FHFA Director James Lockhart
House Financial Service Committee Members
Senate Banking Committee Members
Treasury Secretary Henry Paulson
San Diego Area House of Representative Members
California Senators Hon. Dianne Feinstein and Hon. Barbara Boxer
Re: The Mortgage Crisis, FNMA Pricing Adjustments Offsetting Treasury MBS Purchases
Dear Director Lockhart and All Elected Officials:
Last week a couple of events happened that tell me government agencies at the highest levels are not working together in a positive way that could help solve the mortgage crisis and bring America economic stability.
In the beginning of the week the Treasury Department started buying Mortgage Backed Securities which was supposed to help drive down mortgage interest rates.
By the end of the week FNMA, with the approval of the FHFA, announced loan pricing adjustments and tighter guidelines even for customers with excellent credit scores.
In effect, FNMA’s price adjustments that were signed off by FHFA cancelled out any possible decrease in rates that the Treasury was trying to accomplish by buying the Mortgage Backed Securities.
The tightening guidelines and higher prices for loans will be devastating to many Americans trying to refinance their existing homes or buying new ones. In San Diego, the only way that one can access the best rates now is if the customer has 60% LTV or less and a credit score over 740 on a rate and term refinance or purchase money transaction.
With the depressed economy in California, how many people will have both a 60% Loan to Value and a credit score over 740? The answer is not many. The fact that now we are throwing TARP money into a Treasury Program that buys Mortgage Backed Securities while at the same time the GSE’s are increasing their prices tells me several things and leads to several conclusions:
1) The man on the street is not getting any benefit from TARP money that was previously given to the initial banks that received those funds. The banks have been hoarding those funds, and per many reports those banks went out and bought more banks instead of using those funds to help their balance sheets or pass on lower rates to consumers.
2) Any funds that are being used to purchase Mortgage Backed Securities are basically a waste of money because the loan cost increases added on by the FHFA and the GSE’s offset whatever rate decreases the Treasury was supposedly hoping for.
3) Due to the policies instigated by the GSE’s and signed off by FHFA the American public, even those with good credit are not going to be getting access to low rates that they will be able to take advantage of anytime soon and this will help to continue the downward spiral of the housing market
4) As a 22 year veteran of the mortgage and real estate industries, a person who has funded around $200 Million in originations in my career, and a leader of those industries looked upon as an expert in the San Diego area by some of the local media I can tell you that after the events of last week any confidence level that I had in the federal governments handling of the mortgage and economic has been severely eroded to almost nothing. It is time for people to put their cash under the carpet.
I have spoken to many people in the industry in the past couple of days, including those with HUD and FNMA who wish to remain anonymous. Based on those conversations I have put together a list of action items that are common sense, workable and that would help the average American, the man on the street, get through the economic crisis.
1) PERMANENTLY INCREASE CONFORMING LOAN LIMITS to a minimum of $730,000 in every State - Per my conversations with an employee at FNMA, most states won’t even use this limit, but one loan limit across the board would be easier to administer in dealing with everything from rate sheets to security sales. Having different loan limits in different counties nationwide is making things more difficult and one consistent loan limit would streamline the operation and make it more cost effective.
One of the next waves of foreclosures is going to be people that took out Jumbo loans that can’t refinance into the conforming because their loans are too high and the underwriting guidelines have become even stricter for the higher loan amounts due to the collapse of securitization model. Raising conforming loan amounts will keep some of those loans from going into foreclosure as long as the underwriting guidelines are not tightened up too much like they were when FNMA implemented the temporary loan limit increases with the 2008 Stimulus Package. If you thought that the first wave of foreclosures was bad, wait until the McMansion wave hits when the Jumbo loans start foreclosing. Remember, a Jumbo loan that goes into foreclosure in San Diego effects people all over the country. The Congress, HUD, and the White House should realize this and not fight higher loan limits.
2) Critically look at how the GSE’s are doing business - FHFA, FNMA and Freddie Mac continue to tighten up guidelines such as increasing credit scores and decreasing Loan to Value ratios. They say they do this to help protect them against future losses and to help them deal with current losses. However, in reality, these policies actually Ensure future losses and add to the downward spiral of not only the housing market but also the economy. Many borrowers who at one time could have been put into a better long term position have not and will not be able to take advantage of the low rates and many first time homebuyers will not be able to secure financing based on the new guidelines.
The GSE’s have increased their price adjustments, meaning higher rates for the customers, under the premise that they need to make more of a spread on each closed loan to help out their bottom line. However, even before the latest price adjustments last week, the GSE’s and lenders had already been making historically high spreads on each individual transaction.
Finally, I have spoken to many mid-size lenders and have also read that FNMA has or will be requesting 1 Billion Dollars in loan buybacks from small and mid-size mortgage companies. They are doing this in many cases without letting the mortgage companies try to mitigate the losses themselves. If FNMA goes overboard with these unnecessary and unfair buyback requests you will see even more mortgage companies and banks go under, thus increasing unemployment and decreasing loan and lender options for consumers.
3) CONSIDER REAL FHA REFORM – This means increase FHA limits to $730,000, or more to offset the lack of securitization or investors for the Jumbo Market It means making underwriting guidelines the same for loans over $417K as they are for loans under $417K. Open FHA up to more lenders and brokers by allowing Brokers to utilize surety bonds. Although HUD is against it because they consider the net worth worth requirement a Cost of Doing business with the government, with the economic crash it is going to be harder than ever for some brokers to meet the net worth requirement. This will ultimately put the FHA Loan origination in the hands of only a few lenders who could name their price which should increase rates for consumers. When only a few lenders start offering FHA loans this means that a lot of areas in the US will be underserved, especially Americans that live in rural areas where there may not be any banks left after all of the consolidations happen.
4)Mortgage Insurance Companies Need to be Regulated- This is an area where not too many people are looking. It is one of the most unregulated areas in the loan chain but possibly the most key part in this day in age. It is obvious that the Mortgage Insurance companies are in trouble (under capitalized) and it may be an area where some TARP money could actually be used for the customers benefit. MI companies are doing everything they can not to pay lenders for their losses…i.e. claiming fraud on everything.
Again, under the premise that they want to mitigate their losses the MI Companies have implemented even tighter loan guidelines than the GSE’s or lenders. For instance, FNMA has a 97% LTV loan, but you can’t get it in San Diego because you can’t get mortgage insurance…so effectively, there is no 97% loan. These tighter guidelines, although meant to keep the MI companies from incurring more losses on the new loans that they do….are actually having the effect of driving down values due to lack of available financing, which inevitably increase their losses. The bottom line is that these companies are short funds after years of being cash cows…and they should be the ones applying for TARP funds with the goal of passing on lower rates and more loan products to the consumers.
5) Make Refinance Options Available to Upside Borrowers - A person that is Upside-Down and that is current on his mortgage has a mortgage that is a Performing Asset. One of the keys to Market stability is how we treat people that are upside down in their homes. The market will not stabilize until these people have more options. There are several programs that I won’t go into here that can be wins for the consumers, banks, wall street firms, local communities, and all forms of government. The key is to understand that people that are in their homes and are making their payments should have options open to them based on their record of payments, not necessarily the equity in the property. They are good risks and if programs are designed right everyone could benefit. I have several suggestions if you would like to hear them.
6) Lenders Loss Mitigation Systems still need work - I personally have been working on a short sale that has been at Countrywide since August waiting to get approved. For modifications, the FDIC’s loan modification plan is a good start however even that plan has in it a built in estimate that at least 33% of those modifications will re-default….so with a figure that high…why do it. Modifications should be done for the long term only 30, 40, 50 years and incorporate principle reductions as well as lower rates.
So I ask, when do the consumer and taxpayer get a break? The tax payers bailout FNMA. They bailout Wall Street and the major banks that developed most of the problem loan programs that are leaving most Americans that took loans out within the past 5 years upside down. Considering that the overwhelming majority of Americans are still making their payments, the only thing that they have to show for it besides being upside down is a tightening of loan standards instigated at the WRONG time by the Federal Reserve, advocated for by Congress with prodding from Consumer “Advocacy” Groups such as the Center for Responsible Lending who are funded by Wall Street firms such as Paulson and Company who manage funds that profit from the demise of the American consumer and the continuing mortgage meltdown. These new guidelines are then implemented by the GSE’s. The rules put in place by the Federal Reserve basically made outlaws of about 50% of the people that took out Sup-prime, ALT-A and even prime loans in the previous years….people that already had loans, were already in their homes, were making payments on time but got stuck based upon the changing and outlawing of guidelines almost overnight of certain loans. No doubt something needed to be done as far as rules go for loans going forward, however, the new rules failed to take into consideration people that already had loans and the underwriting guidelines under which they obtained them. Changing the rules for those people was not only unfair but set the whole economy up for failure.
The bottom line is that the average American needs refinance options and access to lower rates in order for us to get out of this mess. As of right now, actions by the GSE’s have been counter-productive and actions by the Treasury seem to have been wasteful.
I have been on record as being against the original $700 Billion Dollar bailout which set up the TARP because I feared exactly what has happened. I mean the lack of transparency and tax payer dollars going to bailout banks and Wall Street firms instead of being directed to areas that would help the average citizen. I think a lot of the issues we have now can be solved without TARP money or stimulus money. Banks and Wall Street need to realize that they played the major part in getting us into this mess and they should be willing to step up to the plate to accept principle reductions and other foreclosure prevention remedies. TARP was created to basically calm the fears of the global financial system….which means it was created to payoff foreign and other investors to help to shield them from losses. Have the things gotten better after TARP? Have fears subsided? Answers to both questions are no. We do know somebody got paid, we just don’t know who.
TARP money or Stimulus Package funds, now that we are actually doing this, could be better used subsidizing principle reductions for long term loan modifications, developing new loan programs for upside borrowers, or capitalizing mortgage insurance companies enough for them to relax guidelines so that lending over 80% LTV could actually occur again.
Thank you all for your service to our country. I am very proud to be an American so much so that my wife and I named our small company The American Dream Real Estate Group. Being a proud American, however, the events of last week made me disgusted to the point that I felt you needed to know about it. Thank you for reading.
Yours Truly,
David J. McDonald
1333 Camino Del Rio South #300
San Diego, CA 92108
President, The American Dream Real Estate Group,
President, California Association of Mortgage Brokers, San Diego
619-977-1193
