Archive for the ‘Mortgage That Matters’ Category

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It’s about products and process

By Rick Soukoulis | February 7th, 2011 0 Comments

It’s said that the pendulum tends to swing too far in either direction, and while I don’t know if that’s true in physics, it’s certainly true when it comes to mortgage products.

Let me explain.

For a long time, we had very limited mortgage products. There were basic fixed rate loans and a few adjustables. Then the pendulum started to swing.

In the mid-part of the recent decade, the subprime world was incredibly innovative in creating new mortgage products. These new mortgages had bells and whistles galore, and they had every feature imaginable.

The only problem was that all those loan products forgot one big thing, to take the borrower into consideration.

The loans had features meant to appeal to Wall Street, but lost in the shuffle was whether the loans were good for borrowers or not, whether a borrower could actually afford these loans.

When the subprime world blew up in 2007 and 2008, the pendulum swung back in the other direction, and that’s where we are today. Today’s borrower has very few choices, and like the proverbial baby getting thrown out with the bath water, a once legitimate-adjustable loan barely exists. It’s as if the sub-prime adjustables ruined the very concept of variability.

Today’s borrower, however, wants more choices. I talk to our Bankers every day as this seems to be a real theme they are hearing from borrowers.

As a result of this, Western Bancorp has decided to go back to the future, and we have come out with a variation on the original California Variable, a wildly popular loan type not seen since the 1980’s.

We call it the Safe AML

These are the loan features we are bringing back:

Very Low payment changes:
Payment caps are the feature of adjustable mortgage loans that control affordability. Our safe AML’s adjust cap is a .50%. Converting our .50% cap into dollars looks something like this: for every $100,000 dollars borrowed the most a payment could increase or decrease during any adjustment period is about $28.00.  It’s very affordable.

Affordable life cap of 7.25%:
Life caps are also very important as they protect borrowers from huge increases over time. Most life caps on adjustable rate loans today are between 9% and 11%. The safe AML’s life cap of 7.25% and this is only 1.5% over today’s 5.75% fixed rates. At some point in the future, the borrower could have a payment slightly higher than today’s fixed rate. This is a worst case scenario, however, and it’s not a bad trade off.

Low 3.5% start rate:
Again, today’s Jumbo fixed rates are around 5.75% to 6.00%, so our start rate is way, way lower. This wildly increases the borrowers buying power.

The safe AML allows for a qualifying Debt-to-income ratio of 50%:
Because we have designed a loan that is so safe for consumers,  we can allow their new mortgage payment to be as much as 50% of their income. Your buyers can get more home and more affordable payments.

Loan amounts up to $2 million!
We love Jumbo loans. We feel very strongly about the local market and as a local banker we are making a bet on supporting the high end.

We created this loan at Western Bancorp, and not only is it a good loan for the borrower, it shows what I believe is a major strength of the mortgage banker: The ability to take an innovative idea and turn it into a specific loan. My hope is that other Bankers will follow our lead and create mortgage product that help increase home sale and affordability.

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Mortgage that Matters: COULD RATES ACTUALLY GO LOWER?

By Rick Soukoulis | July 21st, 2010 0 Comments

The past several months seem to prove that you shouldn’t always trust conventional wisdom. Most recently, conventional wisdom was that in March, the Federal Reserve would have finished buying the $1.25 trillion in mortgage backed securities they were authorized to purchase, and when this heavy buying activity ended, mortgage rates would shoot up in April, May and June.

It was simple economics. If the Fed was in there every day buying up mortgage securities, this heavy buying would drive MBS prices up and rates would go down.

This did work, and the low rates were precisely what the Administration hoped would happen to get the housing market back on its feet.

The 800 pound gorilla was the fear of what would happen when all this buying activity by the Fed ended.

Basic economics would seem to indicate that rates would have gone up and perhaps significantly.

Even worse was what would happen when the Fed started selling these securities. If they were to dump even a few billion a day, the constant selling would drive MBS prices down and mortgage rates up.

Almost everyone predicted this scenario, and many housing economists thought it would be devastating to the housing markets.

But in an economy with so many moving parts, things often turn out differently than expected.

Rates not only didn’t go up, they’ve actually gone down, and this has huge implications.

With rates dropping toward 4.5%, we are seeing a whole new wave of refinancing, and many of these loans being refinanced are in mortgage securities owned by the Fed! As a result, this $1.25 trillion in MBS the Fed owns is gradually being paid off on its own. And the more people re-finance, the more will be paid down.

The implications of this are huge. If the $1.25 trillion pays down through refinance activity to, say, $750 billion, that could open up the Fed to buying another $500 billion to get back to the $1.25 trillion number.

If you think about it, a new round of Fed buying, as they replenish their holdings, could drive rates to a level no one could have ever dreamed of.

As hard as it is to imagine rates being as low as 4.5%, a new round of Fed purchases could drive rates to 4.0% or even lower.

As Yogi Berra once said, “Who’d have ever thunk it?”

Indeed.

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Mortgage that Matters: THE GREEK-AMERICAN AND OUR MORTGAGE MARKETS

By Rick Soukoulis | June 3rd, 2010 0 Comments

As a Greek-American, I have being watching the financial crisis and the upheaval it is creating in Greece with what I think is a different perspective than many other Americans have.  I want to share a perspective on what another Greek-American is dealing with and how his actions affect our mortgage market.

In the 1960’s a Greek economist named Andreas Papandreou was teaching economics at UC Berkeley. His American-born wife wanted to spend some time in her native country, and Andreas had the chance to be a visiting professor at Cal for several years.

The family lived in the Berkeley Hills, and their son, Georgie, played baseball with his neighbors, joined the Cub Scouts, and went to Cragmont Elementary School, one of Berkeley’s public schools.

He was a typical ten year old, carefree, living the life of an American boy, much like Tom Sawyer and every other kid.

Where is he today?

Today, he goes by George rather than Georgie, and today he has the worst job in the world: He’s the Prime Minister of Greece.  He’s often referred to in the press as The Beleaguered George Papandreou.

What’s going on over there, and why is it making the front pages with scary headlines?

Essentially, Greece ran huge deficits and is close to national bankruptcy. Like all governments, it finances itself partly by selling bonds, but their financial house is in such disorder that they might not be able to sell new bonds or refinance old ones.

Like individuals that accumulate too much debt, the Greek government is cutting expenses, but government workers are unhappy seeing their wages cut.  A general strike shut down Greek airports, tourist sites and public services and some 50,000 demonstrators marched against the planned public spending cuts and tax rises.  You’ve seen the violence on TV.

Because Greece is part of the Europeans Union (EU),  people are deeply concerned that their problems will spread to the rest of Europe. The global markets are very scared, and when this happens, nervous investors turn to the strongest currencies and deepest markets in what is referred to as a Flight to Quality.

This has meant global investors moving their money to the dollar, and in buying up U.S. Treasuries as a safe haven, bond prices have risen and rates have dropped.

What happens to Treasury bond rates almost immediately happens to mortgage rates, and you’ve already noticed how mortgage rates have dropped pretty significantly of late.

I don’t know if Greece will be kicked out of the EU or if they’ll solve their fiscal woes.

I do know that as long as there’s financial turmoil around the world, in Greece or elsewhere, people will turn to the U.S.

This should big a great summer selling season!

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IT’S AMERICA’S TIME TO SHINE

By Rick Soukoulis | April 15th, 2010 0 Comments

If you’ve been noticing the headlines recently, you’ve seen that some European countries are going through extremely difficult economics problems. The headlines you’ve probably seen the most have been about Greece. Their government spending was way out of whack, and their economy is paying the price.

The other countries having hard times are Portugal, Italy and Spain, and when you add Greece, the initials for Portugal, Italy, Greece and Spain spell out PIGS. You may have seen this term in the news.

Why do I point this out?  Why is this at all relevant to selling homes and getting mortgages for homebuyers?

The reason I find this relevant and interesting is that the PIGS countries are just starting to sink into their economic problems.  They’re going through now what we went through two years ago.

They’re just starting to grapple with their problems, and we’re starting to come out of our recession.

Two years ago a lot of Americans thought the world was coming to an end.  Washington Mutual, Bear Stearns, Lehman Brothers and Indy Mac all failed, and AIG, General Motors, and our biggest banks had to get emergency financing from our government.

Serious people on the news and in the newspapers would ask if the Bank of America would fail, and when questions like this can be part of our national dialogue, you know people are scared.

Things are different now.

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Mortgage that Matters: BELIEVE

By Rick Soukoulis | March 25th, 2010 0 Comments

If there’s one thing I’ve seen over and over again, it’s the cycle where housing soars, corrects, and then soars again.

At its low periods, like today, many, many people think real estate values will never come back.  And certainly they’ll never go up again like they did in the past.

I don’t know about other parts of the country, but this is California – where the American Dream thrives.  I am eternally optimistic about California housing values, and most optimistic about values in the Bay Area.

So, I’ve collected some quotes from the past where people say real estate is dead.  Reading them might allay some peoples’ concerns and put things into perspective.  Enjoy:

  1. “The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline.”  (Time, Dec. 1, 1947)
  2. “Houses cost too much for the mass market.  Today’s average price is around $8,000—out of reach for two-thirds of all buyers.” (Science Digest, April, 1948)
  3. “If you bought your house since the War…you have made your deal at the top of the market… The days when you couldn’t lose on a home purchase are no longer with us.”  (House Beautiful, Nov.  2, 1948)
  4. “The goal of owning a home seems to be getting beyond the reach of more and more Americans.  The typical new house today costs $28,000.”  (Business Week, Sept. 4, 1969)
  5. “Be suspicious of the ‘common wisdom’ that tells you to ‘Buy now…because continuing inflation will force home prices and rents higher and higher.’”  (NEA Journal, Dec. 1970)
  6. “The median price of a home today is approaching $50,000….Housing experts predict that in the future price rises won’t be that great.”  (Nations Business, June, 1977)
  7. “The era of easy profits in real estate may be drawing to a close.”  (Money, Jan. 1981)
  8. “In California… for example, it is not unusual to find families of average means buying $100,000 houses…. I’m confident prices have passed their peak.”  (John Wesley English, The Coming Real Estate Crash, 1980)
  9. “The golden-age of risk-free run-ups in home prices is gone.”  (Money, March 1985)
  10. “If you’re looking to buy, be careful.  Rising home values are not a sure thing anymore.”  (Miami Herald, Oct. 25, 1985)
  11. “Most economists agree… [a home] will become little more than a roof and a tax deduction, certainly not the lucrative investment it was through much of the 1980s.”  (Money, 1986)
  12. “We’re starting to go back to the time when you bought a home not for its potential money-making abilities, but rather as a nesting spot.”  (Los Angeles Times, Jan. 31, 1993)
  13. “A home is where the bad investment is.”  (San Francisco Examiner, November 17, 1996)

Things look grim right now, but go back and look at the dates on all these quotes?  Anyone who followed the advice of these people would have missed out on one of the great real estate booms of all time.

What if you paid attention to the advice in quote #7?  You’d have missed out on all that growth in the 1980’s.

What about quote #12? If you followed that advice, you’d have missed out on all the great years up until last year.

I could go on and on.  If you’re a patient person, it’s been almost impossible not to get rich on California housing.

It happened before and it will happen again.

Don’t bet against California housing.

In the long run, it’s always been a great investment.

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Mortgage That Matters: A MORTGAGE IS NOT A COMMODITY

By Rick Soukoulis | February 9th, 2010 0 Comments

From time to time I hear people saying that the mortgage loan officer is a dinosaur.  The reasoning is that a mortgage is commodity, that every mortgage has the same criteria, and that they are, therefore, mere commodities.

By extension, the argument goes, borrowers do not need humans involved in the process, and that they can benefit from reduced costs by eliminating the human element from the equation.

When I hear this argument, I wonder if the person ever got a mortgage.

If they had, they’d know that the “human element” is critically important and that many, if not most, borrowers would never be able to buy a house without assistance from the Realtor and the loan officer.

As an example, think about all the subtleties of various loan programs.  Let’s assume a borrower goes online and choose Program 1-A and gets turned down.  He then applies for Program 2-A, Program 3-A and Program 4-A, getting turned down at each of them.

At this point, does he get so discouraged that he simply gives up?

Had their been a loan officer and Realtor involved, he’d have known that of the ten programs offered, he only qualified for the tenth one.  A knowledgeable loan officer could have steered him right away to program 10-A and made certain he chose the right loan program to match his individual situation.

One argument for eliminating the human element also has to do with the reduced number of programs. The argument is that loan officers were needed 2-3 years ago when there were hundreds of programs, and the borrower needed help choosing among all these choices.  Now, they, say, it’s either a conventional 30 year fixed or an FHA 30 year fixed, and anyone can choose between these two.

Again, no one would say this if they’d tried getting a loan recently.  Awhile the number of programs has, indeed, shrunk, it’s a heckuva lot more than two.  And more importantly, while there maybe be fewer programs, they’re all much harder to qualify for.

A good loan officer can help borrowers choose the right program and help them qualify for that.

And no computer program can ever do that as well.

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Mortgage that Matters: Happy New Year from the US Government

By Rick Soukoulis | January 8th, 2010 0 Comments

When I first got in the Business in 1981 I met someone wearing a little button on his lapel with these letters, EGBAR. He told me it stood for “Everything’s Going to Be All Right”.  At the time interest rates were 18.5 % and 4 points… That’s how I feel about the government’s latest policy pronouncements about Fannie Mae and Freddie Mac.

As you might know, the federal government on Christmas Eve made the announcement that the U.S. Treasury would essentially provide these two agencies with as much capital as they might need.

Originally, there has been a cap on how much money the government would provide, but the administration said that they will now do whatever is necessary to keep these Agencies alive and well.

There’s almost unanimous opinion by analysts that these two agencies won’t need additional monies, but housing experts still applauded the move.  And I’m one of them. Their view is that by saying they will stand behind Fannie and Freddie, even if such a statement is not necessary, it would provide a calming influence to investors in the agencies’ debt.

Let me explain something.  There are two types of securities at issue, (1) Fannie Mae and Freddie Mac Mortgage Backed Securities, and (2) bonds issued by these two entities.  The first category is and always has been backed by the full faith and credit of the U.S. government.  Investors know that if they buy a mortgage backed security they will not lose any principal.

The bonds issued by Fannie and Freddie are another thing, however.  They have never been backed by the U,.S. government.  Interestingly, many people thought so, but it simply wasn’t the case.  By offering unlimited support, investor around the world can safely buy Fannie or Freddie bonds.

People opposed to this support say it provides Fannie and Freddie with a blank check.  And from a literal point of view, they’re precisely right.

However, broader public policies are at play here, and the real issue is that such a “blank check” will probably never be cashed, but the fact that it exists will provide stability and predictability to our housing markets.

Right now, with such a fragile economy and difficult housing environment, stability and predictability are precisely what the market needs.

I applaud what the government did.

I think it will help get things back to normal.

EGBAR

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What If The Speculators Go Away?

By Rick Soukoulis | December 1st, 2009 0 Comments

If you’re in real estate or mortgage lending, you’re always getting inundated with data and statistics.  Among the many statistics I’ve seen lately, one kind of jumped out at me.

I read recently that something like 70% of all buyers of foreclosed home are speculators.  Wow.

I had a few quick reactions.  My first one was one of surprise.  I don’t know what I might have expected, but probably something like 30-40% would have been closer.  My second reaction was that we should all be grateful for these speculators, since we need someone to be out there buying real estate.  My third reaction was to wonder what will happen when the speculators all go away.

Let’s look at these assumptions or reactions. 

First, having speculators represent such a large percentage of buyers probably shouldn’t be surprising.  As speculators, they’re prepared to take risk in return for reward, and given how questionable housing values are these days, they’re willing to take great risk for great reward.

It’s speculators who are so key in the price discovery process.  Speculators who get in too early and pay too much will lose money, and that’s precisely how end-users, people buying homes to live in, know whether and when it’s time to buy. The people looking to buy homes to live in are afforded the luxury of standing off to the side where they can watch speculators determine the true value of local homes.

In this sense speculators are as much a part of the recovery process as they are of the discovery process.

But what happens when they go away?  First, we need to remember that the 70% statistic is only for foreclosed homes.  Second, they will go away when the easy profits are no longer there. And why will this happen?  It will happen because supply and demand are getting closer to equilibrium, and this has to happen before housing prices can stop falling and return to normal. 

Speculators thrive when there is a wide disparity between what sellers want and what buyers will pay.  True end-users want a market in which such disparities don’t exist.

The speculator stops playing the game because the easy profits are gone, but that also means that prices have stabilized.  After all, profits are much harder to come by once prices have stabilized.

The speculators will leave precisely when true end-users enter.

The absence of speculators will, by definition, mean that things have returned to normal. 

 And isn’t that what we all truly want?

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What the heck is the Fed up to?

By Rick Soukoulis | November 13th, 2009 0 Comments

The Federal Reserve Board may be the least understood institution in America and about which people know the least.  But in these trying times, their role has not only been big.  It’s been critical.  The Fed has probably done more to get the economy moving again than all the government spending and bailout programs combined.

 About 85% of all mortgages made today are being put into mortgage backed securities. These securities are being created primary by Fannie Mae and Freddie Mac. Both of which are now 80% owned by the government.  In past, these securities were bought by banks, mutual funds, insurance companies and pension funds.  These same investors are still buying, but in general, they are buying a whole lot less than they did before the credit crunch of 2008-09.

In order to drive rates lower, the Fed has stepped in and been buying massive amounts of mortgage securities.  As a matter of simple supply and demand, massive buying will drive bond prices up, and as bonds prices rise, rates drop.  Thus, the Fed made a conscious decision to buy mortgage securities to drive mortgages rates downward, largely to keep pressure off the American homebuyers and to stimulate housing markets in general.

 The Fed has stepped in as the buyer of last resort, and they are now authorized to buy up to $1.2 trillion in these MBS’s.  They’ve already bought $975 billion, with $225 billion more to be bought.

 They have been buying at a rate of $25 billion a week; just enough to keep rates relatively low, allowing people to refinance at lower rates and for homebuyers to afford new homes.

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Foreclosures and other Opportunities

By Rick Soukoulis | August 10th, 2009 0 Comments

Have you ever noticed the changes in late night ads and infomercials for real estate opportunities? During a boom period, the late night ads are all about how to buy with nothing down and how to build an empire of rental houses.  People who bought the programs all speak glowingly into the camera about how much they are making in a week, and it seems they’re always filmed from some beach in Hawaii where they’ve presumably retired to.

But isn’t it kind of amazing how quickly the ads change once the real estate cycle turns?

Over the last few months, I’ve noticed a not-so-subtle change, as most of these late night ads now tell us how much money there is to be made in foreclosures, short sales, and other side effects of a difficult real estate environment.

Are these ads accurate?  Is there big money to be made during times of great stress in the housing markets?

They answer is that there can be, but that it’s gotten much more tricky this time around.

Why do I say that?

In the old days, and this may have been just  15 years ago or less, dealing with foreclosures and the like was pretty simple.  There was a good chance that the loan was owned by a local bank or savings & loan, and many realtors developed relationships with the foreclosure departments at these banks.

When good deals came along, the bank would call the realtors they worked with, and everyone made money.

Like a lot of things in modern life, things have gotten much more complex.

It sounds strange, but it’s not so simple to understand who owns a given loan anymore,

You’ve all heard of securitizations, right? It’s taking a large number of loans and putting them into a mortgage-backed security of some sort and then selling that security on Wall Street.

It’s like a bond that’s backed up by a whole bunch of individual mortgages.

That part sounds pretty simple, and whoever owns that security really owns the underlying mortgages.

For a number of reasons, we now have financial “engineers” who take a lot of the securities and then slice them into thin pieces.  They’ll then take these thin slices from maybe 10 different mortgage securities and combine them into new securities.

I know it sounds strange, but a single loan could end up being a part of 5-10 different securities. One might get the interest payments of the loan, while a totally different security might have the principal payments. One security might absorb the first 10% loss on a loan, while another security could absorb loses that exceed that 10%.

If you’re getting just a bit confused, well, it is confusing.

When you’re dealing with foreclosures, short sales and loan modifications, at some point you need to talk to the owner of that loan.  At some point you need the owner of that loan to sign off on what you’re trying to accomplish.

If it’s unclear who owns that loan, you’ll most likely need a decision that can only come from the owner of that security, or perhaps the custodian.

And not to scare you, but here’s a very possible scenario:  The loan you need a decision on could be part of a mortgage security owned by the Michigan State Teachers Retirement Fund. But another part of that loan could be owned by an insurance company in Japan.

How the heck will you ever get a decision on your proposed loan modification or short sale?  Unless you know your way around this world of securitizations, or unless you know someone who does, you might not ever know that the custodian for these securities can make the decision.

 My point is quite simple:  Financial engineering by Wall Street has made things more complicated, but there is some good news to this situation.  There are mortgage professionals who understand this process and who can guide you through it successfully. Intero Mortgage is here to help.

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