Michigan Loan Experts

Loan Servicing Greed

If subprime borrowers didn't have enough to worry about, they should also be wary of the people they send their checks too.

According to a recent Realty Times article, a currently hidden source of subprime difficulties that have yet to really start to snowball is the servicers who collect your payments.

In the opinion of the author, the servicers are in a massive money grab with a number of scams designed to squeeze every last penny out of your pockets. 

Those scams being:

1.  Scaring you into doing a check-by-phone.  They say if you mailed the check it will probably get processed late so to avoid a late fee you should do a check-by-phone (for a fee, naturally).

2.  Flat out denying your payment was ever received even if you can show canceled checks.  (Late fees start getting charged)

3.  Signing up for automatic checking account withdrawal's where they take up to 2 weeks to credit your account in some cases.  (more late fees)

4.  Being there to 'help you'.  Once you're really late, they try to squeeze you for even more by arranging to a big repayment schedule as high as you can possible pay.

The basic reason for all this apparent greed is that the employees of these servicing firms are paid incentives based on the amounts that they collect from you.  This type of compensation plan encourages greed and abusive behavior from servicers.

Whether or not it blows up to be the huge problem claimed in the article, people can avoid most problems with any servicer by following two cardinal rules:  Pay early and get everything in writing.

Are More Laws Needed To Protect The Consumer?

Certainly no one is disputing that the housing and subprime mortgage market are both in some rough times.  Housing, especially in Michigan, is in a funk; and the subprime market is still trying to stabilize.

So is government the answer?

Should lawmakers come to the rescue?

Any reasonable person can make a strong case that the status quo isn't acceptable.  On the other hand, when have lawmakers ever seen a problem they didn't want to legislate to solve.  Taken too far, lawmakers can often be their constituents own worst enemy.

For Exhibit A of "Lawmakers gone Wild", we need look only across the Michigan border to the State of Illinois.  According to a press release from the Illinois Governor's Office, the HB 4050 law of the Illinois legislature is being revived.  It's good hearted intent is to reduce foreclosures in Cook County, Illinois.  The law applies to any individual who is: a first time homebuyer, buying a home for the first time in 3 years or refinancing their home.

If you're one of the above types of people then you need to get counseling before you can get any of these types of loans:

• The home loan has a prepayment penalty
• The home loan can negatively amortize
• The home loan carries an interest only feature
• The home loan has fees in excess of 5% of its size
• The home loan is a "stated income" loan
• The home loan(s) are for 100% of the home's value
• The home loan is an ARM that adjusts in fewer than 5 years

Sure, I know.  You're all thinking, "what's wrong with requiring counseling for those types of loan?"

Answer: Liability

You see, once you make a law that lenders have to follow, you implicitly create a liability for them if they happen to make a mistake and don't document that they followed it.  Besides lenders, this law also affected title companies, real estate agents and others with a cumbersome process to document that the required counseling had indeed taken place.  If you didn't follow it exactly then you risked a lawsuit.

Well the law was in effect for a short time last year and guess what happened.

Rather than risk lawsuits, most lenders just cut back on their lending in the affected areas.  Home sales in the affected areas dropped by over 40%.  Can you just imagine what would happen to sales in Michigan is a law as restrictive as HB 4050 was inacted.

Thankfully the legislators in Michigan are not nearly as naive as in Illionis and Congress has nothing on the radar that even comes close to what's being proposed in Illionis. 

Legislation has its place and will probably be needed to correct some of the problems that we've seen in the mortgage industry the last three months.  But it's important to also keep in mind the big picture and not turn off the spigot so tightly that the housing market begins to suffer because people can't get loans they need to buy.

Tomorrow we'll go over to the other side and talk about industry proposals.  Self-regulation, yea right.  Most likely a blending of industry proposals and legislation will be the best for consumers.

Should Subprime Borrowers Be Bailed Out?

Senate Banking Chairman Christopher Dobbs has opened the door to hearings on whether the US Government should pass legislation regarding the dire situations many subprime borrowers face.

No specific proposals have been made, but according to Sen. Dobbs, "Congress may need to do something much more quickly to provide some protection or you could end up with a lot of poverty and blight,.... Federal aid of a few billion dollars may be a lot less costly than $164 billion in lost wealth."

Of course, passing legislation takes time to go through both the House and Senate committees then get passed by both Chambers of Congress to finally get signed by the President.  Then there is the little fact that maybe the government shouldn't be supporting a bailout since many of the people who would take advantage of it are the ones who can't afford the homes in the first place.

Lets face it, with so many foreclosures on the books now, any lender who has borrower facing default that they can do a workout with, then they're going to do it.  Loan workouts can be any combination of forbearance, new loan payment schedule or even a straight loan modification from an ARM to a fixed without a new closing.

If you really have the ability to afford the home then the lender will want to work with you; if they don't they they're a very foolish bank or they need smarter employees.

Direct federal intervention is probably a bad idea.  Any legislation would come too late to have an effect, not to mention being a bit unfair to all the millions of non-homeowning US taxpayers that would be subsidizing the program.

Far better for the government regulators to enact tighter guidelines for lenders to follow and, most importantly, repeal that terribly anti-consumer bankruptcy law that was passed last year.  Allowing an easier access to a fresh start would do more good than a bailout which leaves intact a shaky financial situation for homeowners.

Source:
Bloomberg.com: Senate Weighs Aid to 2.2 Million Subprime Borrowers 3/13/2007

 

Mortgage Rates Remain Flat

Despite the tremendous upheaveals in the stock market and ongoing soap-opera like drama of Subprime collapse, mortgage rates remained steady.

30yr Fixed mortgages averages were unchanged at 6.14% with .4 points paid.

15yr Fixed mortgages averages went up to 5.88%  from last weeks to 5.86% with .4 points paid.

In other economic news over the week the US economy added 97,000 jobs in Feburary which was in line with consensus expectations. 

Source:
Freddie Mac - Primary Mortgage Market Survey: March 15, 2007

Subprime Lending Guidelines Proposed

After months of preparation the US Treasury Department along with the FDIC, Federal Reserve and other agencies have published a set of principles to guide subprime lenders in their business.  These guidelines are now entering a 60 day period of public comment before any adjustments are made and they become official policy statements.

The rising number of defaults in subprime mortgages and the aggregate losses that banks face has been a growing concern to regulators on the stress they could inflict on financial markets if any type of government action would become necessary.  According to a report last year by the Center for Responsible Lending, nearly 20% of subprime mortgages made in the last 2 years could end in foreclosure with total losses exceeding 150 billion.  Losses of that magnitude, while in many cases self-inflicted by banks being too willing to lend, could cause broader impact on US financial markets, which in turn is prompting regulators to act.

The guidelines cover several areas but in particular focus on ARM loans with the following features:

• Loans with a Variable rate that have short fixed or introductory rate periods.
• Loan without documentation of Income (Stated Income).
• Loans that contain features designed to encourage refinancing.
• Loans that have no cap on how much the payment can go up.
• Loans with prepayment periods that exceed the fixed rate period.
• Loans that are not adequately explained or disclosed to the borrower, including their obligation to pay their own property taxes and/or homeowners insurance.

While the guidelines don't say that these loans are unacceptable; they do say that loans with these things are more likely to default and therefore the guidelines 'outlines prudent underwriting and consumer protection principles that institutions should also consider with regard to subprime mortgage lending.'

Some of those consumer protection principles include approving borrowers based on their ability to repay the note at the highest possible rate the loan can adjust to and increasing disclosure requirements to make sure people understand what the terms are.

Policies like these will only be good for the consumer and should help stabilize the subprime market so that credit continues to be available to credit damaged consumers.  Certainly standards will go up, but the alternative could be a complete shutoff of the flow of mortgages to credit challenged consumers.

Subprime Troubles Add Downward Pressure to Housing Market

While people with good credit can enjoy still low interest rates the households with damaged credit face ever decreasing opportunities to obtain financing.  From 2001 to 2005 subprime mortgages went from 5% to 20% of new mortgages originated.  Many of those people were first time homebuyers that helped fuel the surge in housing prices.

With subprime mortgages being less available the number of potential buyers for homes in difficult real estate markets decrease as well.  Michigan has been in a housing downmarket for over a year, but according to Realty Times, housing markets nationwide are suffering with problems with subprime lenders being one of several causes.

National banks that once bought the loans of subprime lenders and resold them on Wall Street are now refusing to buy 100% financing deals or loans with a 'stated income' borrower.

The rapidly dwindling choices for damaged credit borrowers has just increased the burden for Michigan homeowners wanting to sell their homes. 

Just a month ago a buyer with low credit scores but still having a good job could get 100% financing.  Now with lenders raising their standards that same buyer would only qualify for 90% in most cases and perhaps be fortunate enough to get as high as 95% with some now hard to get underwriting exceptions.

Homeowners trying to sell need to really adjust to a realistic price if they don't want to continue owning their homes.  They also need to see what level of support they might be able to provide a buyer if they're trying to sell to a first time buyer that can only get a subprime loan.

What's a desperate homeowner to do?

Now that the list of 'what's still available' has gotten so much shorter in the subprime sector it's getting harder and harder for homeowners to get out of those loans and into better ones.

For millions of homeowners that purchased or refinanced in the last 3 years mortgages were taken out that included a variable rate, the ARM.

While there are times when ARMs can make good sense, loans that were affordable in the beginning can be simply impossible to meet the payments on once they start adjusting.  The USA Today reported that 400,000 subprime loan holders nationally have missed at least one mortgage payment.

Well the problem is that these homeowners, instead of maintaining or improving their credit over time and graduating to a better good credit loan are now in a position where even the subprime lenders don't want to lend to them.

The options they have are really bad in most cases.  Some will face foreclosure while others will manage to save their homes.  The first thing they should remember is that they need to contact their lender ASAP. Most lenders will want to talk to you and try to work something out.

New Century Tightens Guidelines

The subprime market continues its difficult adjustment with another lender, New Century, eliminating products.  According to an email I just received from our account executive, 'lack of investor demand for high LTV/CLTV non-prime products requires New Century to no longer offer the non-prime Combo and 100% One Loan products.

At least they're not pulling out of the Michigan market completely, which is what several major players in the subprime sector have done over the last year.

While the collapse of availability of subprime products may result in stronger companies, it will also reduce the availability of homeownership opportunities for deserving individuals and families.

There are still subprime lenders willing to do the 100% financing, but they're getting fewer in number and stricter on the credit quality they will continue to accept.