Home >> News >> LoanBlog >> September 2008

Wake Up and Smell the COFI: Good News for Some Option ARM Holders

September 30th, 2008

Today the Federal Home Loan Bank released the 11th District Cost of Funds Index for 2008. At 2.693% it is lower than July’s index, which was 2.698%.

The COFI is computed from the actual interest expense by the Arizona, California, and Nevada members of the Federal Home Loan Bank of San Francisco that meet the Bank’s criteria for inclusion in the COFI (”COFI Reporting Members”). Interest rates on many adjustable rate mortgage loans are determined by this index.

This should be a source of relief to those with monthly ARMs (like many payment option ARMs) who can’t refinance due to a lack of equity in their homes. At least their rates are not increasing and have in fact dropped slightly. Homeowners who avoid the temptation of the minimum payment on these loans and make the fully-amortized payment most of the time don’t face the same well-publicized payment jump that others have.

Relocating? You Need to Know This

September 26th, 2008

As of September 19, 2008, HUD formulated an official “Buy and Bail” policy. This was done in response to a common fraud perpetrated on banks by homeowners in declining markets. They would buy a new house for much less than was owed on their current home, indicating on the application that the current home would be converted to a rental (and use the proposed rental income to qualify for the new purchase). Of course, once they got the new cheaper home they just gave the old house back to the bank–never intending to make both payments. The new policy was created to thwart such fraudulent activity while still allowing those with good intentions to buy new homes before selling old ones.

So if you own one home, are buying another as a primary residence, and wish to use FHA financing, you have new rules to deal with. If you are converting your current home to a rental property, you will be able to include the rental income in your ratios if at least one of the following is true:

1. You are relocating with a new employer or transferring to a different location for your current employer, and the new job is not within a reasonable commuting distance.

2. You have at least 25% equity in the existing property. This can be shown with a current appraisal (for example, you owe $150,000 on the property and an appraisal shows the value is $200,000). Alternately, you if you have paid down your mortgage to 75% of the original purchase price you also qualify to count rental income when qualifying for your new mortgage. So, if you bought a home for $200,000 and took a loan for $190,000, once you have paid the balance down to $150,000 you qualify to count the income. You will not need an appraisal and will not be penalized if your house value has decreased.

These guidelines allow those with little equity in their homes to convert them to rentals and count the income when applying for a new home loan–as long as they truly need to move. Those with more equity have no restrictions because it is less likely that they would abandon an assets in which they are substantially invested.

Bailout or No Bailout: Are Mortgages Really That Scarce?

September 25th, 2008

As congress debated the Wall Street bailout, there seemed to be an underlying assumption that some kind of package was necessary to put liquidity back into the mortgage lending industry. The general impression is that tougher lending standards have made mortgages scarce, and indeed, the number of existing home sales continued to slip in August. Taken at face value, these stories might be enough to scare potential home buyers out of the market, at least long enough for the bailout package to kick in. However, before heading to the sidelines, those potential home buyers would do well to ask two key questions:

  • Are new mortgages really that scarce?
  • Will things be better or worse once government rescue efforts take hold?

Read the rest of this entry »

No Freebies

September 18th, 2008

Okay, politicians can rail against lenders all they want, as Massachusetts Attorney General Martha Coakley did today. She claims lenders aren’t doing enough for borrowers in trouble because they have not written down the loan balances (reduced the principals) despite the fact that home values have dropped. Well, don’t hold your breath, Martha. When housing values increased, did your lender get to increase the balance of your loan and share in your good fortune? No? Then why do you expect these companies (who are owned by shareholders who are regular folks just like you) to share in the losses created by mindless real estate speculation?

So if you have amortgage in trouble, claiming hardship just because your home value has gone down probably isn’t going to cut it. Not should it. If you want your lender to offer a constructive solution you need to be realistic as well.

Mortgages Get Cheaper Amid Financial Turmoil

September 18th, 2008

There’s an old saying that it’s an ill wind that blows nobody any good. It applied this week, as the whirlwinds on Wall Street had an unexpected benefit for mortgage shoppers.

While mortgage shoppers should not ignore the gathering economic and financial clouds, those lower mortgage rates should remain their primary focus.

Read the rest of this entry »


September 17th, 2008

Looks like FHA’s Hope for Homeowners is going over like a lead balloon.  According to CNNMoney, most lenders are rejecting the voluntary programs in favor of their own. The FHA programs requires that the lender write down the balance of the loan to 5% less than the value of the home and in addition pay FHA its fees to originate the new loan. So FHA gets a new loan that is a realistic LTV and at this point unlikely to have much of a downside, while the original lender takes the loss.

Not surprisingly, lenders prefer to take their chances with their own solutions, for example, instituting repayment plans alllowing borrowers to catch up their arreages over time and leaving the loans on the books at full value. Or modifying the terms of the loans to make payments affordable. Principal writedowns force the lender to give up any chance to make up the values when housing prices recover–they are considered too drastic and permanent a solution in most cases.

Rates Down, Credit Scores Up: What to Do When Your Bank Says No

September 16th, 2008

Recent goings-on in the financial markets, particularly the government take-over of Fannie Mae and Freddie Mac, made mortgage rates more affordable but loans less attainable. So what should you do if you don’t have a cookie-cutter file, with 5 years on the job, 20% down, and perfect credit? Are the days of 40 or 50 year terms, interest-only or payment option ARMs over for good?

According to Bloomberg, probably–at least at your larger banks. “Tighter standards assure the loans are less likely to fail, but also have had the unfortunate effect of limiting the ability of some first-time home buyers to enter the market,” said Sara Tinsley Demarest, spokeswoman for the Washington-based Mortgage Bankers Association.

Those who financed their homes with Alt-A or non-traditional products have a lot to worry about. If they are facing significant rate resets (which they fully expected to avoid by refinancing or selling) and have not been aided by an increase in home value, they may find it difficult to get out of their loans. This is where, while a bank may not be able to help, a broker may. Non-traditional mortgages are still available. Just be prepared to look harder, pay more, come up with higher down payments, and have better credit. A broker with access to a wide variety of programs may be better equipped to help you with this than a large bank with its conservative offerings.

Look for a loan officer you trust and see what’s available now, and what you may have to do to qualify for it (save more money, show more income when you prepare your taxes, increase your credit score, or pay down your debt). Many feel that in the future, Alt-A programs will make a comeback, though in a more conservative guise. But if you do what you can to make the grade now, you won’t have to rely on the industry changing to accommodate your situation.

Mortgage Rates Respond to a Double Dose of Good News

September 11th, 2008

30-year mortgage rates fell sharply over the past week, extending a sustained move into more affordable territory. Two key factors were behind the change:

Is this reason to be optimistic about the housing market? As always, optimism about housing should be tempered with a healthy dose of caution, but this does spell opportunity for certain buyers and home owners who want to refinance — especially those with strong credit histories.

Read the rest of this entry »

Fannie and Freddie: Who Wins, Who Loses?

September 10th, 2008

Speculation abounds about the government takeover of ailing mortgage giants Fannie Mae and Freddie Mac. Who wins and who is left hanging? Forbes.com offers a succinct analysis:


The largest banks especially those like Bank of America with large mortgage lending capabilities, which may get to take over some of the Fannie and Freddie business.

Homeowners may be able to refi their existing Fannie or Freddie mortgages at lower rates and avoid foreclosure.

New home buyers who might obtain lower rates if the government chooses to inject more liquidity into the mortgage market.

Short sellers of Fannie and Freddie common stock–the companies’ shares slid more than 80 percent on Monday after the weekend’s announcement.

Holders of Fannie and Freddie debt, including foreign governments and central banks. They are more likely to be repaid now.

Homebuilders and home improvement companies if the bailout stabilizes the housing markets.


Fannie and Freddie’s stockholders who may lose their entire investment.

Taxpayers who will foot the bill for bailing out the companies and repaying their debts.

U.S. Treasury debt owners as prices have fallen because of an increased government debt burden.

Fannie and Freddie employees, facing even more uncertainty about their futures.

Lobbyists, who will lose Fannie and Freddie as clients.

Politicians and others who received financial and other backing from Fannie and Freddie.

The CEOs of Fannie and Freddie who are now unemployed and probably deserve it.

Commercial banks that hold Fannie and Freddie preferred shares.

Why Banks Make Economic Problems Worse (Why the Government had to Take Over Fannie and Freddie)

September 8th, 2008

Banks are famous for being willing to lend only when you don’t need it. Like the guy who hands you an umbrella when it’s nice and sunny–only to take it back at the first sign of rain–banks are unwilling to extend credit when it’s needed to restore economic stability. Why? Because the system is designed to reward behavior that is bad for society and punish conduct which is good.

For example, when money was cheap and pentiful, anyone who could fog a mirror was granted mortgage financing. Lenders couldn’t write loans fast enough, and the ones who wrote them fastest and loosest earned the most. Then, when economic conditions turned sour and money was most needed to restore order in financial markets, lenders took it all away and pulled back. Which made things worse and perpetuated the cycle. Because banks are businesses, and businesses owe a duty to their stockholders to make as much money as legally possible, current law reinforces this behavior.

So like it or not, government has to step in when the best decision for business isn’t the best for society. An article in the LA Times explains why we should care about the takeover of the two mortgage giants Fannie Mae and Freddie Mac. Experts predict that government control of Fannie and Freddie will ensure a certain level of liquidity in mortgage financing, keeping money available for those who should be granted mortgages and supporting the housing markets. Right now, banks and other mortgage lenders have no downside–when times are good they can lend early and often–and rashly. Then, when the bad loans come back to bite, taxpayers are asked to shoulder the losses. So a company doing its duty by its shareholders is pretty much obligated to exploit this loophole. It needs to be closed so that taxpayers can get out of the mortgage business.