Tag Archives: mortgage

Can Fannie and Freddie Be Privatized?

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Kroll Bond Rating Agency posted Housing Reform 2017: Can the GSEs be Privatized? The big housing finance reform question is whether there is now sufficient consensus in Washington to determine the fate of Fannie and Freddie, now approaching their ninth year in conservatorship.

Kroll concludes,

The Mortgage Bankers Association sends a very clear message about privatizing the GSEs: It will raise rates for homeowners and add systemic risk back into the financial system. Why do we need to fix a proven market mechanism that is not broken? KBRA believes that if Mr. Mnuchin and the President-elect truly want to encourage the growth of a private market for U.S. mortgages, then they must accept that true privatization of the GSEs that eliminates any government guarantee would fundamentally change the mortgage market.

The privatization of the GSEs implies, in the short term at least, a significant decrease in the financing available to the U.S. housing market. In the absence of a TBA market, no coupon would be high enough to support the entire range of demand for mortgage finance, only pockets of higher quality loans as with the jumbo mortgage market today. Unless the U.S. moved to the Danish model with 100% variable rate notes, no nonbank could fund the production of home mortgages efficiently and commercial banks are unlikely to pick up the slack for the reasons discussed above.

In the event of full privatization of the GSEs, private loans will have significantly higher cost for consumers and offer equally more attractive returns for financial institutions and end investors, a result that would generate enormous political opposition among the numerous constituencies in the housing market. Needless to say, getting such a proposal through Congress should prove to be quite an achievement indeed. (4)

I disagree with Kroll’s framing of the issue:  “Why do we need to fix a proven market mechanism that is not broken?” To describe Fannie and Freddie as “not broken” seems farcical to me. They are in a state of limbo with extraordinary backing from the federal government. It might be that we would want to continue them with much the same functionality that they currently have, but we would still want this transition to be done intentionally.  Nobody, but nobody, was thinking that putting them into conservatorship was the end game,

While the current structure has some advantages over privatization, the reverse is true too.  The greatest benefit of privatization is getting rid of the taxpayer backstop in case of a failure by one or both of the companies.

We shouldn’t be saying — hey, what we have now is good enough. Rather, we should be asking — what do we expect out of our housing finance system and how do we get it?

There appears to be a broad consensus to reduce taxpayer exposure to a bailout.  There also appears to be a broad consensus (one that I do not support as broadly as others) to protect the 30 year fixed rate mortgage that remains so popular in the United States.

Industry insiders believe that a fully private system would not provide sufficient capital for the mortgage market. They are also concerned that a fully private system would put the kibosh on the To Be Announced (TBA) market that provides so much stability for the mortgage origination process.

A thoughtful reform proposal could incorporate all of these concerns while also clearing away the sticky problems built into the Fannie/Freddie model of housing finance.

“If it ain’t broke don’t fix it” is not a good enough philosophy after we have lived through the financial crisis. We should focus on the big questions of what we want from our 21st century housing finance system and then design a system that will implement it accordingly.

Mortgage Moves in 2017

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MortgageLoan.com quoted me in Three Mortgage Moves o Consider in 2017. It opens,

How much do you think about your mortgage? Probably not much at all.

But financial professionals say that homeowners can save money, lower the amount of interest they pay each year and maybe free up some extra cash, all by tweaking their mortgages, whether they are paying off a conventional loan, FHA mortgage or VA loan.

If you’ve gotten into the habit of ignoring your mortgage, it’s time to take a look at what is probably your biggest financial obligation. Here are three suggestions from mortgage lenders and financial pros to use your mortgage to better your finances in 2017.

Going Short-Term

Are you paying off a 30-year, fixed-rate mortgage? It might be time to refinance that loan, not for the benefit of lower interest rates but to turn your mortgage into one with a shorter term.

Turning your loan from a 30-year version to a 15-year one will result in a higher monthly mortgage payment. But you’ll also dramatically reduce the amount of interest you’ll have to pay over the life of your loan. Mortgage rates with 15-year, fixed-rate loans are lower than the ones attached to longer-term loans, too.

“Going shorter term is a big financial benefit,” said Jason Zimmer, president of Lockport, Illinois-based Parlay Mortgage. “The 15-year loan is where you want to go. You can save so much money.”

Look at the financial difference: Say you are paying off a 30-year, fixed-rate mortgage of $250,000 at an interest rate of 4.09 percent. Your monthly payment, not including property taxes or insurance, will be about $1,200. But you’ll pay a total of $184,000 in interest if you take the entire 30 years to pay off your loan.

But say you now owe $225,000 on that same loan. If you refinance that amount to a 15-year, fixed-rate mortgage with an interest rate of 3.33 percent, your monthly payment, not including taxes and insurance, will jump to just under $1,600. But if you take the full 15 years to pay off this loan, you’ll only pay about $61,000 in interest, a huge savings from that 30-year loan.

“Lots of people don’t consider a 15-year, fixed-rate mortgage for a refinance because they knew they could not afford one when they bought their house in the first place,” said David Reiss, professor of law at Brooklyn Law School in New York City. “But if you have had your house for more than a couple of years, and your income has increased in the interim, refinancing into a 15-year, fixed-rate mortgage can be a great way to get a lower interest rate and pay a lot less interest in the long run.”

New Protections for Homeowners

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Consumers Digest quoted me in Protections Coming for Homeowners. It opens,

New rules that cover mortgage servicing aren’t dramatic, but they should help certain consumers, experts say. In August 2016, Consumer Financial Protection Bureau finalized rules that focus on foreclosure protections and delinquencies.

“These changes are more at the margins,” says David Reiss, who is a law professor at Brooklyn Law School. “It’s looking at normal situations that occur and adding protections for consumers.”

The new rules, which are expected to take effect by 2018, would prevent dual tracking. Dual tracking is when foreclosure proceedings start while a homeowner who is current on his/her mortgage awaits a decision about a request to work with the loan servicer to avoid foreclosure. (This request is known as loss mitigation.)

In addition, borrowers who are current on their mortgage since a prior loss-mitigation application can avoid foreclosure by having their application reviewed again if they have unexpected financial difficulties. Loan servicers also have to notify borrowers when a loss-mitigation application is complete. Finally, if a borrower is in foreclosure and his/her loan is transferred to another servicer, he/she won’t have to restart the loss-mitigation application process with the new servicer.

What Is a Promissory Note?

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by Zoli Erdos

Realtor.com quoted me in What Is a Promissory Note? What You’re Really Promising, Revealed. It opens,

If you get a mortgage to buy a home, you will end up signing something called a promissory note. So what exactly is a promissory note?

In the most basic terms, it’s a legal document you sign containing a written “promise” to pay a lender, says Scott A. Marcus, a shareholder in Becker & Poliakoff’s Real Estate Practice Group, in Fort Lauderdale, FL.

Promissory notes are a standard part of all real estate financing contracts and include basic information such as:

  • The amount due
  • The terms of repayment (e.g., do the payments include principal and interest, or only interest)
  • The interest rate and whether it can change or is fixed
  • Whether there is a prepayment penalty
  • The loan maturity date
  • The names of the lender and borrower

Promissory notes are an important yet often misunderstood part of the loan process.

“The worst mistake someone signing a promissory note can make is to sign a note without reading and understanding all of its terms,” says Marcus.

So let’s clear up a few common misconceptions, shall we?

Promissory note vs. a mortgage: What’s the difference?

Many home buyers mistakenly think that the mortgage—another contract they sign—is their promise to pay back the loan.

Well, they’re wrong! The promissory note is your promise to do that, plain and simple. The mortgage, on the other hand, is a contract that kicks in more when things go wrong.

In a nutshell, a mortgage (also called a deed of trust) is a pledge you sign to put up your property as collateral in case you default on your loan, according to David Reiss, professor of law at Brooklyn Law School and editor of REFinBlog.com.

In other words, if you suddenly find yourself unable to repay your home loan, your lender will eventually confiscate your property and sell it as a foreclosure to help it recoup its losses from lending you all that money.

Promissory Note v. Mortgage

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photo by Thugvillage

 

Zing! quoted me in What’s the Difference Between a Promissory Note and a Mortgage? It opens,

Buying a home can sometimes feel like learning a new language. Preapprovals, appraisals and the fact that “concessions” don’t involve hot dogs at a baseball game can be more than a little bewildering for first-time homebuyers. If you’re in the market for a mortgage, the more you know, the more confident you’ll be with each transaction during the life of the loan. If you find yourself scratching your head over mortgage lingo, we’d like to make your contract a little clearer by explaining two items that are often confused for one another: a promissory note and a mortgage.

What’s a Promissory Note?

Essentially, a promissory note is an agreement that promises that the money borrowed from a lender will be paid back by the borrower. “It also includes how the loan is to be repaid, such as the monthly amount and the length of time for repayment,” explains David Bakke, a finance expert at MoneyCrashers.com.

Although the home loan process involves both a mortgage and a promissory note, a promissory note can be used singularly in a lending relationship between two individuals. In this case, a promissory note is simply a promise to pay back the amount of money that is borrowed in a set amount of time.

“Another way to think of it is that the promissory note is the IOU for the home loan,” says David Reiss, who teaches about residential real estate as a law professor at Brooklyn Law School in New York.

What Is a Mortgage?

The second part of the home loan involves a mortgage, also referred to as a deed of trust. While a promissory note provides the financial details of the loan’s repayment, such as the interest rate and method of payment, a mortgage specifies the procedure that will be followed if the borrower doesn’t repay the loan.

“The actual home loan (or mortgage) provides information as far as the lender being able to demand complete repayment if the loan goes into default, or that the property can be sold if the buyer fails to repay,” says Bakke.

In the case of a home loan, the promissory note is a private contract between the client and the lender, while the mortgage is filed in the regional government records office. “Once you have paid off your loan your lender will record a document that releases you from the liability of the deed of trust and the promissory note,” says Ross Kilburn, CEO of Ark Law Group, PLLC.

It’s a Package Deal

In the home loan process, a mortgage and a promissory note are not a question of one or the other, but rather, both play distinct roles in the relationship between the lender and borrower. “A home loan refers to a transaction where a borrower borrows money from the lender and in turn signs a promissory note that reflects the indebtedness as well as a mortgage that gives a security interest in the home in case the debt is not paid back,” explains Reiss.

Negotiating Real Estate Fees

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office-negotiationPolicyGenius quoted me in 5 Mortgage Loan Fees and Rates You Should Always Negotiate. It opens,

When it comes to making major purchases or financial decisions, we always hear that mantra, “Everything is negotiable.” You can haggle with the salesman when shopping for a new car, or with the hiring manager at a new job over your starting salary. It’s even possible to negotiate your tuition rates as a college student.

But a lot of the costs associated with buying a house can be difficult to negotiate down, according to mortgage advisor and author Casey Fleming.

“Appraisal, underwriter and processor are chosen by the lender, and the variation in fees is quite small,” he says. “Escrow and title services are typically chosen by the real estate agent of the seller in most areas, so the buyer has little say in what those fees will be.”

There’s also not much way around paying private mortgage insurance — you’ll need no less than a 20% down payment to avoid it.

But, you don’t need to let the non-negotiable items prevent you from bargaining for a better deal on other house-hunting costs. Here are a few fees and costs worth negotiating:

Real estate broker’s fees and commissions

From the outset, consider negotiating your real estate broker’s fees, according to Prof. David Reiss of the Brooklyn Law School, who teaches real estate finance and community development. “If 6% is standard in your community, you can look for brokers who will sell your home for 5% or less,” he says. “Be careful how low to go though, because you want your broker to be motivated enough to sell your property.”

Reiss notes that to gain the most advantage in negotiating their fees, your broker’s listing agreement should outline all the services they’ll provide you regarding advertisements, showing, and the plan in place to buy or sell the property in question.

Fannie/Freddie Scorecard

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The Federal Housing Finance Agency released its 2017 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.  The scorecard highlights how the FHFA’s reform of Fannie Mae and Freddie Mac is proceeding apace, absent direction from Congress.  This reform path had been set by Acting Director DeMarco, appointed by President Bush, and has continued relatively unchanged under Director Watt, appointed by President Obama.

The scorecard’s assessment criteria for the two companies are,

  • The extent to which each Enterprise conducts initiatives in a safe and sound manner consistent with FHFA’s expectations for all activities;
  • The extent to which the outcomes of their activities support a competitive and resilient secondary mortgage market to support homeowners and renters;
  • The extent to which each Enterprise conducts initiatives with consideration for diversity and inclusion consistent with FHFA’s expectations for all activities;
  • Cooperation and collaboration with FHFA, each other, the industry, and other stakeholders; and
  • The quality, thoroughness, creativity, effectiveness, and timeliness of their work products. (2)

The scorecard states that Fannie and Freddie should increase credit risk transfers to investors.  Currently, the focus is on transferring risk from pretty safe and standard mortgages, but the FHFA is pushing Fannie and Freddie to increase risk transfers on a broader array of mortgage types.

The scorecard also states that the effort to integrate Fannie and Freddie through the Common Securitization Platform and the Single Security should continue so that the Single Security is operational in 2018.  The scorecard emphasizes that the Platform should allow “for the integration of additional market participants in the future.” (6)  While this has been a design requirement from the get-go, I have heard through the grapevine that this element of the Platform has not been pursued so vigorously.  To my mind, it seems like a key component if we want to build the infrastructure for a healthy secondary mortgage market for the rest of the 21st century.