Deb Espinoza's Real Estate BLOG: February 2010

I have been worrying about the fact that FHA is the "new" creative mortgage for today's buyers. Although the loans are not near as creative as the old teaser rate loans and liar loans, I did have cause for concern- and now the government seems to be letting on that there may be a problem. FHA's requirements for borrowers, although more strict than the past 'breathe on this mirror' loans, have up to this date allowed credit scores in the 500's, low down payments of 3-3.5%, allowed 'gift' money for down payments, and seller contributions as high as 6%. When you take all this into consideration you still MAY have a borrower that has not handled their credit well, and still had none of THEIR skin in the game (evidenced by "gift" funds and seller contributions); quite frankly the only difference from the old easy loans that created most of this crisis we are in is that there has to be proven income, no more 'stated income'. The thing is, in my opinion, the Stated Income loans were created for self-employed borrowers who in most cases had heavy write offs for tax reasons and therefore their tax returns did not create an accurate picture to prove income for loan qualifications. For example- standard underwriting would allow for adding back in such items as "depreciation' or home office expense to the business owners bottom line income, but Business owners may write off close to 100% of gas expense, or vehicle payments etc. and generally those were not added back in to create a real picture of income and thus disqualified them from a loan they could really afford. This Stated Income loan was created for this reason; and it just makes sense. Business owners with a succesful proven track record in business, evidenced by great FICO scores and cash and assets are now unable in most cases to get a good loan because of misuse of these loans in the past by those who should never have been allowed to use them. Now, what could be a great resource of purchasers for a lot of these foreclosed properties are unable to qualify for loans to purchase these properties for investment. Another example of the government not seeing the "big picture'.

The problem began when Stated Income loans were made available to everyone- even salaried or hourly workers. A teacher making $45K a year may have been creatively revamped to be an "Educational Administrator" with a Stated Income of $110K, this is just one example of what I know was done on a regular basis- and encouraged by account reps at lenders so the loan would be approved. Thus, the nick-name "Liar Loans". It was just TOO easy, and everyone was doing it.

The other thing about FHA loans that really puzzled me was the debt ratio, ratio of house payment to income (including taxes, insurance and HOA dues), considered the 'top end ratio" and then the calculation of all debt; housing, autos, credit cards, student loans, to the income; refered to as the bottom end ratio. In the hey day of easy loans these ratios were as high as 55%, which didn't leave much for taxes, food, gas and other necessities that aren't calculated into these numbers. So when I saw that the FHA loans were allowing for a much higher debt ratio than all the other loan types- 50% in some cases; I'm still thinking- What are they thinking?? Isn't this STILL Cause for Disaster?? and apparently it is and was.

Recent news is that not only are Freddie and Fannie still in trouble, but FHA backed loans are now a concern. The Federal Government was responsible for 95% of all new home mortgages in the last quarter of 2009. The Federal Government backed $390 Billion in new mortgage loans just in Q4 2009. Freddie, Fannie, VA and FHA stands behind 95% of those loans, when just a few years ago that figure stood at just 40%. Federal Reserve Chairman, Paul Volker, states that our Nation's home mortgage market is in 'trouble' and will have to be 'restructured'. "It is totally dependent on the government and should not be. That's going to have to be reconstructed."he says. While stating that this situation is a big problem, he also states that it can't be fixed in the next year. Volker states; "Its like saying we're going to make some improvements to the Titanic after it has hit the iceberg." Okay, so if you interpret this statement as it was made, we are already SUNK and need to build a new ship.
So do you think now may be the time to get input and ideas from those who actually work in the business and understand how it works and what will and won't work in building the new ship ??

Obviously the new ideas for tightening up FHA underwriting is not enough. Their ideas include: raising the down payment to 10%  IF your FICO scores are below 580; lowering the seller credit to 3% maximum, and then in order to get more money into the Fed Govt. Mortgage Insurance coffers- raising the percentage of upfront FHA insurance fees to 2.25% (I think it stands at 1.75% now) and raising the monthly cost to the borrower for the FHA insurance backed loan as a percentage of the mortgage payment. Ths doesn't much solve the fact that these loans are still being offered to those that have proven mis-management of their credit; which I feel in reality, is a huge indication of their future money management. Also that most of them are employees, most with no cash reserves in the bank after they purchase their home, in a time when there is still has an alarming amount of layoffs every month.  It's not easy to teach an old dog new tricks- quite frankly I often wonder just how many of these people losing their homes to foreclosure are repeaters from the mid to late 90's. Perhaps some financial education would be in order, and the government should be the first in line to be educated.

The question that comes to my mind these days is When does a lender qualify as doing illegal dealings in this mortgage crisis debacle?  I see outrageous things that make you go hummm....  Take the foreclosed upon house for instance. I pull title and see that say RESMAE Mortgage Corp owned the  $200K loan that foreclosed, however, when the foreclosure recorded it showed as a SALE to Deutsche Bank for $1000 at a Trustee Sale. This property was actually an REO being serviced and sold by Ocwen. FYI- This title now creates a Red Flag on the new buyer who now gets to pay for TWO appraisals because the FHA requires this when a property sells for more than 100% of the last sale (which in this case was $1000).

So- I ask myself, "What is the reason for these strange title recordings?" Do you think it may be a banking 'magic trick' used to transfer properties back and forth strategically in order to make the most of the write offs and book cooking to take advantage of OUR funds so willingly given by the government to help these poor little banks from failing?? Is this strategic loss shown on the books of $199K plus helping these lenders ? and how nice for Deutsche Bank or Ocwen Loan Servicing who actually showed as the "seller" on the REO to get a house for $1000 that they then turn around and sell for $140K.  I'm just asking... and certainly wish I knew where to dig for answers to expose this.  Come to think of it, I recall a Ramona Realtors meeting sometime last year where a person on the legal affairs committee said that the Feds were investigating some property switching by BIG BANKS.. (BofA rings a bell in my memory) So say Big Bank 1 forecloses on a house with a loan for $450K and they turn around and sell to Big Bank 2 for 150K who immediately is able to get an offer and sell it for $380K... and apparently they were alternating sales back and forth. Now I never heard any more about it- but it sounds awful shady to me.

Now I see the new 'Perpetrator' as Chase bank.  All of us who work in short sales know that the SOP for 2nd liens has currently been $3000 max to the 2nd for lien release, and since that is what the Majority of the Big Banks were doing to their second lien holders we, in negotiating releases for the seconds that they owned, used this as a 'fair play' rule.. saying that since that is all you are willing to give a second then this should be what you will accept when you are the second. And yes, they capitulate and take the $3000. But wait! Chase apparently now has a much better idea, being all warm and fuzzy customer service like. Seeing as how they know the max they are going to get on a 2nd lien in a short sale is $3000 they have found a way to realize immediate gains. Yes! "Let's SELL a boat load of 2nds to a collection agency and get more than the measly $3K"  Brilliant. Thank you Chase.  I had a offer and HUD in to Chase that had approval from the first lien holder- we kept being told by Chase that we would have an assigned negotiator any day-- for two months we waited. Then lo and behold we call for our regular check up on status and are told the loan was sold to collections. Some place called Regency... and strange enough too that all their correspondence lists BOTH Regency and Chase Bank on it.  First Regency tells us they have to have approval from Chase then Chase says they have nothing to do with the loan because they sold it.  Could there be a possibility that a lender creates a 'strategic' alliance or actual other entity to 'sell' it's bad assets to?  I'm just asking...

The Mortgage Bankers Association announced numbers on Friday of delinquencies in the last quarter of 2009. No surprise that most journalists and government people are saying that this is "Proof we are coming out of the housing crisis". What they fail to mention is that a large- VERY large percentage of lenders put a moratorium on foreclosures over the holidays in an effort to allow homeowners to enjoy the holidays in their homes for one last year before they had to find other living arrangements due to foreclosure.

The other 'fail to mention' is the fact that there are many homeowners who took the famous pick a pay loans with teaser starter rates of 1-2% interest only that reach their 5 year re-cast period in 2010 and 2011.  The majority of these homeowners will find it impossible to afford their new payments where 're-casting' calls for taking their mortage and re-setting the payment to fully amortize payoff in the remaining 25 years... at the new principal balance which now could easily be a balance that is $50,000 or more than the original loan amount. This takes into consideration that the majority of borrowers paid only the 'teaser rate' minimum payment required for the past 5 years which piled on interest not paid to the principal balance every month. Take that higher loan balance on a home financed at 100% and add the fact that most home values in San Diego County have plummeted 30% and more. DISASTER for sure. Payments could easily double and even triple according to the re-cast terms.

Add this to the commercial real estate crash thats moving in full force and the only realilty I come up with is 'This crisis is far from over..'  My prediction is more bank failures and a very real possibility that our dear government will want permission to throw more bailout money to the lenders..