on them seriously considering this radically destructive move out of sheer panic. At this point in time, I see little chance of a permanent solution being brought forth, which I outline in ‘My Case for Principal Balance Reductions’.-Best Mr Mortgage
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