This was sent to me by my partner Steve Heaney.  It is well worth the read in my humble opinion.

Intended or Unintended Consequences?  You Choose

How is the implementation of HUD’s new GFE arbitrarily redefining APR?  How does a new mandate to be open, honest and disclose to consumers in a new way impact the pure math of what APR is, and how it is calculated?  How can a handful of large national lenders create an artificial disparity between different channels of origination?  How possibly can the APR be different for exactly the same loans?

The Federal Reserve Board through the Truth in Lending Act / RegZ defines very clearly the items that are, and are not included in an APR calculation (PPFC’s).  While confusing perhaps to new entrants in the mortgage marketplace, it is pretty straight forward in the math.  There is a line in the reg that provides a little latitude in the calculation provided the bank is consistent and has a lawyer’s interpretation.  For now let’s presume that everyone in the industry can agree that issues regarding APR calculation are old hat and not new news…  Or is it…  I will come back later to the “consistency” issue I mentioned.

I looked far and wide and cannot find anywhere in the Truth in Lending Act, RegZ or anywhere in the Federal Reserve Board communication where they reference a certain line on the Good Faith Estimate (new or old) for APR calculation.  I also have not seen any breaking announcements on new ways to calculate APR.  In review of the new HUD changes and the new GFE that we have come to embrace, I did not see the section where HUD told the FRB that they were going to arbitrarily change APR calculations.

So to the issues… Some of the large national lenders that do both retail and wholesale lending have taken this issue to a level that is disparate forcing TPO wholesale lenders to improperly (if not illegally) calculate APR while they calculate it differently in their retail operations.  The math can get a little complicated but I will use a no fee loan as an example for ease.  By pure math calculations, a no fee loan has the same note rate and same APR, pretty basic right??  Well, now the fun begins.  The Big Three are telling the TPO wholesale lenders to use “Line 1” of the new GFE for APR calculations.  If you were going to reference a GFE line that “may” be accurate it would be “Line A”, adjusted.  Frankly, APR is not a line on a GFE but rather a very clearly delineated set of calculations but for argument purposes they are using the GFE.  Most of the origination world is not as black and white as a fee versus no fee loan.  For this reason the subtleties of APR are exacerbated by these artificial calculations.

Why does this matter?  By using line 1 you are including items that are already included in the note rate that drives APR calculations.  Pre Paid Finance Charges (PPFC’s) are defined in TILA.  Items that are defined as a result of rate are not PPFC.

Scenario: A loan with standard closing costs and a note rate of 4.875% might have an APR of approx. 5.1%; The  same customer reviewing a no fee option could review quotes at 5.125% and 5.25% and their respective APR should be the same as the note rate.  In the real math world, this is what APR was designed to do: give the customer a meaningful number to compare the true cost of the loan offers they are receiving.

Now for the deceptive math: This same consumer gets GFEs from both a banker and a broker.  The APR’s on the 4.875% are about the same but there is where the real math stops and the disparity in APR calculation begins.  The Broker quotes a no fee loan at 5.25% and side by side the Bankers no fee 5.25% and shazam, everything we learned in math class is out the window.  Both no fee loans at the same note rate but the Broker APR (for the identical loan) is almost 5.5%…..  Wait a minute; I thought APR was a math calculation that had nothing to do with the source of origination……  Checked again, I did not find any change in the APR math so what happened.  Well, intended or unintended, the same banks that have the APR and note rate the same on a no fee loan are telling the TPO wholesale lenders that they will not buy a loan unless they use Line 1(GFE) artificially increasing the APR.  Wait a minute; don’t these same three massive lenders rule the retail origination channel?  Are they not competing everyday and confusing customers with fuzzy math.  Aren’t these changes and disclosures supposed to help clarify the process and help consumers??  As I am writing this I received an email from a customer.  They just received the package from the lender directly and the APR calculation is .354% higher than the actual and correct computation of APR that was disclosed to her initially.  THIS IS A NO FEE LOAN! The loan is identical, note rate, payment and everything except the APR due to faulty math (intended or unintended).

I am really confused, ( in a Columbo sort of way)… While some could disagree, I believe that the intentions of HUD and the FRB are clear and honorable.  It is the underhanded execution and muscle flexing arrogance of the big banks in the marketplace that are changing the math we all learned.  They are creating a playing field that is comparing apples to oranges.  It is the consumer we are serving or in this case confusing and taking away the clarity that HUD was trying to get with the recent changes.

Is the new regulator of loan originators nationally going to create two separate tests with different math?

Just another example of the new BBB; no, not the Better Business Bureau but rather Banks Behaving Badly.  How can they be allowed to change the math, no not just change the math, but cause the way a straight forward computation is done to be different between origination channels.  APR is what it is!!  They must stop confusing the consumer and playing with the numbers for advantage in the marketplace.  We have seen their arrogance and disregard for the Whitehouse, and now more than ever to the consumer.

Steve Heaney, Executive Vice President

Cascade Pacific Mortgage

FHA Lifts Anti-Flipping Ban – According to National Mortgage News, effective February 1 FHA is temporarily lifting their “anti-flipping” rule that prohibits FHA financing on purchase transactions where the seller has owned the property for only 90 days. HUD found this policy blocked potential FHA borrowers from taking advantage of quick resales of real estate owned. Savvy REO sellers are reticent to sell to FHA borrowers because of holding cost and vandalism risk during the 90-day holding period. FHA is lifting the 90-day rule for one year. All sales must be arms-length transactions with no evidence of flipping in the previous 12 months. If the resale price is 20% higher than the REO sales price, the lender has to provide supporting documentation and a second appraisal in some cases.

Big Banks’ Big Las Vegas Adventure – Bank of America expects to release about 6,000 foreclosed properties into the Nevada housing market in 2010, or about 500 a month, according to a report in the The Las Vegas Review-Journal. The homes are part of a “phantom inventory” of foreclosed units being held by banks as they work through loan modifications and negotiate short sales.

What do you think this will do to home prices in Las Vegas?

Countrywide, it is estimated B of A will be taking back at least 11,000 homes per month the early part of this year with predictions of over 40,000 homes taken back in  November and a similar number in December.

What does this mean for you? Expect home prices in the hardest hit regions to stay where they are or take another dip.  It could many years for all foreclosed  and distressed property to be absorbed and residential real estate values to return to something more normal.

Bottom line, now is a good time to buy a house.

Does anyone besides me see a correlation between Big Banks’ REO dilemma and the lifting of the FHA ban on flipping?

Banks’ Buybacks of Loans up 373%

According to National Mortgage News banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter. JPMorgan Chase and Bank of America led the field followed by Citibank, National City, Wells Fargo and SunTrust.

What does this mean for you?  Further tightening of underwriting standards and larger down payment requirements are coming.  The next wave of changes hits in mid-December.

Average 30-Year Freddie Mac Rate Matches Record Low

The average Freddie Mac rate for a 30-year fixed-rate mortgage has matched a record low last seen earlier this year.   Borrower’s who qualify can get 30-year, fixed rate conforming loans with note rates in the mid 4’s.

New Home Sales Bump Up- Big Deal

New home sales rebounded 6.2% in October after a slight 2.4% dip in the previous month, while the inventory of newly constructed homes plunged to a 38-year low. The U.S. Census Bureau found that the new home inventory fell to a 6.2-month supply during the month, down from a 12-month supply in January.  Still, according to the chart below from realestatedecline.com new home sales are seriously below annual averages for the last ten years.

According to National Mortgage News, real estate analyst Mike Larson of Weiss Research says this is a sign builders need to start swinging their hammers.  Mike Larson is wrong unless you believe more bankrupt builders and banks in trouble are a good thing.  Until this economy creates jobs and the current and hidden inventory of existing homes held by banks are moved off their balance sheets, builders need to be hyper-cautious.  Actually, builders don’t need to be hyper cautious because banks are not lending.

How does a builder create a small fortune in housing in this market?  Start with a large one……

 According to the Assoiciated Press there are two versions of an extension of the First-Time Homebuyer’s Tax Credit being circulating in the Senate. Both versions are targeted to be put in place by an amendment to the larger bill extending unemployment benefits. One version extends the credit through the end of March, 2010, allows move-up homebuyers to also get a credit and contracts written by the end of March have 90 days to close. It seems somebody in the senate actually understands the current state of affairs in the housing industry. The other version apparently keeps the current credit in place but drops the maximum credit by $2,000 each quarter with full expiration at the end of 2010. According to AP, both versions face a key vote next Tuesday. Google “first time homebuyer’s tax credit” and the search should bring up the most recent stories.

Big Bank gets big bucks.  Big Auto gets big bucks.  Big Insurance gets big bucks. What about Jane & John Homeowner?  You know, clients like yours’ and mine, quietly paying their mortgage every month on a home worth far less than they paid a year or two or three ago.  Often, their mortgage is greater than the home’s present value.  There are likely millions of homeowners who fall into this category.  They are struggling like the rest of us.  Who is looking out for them?  From what I can see, no one is.

Why not an Underwater Homeowner’s Tax Deduction?  Why not allow the homeowner to take a tax loss on their home based on an independent appraisal?  I think it is an idea worth exploring.  In a nutshell the program could work like this:

• The homeowner gets an independent appraisal (HVCC perhaps)
• The present appraised value is deducted from the original sales price
• The loss is taken all at once or over a 2-3 year period, taxpayer’s choice
• The new basis for the home is the new appraised value
• Future gains are based on the new basis

I propose this Tax Deduction be applied only to the taxpayer’s primary residence but would love to hear other idea’s.

Think about it, potentially millions of homeowner’s could get immediate tax relief which will directly benefit their household economy.  The tax effect is targeted directly where it is long overdue, for Jane and John Homeowner.  Do you know an elected representative who is willing to create and sponsor this legislation?

For the record, I was having a conversation with Debbie Taylor , a loan officer in Puyallup, Washington and she came up with this great idea.  She said it was ok with her if I wrote about it.  It is too good of an idea to keep below the surface.

We have experienced a whole season of ultra-low mortgage rates.  Borrower’s who qualify, who own or are purchasing a property that qualifies have been able to cement sub-5% interest rates for up to 30-years. 

Why are rates so low?  First, we are in a recession.  Real unemployment is over 16%.  Regrettably, there is nothing on the horizon to dispel consumer jitters about their jobs or the future so the typical paths to recovery, housing and consumer spending offer no relief.

Second; inflation is not a fear, deflation is the fear, most notably in the housing market.  These two factors alone are enough to foster a low mortgage rate environment as long as energy prices remain in check.

There is a third factor at play.  The Federal Reserve and the Treasury have been plowing through the issues of mortgage backed securities.  According to the Mortgage Bankers Association, the Federal Reserve purchased almost 80% of available product in August.  The Treasury stepped in for another 9%.   You don’t need a Nobel Peace Prize in economics to imagine where rates would  be if the combined total of the two were less than 50% of the available product.  According to Jay Brinkman, Chief Economist for the MBA the government might be overpaying for mortgage backed securities (the higher the price, the lower the rate) and they are keeping the usual investors on the sidelines.

When will this end?  The conventional wisdom is the Federal Reserve plans to wean themselves off buying mortgage backed securities this Spring.  If the above analysis is right, expect rates to rise this Spring, just in time to throw cold water on the buying season.  And if the economy shows any signs of recovery or if energy prices rise (i.e. inflation) expect rates to leap high enough to punch housing in the stomach, getting us shovel-ready for stagflation.

My advice, buy now, pray later.

Note: today was a typical day for the bottom seekers.  Rates blipped up a tad and many have regrets.  “You should have locked yesterday.”

Pre Amble

Today, new disclosure requirements are in effect.  These requirements are being issued by the Federal Reserve, under Reg Z as mandated by the MDIA (July, 2008) as an amendment to the Truth in Lending Act.

The application of the Act leaves some guidelines unchanged, creates addition disclosure and timeline requirements and mandates new language be added to our disclosures.

If you want to read every word of the Rules and Regulations, they are published in the Federal Register, Vol.74. No. 95, dated Tuesday, May 19, 2009. It is specifically published under the Federal Reserve System, 12 CFR, Regulation Z, Docket No.-R-1340, Truth in Lending. 

Transactions Affected – All mortgage transactions on 1-4 family dwellings regardless of occupancy with one exception.  A specific exception is any mortgage transaction for a rental property that is not owner-occupied (the owner does not expect to live more than 14 days during the coming year).

Early Disclosures

A Good Faith Estimate and TIL (early disclosures) must be delivered or mailed no later than three business days after receipt of an application.  No advance deposit can be collected from the consumer prior to delivery of the early disclosures for any expense other than for the actual cost of a credit report(s).  Delivery has been defined as “three business days after mailing (or any other delivery method) unless delivered in a face-to-face interview.  If the creditor has proof of receipt (i.e. email acknowledgement of receipt, courier receipt) then the date of receipt of acknowledgement can be deemed the date the three day waiting period begins.  The same credit card can be used for the appraisal with a specific request to and acknowledgement from the consumer after the waiting period has passed.  In practice, most appraisal orders will be delayed until the seventh day after initial disclosures are mailed or on the fourth day from the date of an email or courier receipt of disclosures is dated.

Re-Disclosure

For any transaction that qualifies for Early Disclosure, re-disclosure is mandated any time the initial terms disclosed are changed to the point where the APR calculation is changed (higher or lower) more than .125% for a fixed rate transaction and .150% for any other transaction.

Any loan subject to redisclosure cannot be consummated prior to three business days from the date the creditor delivers the re-disclosures.  Refer to the Early Disclosure paragraph for clarification of delivery. 

Seven Day Rule

No loan can close sooner than seven days from early disclosure.  The determination for seven business days is defined as when the early disclosures are either delivered or placed in the mail. The final rule also stipulates the transaction can close on the seventh business day. 

Note 1:  In theory, based on the new guidelines a purchase or refinance transaction could close on the seventh business day after the receipt of an application, presuming there is no trigger for re-disclosure. 

Definition of a Business Day

For purposes of all disclosure requirements a business day is defined by this new regulation as all calendar days except Sundays and legal federal holidays.  Whether an office is open or closed does not affect the definition of a business day. 

Consumer’s Waiver of Waiting Period Before Consummation

The new regulation allows for the waiver of the waiting period prior to consummation of the transaction to expedite consummation based on a “bona fide personal financial emergency.”  On brokered transactions the wholesale lender will make the final determination as to whether a waiver is warranted based on a “bona fide personal financial emergency.”  As a matter of policy, it is doubtful any lender will allow a waiver for any reason. 

New Disclosure Language

There is a new requirement that the early disclosures contain a clear and conspicuous notice containing the following statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” 

 Epilogue

This  description of the MDIA is based on an actual reading of the act.  You can expect varied approaches to compliance based on the lender selected.  The month of August will be a “shake out” month as the ramifications and unintended consequences of the new regulation are realized with implementation. 

Choose your loan originator wisely.  You will need a diligent, seasoned, ethical professional with experience sheparding transactions through the maze of existing regulations to manage the new changes.

Hope and change, baby.  Hope and change.

In May I wrote about TALP (Tax Advance Loan Program) the brainchild of Washington Realtors. WR took a good idea (the $8,000 tax credit) and made it better by creating a program to get the money at the closing table, when in it really needed, not weeks or months later. They worked diligently with the Washington State Housing Finance Commission (WSHFC), the State Treasurer and others to bring the program to life. However, the plan had an Achilles heel.

You see, the TALP program required the tax credit be sent directly to the bank, not the tax-paying borrower. This requirement meant a change in IRS policy and procedure. In a few words, no way, no how would the IRS go along with the plan. End of story?

Not quite. WR should still lobby hard to get the WSHFS to allow tax-payers with a pre-determined credit score to utilize the program, trusting no right-minded citizen would jeopardize a hard-earned quality credit score by diverting the refund to anywhere other than to pay back the loan. With WR backing their plan with their own money, it just seems right to modify TALP to let this happen.

What do you think?

It stands for Tax Advance Loan Program and it is the pet name given to Washington State’s “public-private” down payment program by Bill Riley, Pierce County Realtor and President-Elect of Washington Realtors. Riley and others had a big problem with the $8,000 tax credit for first time home buyers. According to research conducted by his group, about half of all first-time buyers can’t save enough for a down payment and closing costs before November 30th in spite of having the credit profile and income to afford a home. They would be effectively locked out of this buyer friendly market without a better idea in place.

Under Riley’s leadership Washington Realtors created a better idea. The outcome, working with the legislature and more importantly state Treasurer James McIntire, $25mm is standing by for the TALP, available in $8,000 increments. This money is not a new tax nor will it add to the state’s overburdened budget. Washington Realtors put their own money behind the success of the program, pledging $400,000 as loss mitigation. Anyone who has not owned a home three years prior to closing qualifies as a first-time homebuyer. The buyer must take a five-hour class from the Washington State Housing Finance Commission, available online. They must also have their 2008 tax return amended by a qualified tax professional. According to Riley, the money is interest free the first 10 weeks but there is a processing fee.

There is one more piece of the puzzle that must fall into place. The lynchpin of this plan is convincing the Obama administration to allow the state to tap into the tax payer’s amended 2008 tax return and be directly assigned all or a portion of the tax credit refund. Under current IRS rules, according to McIntire, tax refund checks are sent only to the taxpayer’s address. In letters to Treasury Secretary Timothy Geithner and IRS commissioner Douglas Shulman, McIntire argued that credit monetization programs run by states are crucial to the success of the federal effort. To ensure prompt repayment of bridge loans, the state wants refunds mailed to the housing finance commission to facilitate immediate repayment of each loan upon receipt. With direct repayment from the IRS, the state can return the money to the pool and lend it again. Used once the $25 mm could create up to 3,000 home sales.

With over 190 days left until November 30th the money has the potential to turn up to three times. Riley said that State Senator Steve Hobbs and US Senators Murray and Cantwell are working through their own channels to get this change in IRS policy implemented quickly.

When I spoke with Riley on May 1st he said mortgage brokers have full access to this program as long as they work on a wholesale basis with Bank of America (Countrywide) wholesale. B of A is offering the first mortgage and is the conduit to advance the TALP funds from the state.

Riley wanted to make it clear the staff of Washington Realtors worked tirelessly on the project and the lobbyist for the Washington Association of Mortgage Professionals, Steve Buckner was instrumental in getting the word to the right legislators and officials in state government.

When I learn more, I will post again so stay tuned.  This same story is unfolding in at least ten other states so this should be interesting.

That is right; I have studied the maps, looked at the stars, consulted the hair ball, worn out my boots and talked to those who should know.  The news is encouraging. Foot traffic is up at open houses.  Sellers with listings are serious about selling their homes.  Rates are down, very down.  The State of Washington is close to a measure that will allow qualified first time homebuyer’s to utilize their full tax credit this year, before they file their 2009 return.  Everything is in alignment.  This is the perfect scenario for our recovery to officially begin.  All we need is good weather.

The Farmers’ Almanac provides support for my bold prediction.  You see, according to the Farmers’ Almanac we are going to have great weather on the weekends of May 8th and May 16th.  Puget Sounders will spend at least part of the May 8th weekend finishing work in their yards.  When the next weekend of good weather rolls around (May 16th) mom will have cabin fever and will want to get out.  Most will stay close to home because the Memorial Day weekend follows.  What better way to spend a lovely weekend with the yard work done than visiting the local offerings of homes for sale?  It is free, always interesting and of course you have the chance to engage with any number of local, committed real estate professionals.

I say transactions will be started after the weekend of May 16th.  That week will be full of counter offers and final agreements.  On May 26th, everyone in our market will agree, the real estate market has turned the corner.  

Count on it.  The Farmers’ Almanac told me so.