Making Home Affordable Letter to Congress

September 15, 2009

San Diego Congressional Representatives
Hon. Senators Dianne Feinstein and Barbara Boxer
FHFA Director Edward De Marco
United States Treasury Secretary Timothy Geitner
House Financial Services Committee Members
Senate Banking Committee Members

RE: Making Home Affordable Program Implementation and the Financial Reform Plan

Dear Honorable Senators Feinstein and Boxer, Congressional Representatives, Secretary Geitner and Director De Marco:

This morning I received a memo from Wells Fargo that says even though FNMA and Freddie Mac now say they will go up to 125% Loan to Value on the Making Home Affordable Program Wells Fargo will only go up to 105%. Wells Fargo is one of the biggest loan servicers and it has not bought into the Making Home Affordable program per this memo:

Investor: Wells Fargo
Type: Guideline Information
Description: DU Refi PlusTM LTV Update: Fannie Mae Announcement 09-26 increases the maximum allowable LTV for DU Refi PlusTM loans to 125% effective with DU® system updates after the weekend of September 19, 2009. Wells Fargo Funding will not adopt this change and continue to limit the maximum allowable LTV for DU Refi PlusTM loans to 105% and will not purchase loans with an LTV greater than 105%. This communication amends Seller Guide Section 805.06 which will be updated accordingly.

The Making Home Affordable Program is not working, and has never really had a chance to work based on the lack of participation or other issues with key institutions that make of the chain of the lending process.

I personally am sick and tired of the dog and pony show of different government agencies rolling out new loan programs and exaggerating the anticipated success of those programs. Making Home Affordable is not going to help 9 Million People. It won’t even come close. Here is why:

SOME PROBLEMS WITH MAKING HOME AFFORDABLE

1) The program is limited to only FNMA and Freddie Mac serviced loans. Alt- A loans and others still don’t have even the options available from Making Home Affordable.

2) If a customer has a FNMA or Freddie Mac serviced or guaranteed loan still many lenders are not participating in the program.

3) If a lender does participate in most cases they will only participate with their own customers. Both the FNMA DU Refinance and the Freddie Mac Home Relief in reality are only being used by the lenders that currently service the loan. This means that there is less competition for that loan and the consumers are getting hit with higher costs and higher rates.

4) Mortgage Insurance companies are still a clog in the system. Most borrowers that currently have Mortgage Insurance and are with one servicer do not have the option to shop around for a loan because in most cases the only way to qualify and re-write the MI policy is to go back to the same lender as before. Again, no competition for that loan and higher fees and rates to the customers.

5) I understand the reluctance of the lenders to join the program. On many levels it makes sense that a lender would not want to do a 125% Loan to Value loan. It would make sense for them to want to charge more for it because of the risk factor. It would make sense for undercapitalized Mortgage Insurance companies to not want to re-write policies for higher loan to values when they are already struggling to come up for reserves for anticipated loan losses as well as reserves for the new policies they write.

Here are some suggestions on what could be done to unclog the system:

SOME SOLUTIONS TO CURRENT LENDING ISSUES

1) Enforce the agreements between the GSE’s and lenders. Wells Fargo and other lenders have signed up to be a servicer with the GSE’s and have signed other agreements with the GSE’s. However, from what I am being told it is up to the individual lenders to make their own loan guidelines such as staying at 105% LTV. The Congress, Treasury and the GSE’s have to make the lenders go with the programs that the GSE’s come up with. Lenders that use GSE funds or guarantees cannot have it their way only. Lenders have to understand that refinancing a loan that ends up reducing the payments for a customer that is upside down is and will be beneficial in the long term for everyone.

2) Force the lenders to re-open the 3rd Party distribution channel. Currently and predictably, there is very little or no competition out there for consumers to shop to get loans. The small mortgage brokers, realtors and appraisers has been made into the scapegoats that caused the mortgage meltdown. Today, most lenders have cut brokers off. The Home Valuation Code of Conduct has put appraisers out of business. Realtors are having a tougher time than ever dealing with lenders on short sales.

Now, the lenders who are trying to manage the balance sheets are hiring their own retail loan officers and loan modification staffs at great costs to those lenders. The reason brokers existed in the first place was because banks used them to get more market share without having to pay for training and other human resource expenses. The mortgage brokers that are currently in business have been in it for a long time and new laws being implemented will prevent bad actors from getting into the business. Now is the time when banks should be using and outsourcing the expertise that is available.

3) Combine the GSE’s. Take the best programs of both of them and get rid of the rest. The fact is that we the people own them. We are overpaying. Customers and even industry professionals are confused and have a tough time keeping up. Consolidation is good in this case.

4) Develop another government entity via the Treasury that could provide warehouse lines of credit at good terms to banks and mortgage bankers which would result in more competition for loans. The increased competition would be great for consumers and would ignite the securitization market. If done right the Treasury could and would actually make a profit. The securitization process has worked in the past before rogue Wall Street insiders bastardized the mortgage backed securities market with loan products that did not make sense. However, securitization has not comeback yet. Lenders really don’t want to lend because they know we are expecting more declines in values and higher unemployment rates. Lenders are balancing their current lending capacity against their anticipated future losses. Thus, every loan done today is extremely tough to get done even for the best customers. Increasing the lending capacity overall will help to stabilize the housing market which would help to stem some of the future losses.

5) Form a co-op with the GSE’s, Mortgage Insurance Companies, Lenders and borrowers so that Mortgage Insurance is available for the GSE Products with less than 20% down. This would be similar to the FHA MIP program except that the MI companies would have a vested interest in the program. Mortgage Insurance companies are severely undercapitalized to the point where they are not even able to insure many new loan products in the parts of the country hardest hit by the financial crisis. Thus, for most new buyers with less than 20% down or previous FNMA borrowers that have lost equity and are trying to refinance those borrowers have to get an FHA loan and pay the upfront and monthly FHA Mortgage Insurance Premiums. The inability for the Mortgage Insurance companies to insure new GSE loans has hurt the economic recovery in the country. Customers have not been able to better their financial situation in many cases due to mortgage insurance issues.

6) Develop a loan product thru the GSE’s for Performing loans such as Alt-A that are not currently owned by the GSE’s. Make this loan product available for upside down borrowers as well as borrowers with alternate income documentation. If done right this could be a money maker for the government. Many borrowers who are making their payments now could qualify when they got their original because of higher debt ratios available on full income documentation loans or the fact that they used alternative income documentation to get into the loans at the time. Now those guidelines are no longer available. The borrowers cannot better their financial situation and if they are upside down they have a high likelihood of walking away unless a program comes around which could help make them feel more financially secure.

7) Bring transparency to all of the financial instruments such as CDO’s and the mortgage backed securities that brought on the financial crisis by setting up a regulated trading platform for all to see.

8) It is estimated by one bank than in a couple of years almost 90 percent of Californians will be upside down and about 50% of American will be upside down. When that happens the American people will be losing their freedom. There only options will be bad ones such as going on now with foreclosures, short sales and bankruptcies. There will be very few buyers that will qualify for new home loans due to bad credit issues and this will effect the pool of buyers in the coming future. When this happens 2 things have to happen:

A) a mortgage credit moratorium which would free the market up to more buyers. 90% of the borrowers were not stupid and it is not their fault they are upside. If the rest of the credit is good and they have the ability to pay they should not have to deal with the negative consequences that Wall Street and the large banks created.

B) There will have to be a systematic loan program that allows current homeowners that are upside down move without having a foreclosure or short sale on their. One program might allow traveling debt to another property in the form of an note. One program might allow for principle reduction with certain terms.


MY CUSTOMERS, THE BAKERS

This story says it all about what I have been talking about. Mr. Baker has a home in Central California. He had a 15 year fixed on it with a rate in the 6’s and hoped to pay it off before he retired. He and his wife took out a Home equity Loan to do major home improvements and for other family needs. The plan was for the first mortgage to be paid off then they would payoff the 2nd mortgage.

The problem happened when Mr. Baker lost his over 100K per year job that he had for over 15 years with no notice. Refusing to go on unemployment, Mr. Baker sucked it up and took almost a 70% pay cut just so he could keep working. He didn’t want any handouts.

When he took the job for about 35K he called his lender Citi to see what they could do for him. The Baker’s just wanted to make the 15 year loan into a 30 year and hopefully lower their rate. I have it documented that Citi tried to push a modification on the Bakers…the modification side didn’t even bring up the refinance option where an experienced mortgage broker is used to looking at all options. Already a lack of training and expertise with the Citi employee is evident.

When I heard about this I suggested that he should qualify for a refinance instead the modification. He called Citi and they said that he did qualify for the refinance at 5.5 with 1.75 points upfront. A week later Citi increased their upfront origination cost to 2.625 points not including processing and underwriting fees and told the customer he would have to bring in about $8000 to close the refinance. This was at best unethical and at worst a bait and switch.

The Bakers asked me if I can help them. The problems I had were many. Citi has cutoff almost all of their brokers including me. The Freddie Mac Relief Program that Citi had that the customers qualified for was basically only being done thru Citi directly and no brokers were allowed. I could not take the borrowers to another lender because lenders were not accepting other lenders Freddie Mac loans….for a broker like me had I had to bring it back to the current lender and because Citi chose not do business with over 95% of the brokers out there I could not help them.

If I could have helped them I could have done the loan for no points and have Bakers bring in very little of any funds to close….I have saved them close to $8000. Instead, the Bakers so far are stuck with the options of taking the 8k out of their dwindling retirement to pay for overcharged lender fees or not doing anything at all and possibly losing the house. Based on the rates at the time I estimate Citi’s total yield on this refinance to be about 4.5% to 5%, where my yield would have been 1 to 1.5% if I could do the loan.





THE OBAMA FINANCIAL REGULATORY REFORM PLAN

The Baker’s story above has many meanings. One is how Citi used the fact that there was no competition for that loan to increase the fees on their own customer. Another is how the large banks are consolidating their lending power by cutting off the small mortgage brokers that in most cases could give better customer service to their clients. Citi is probably trying to increase their points on loans to help pay for their inexperienced staff. Mr. Baker is a Salt of the Earth American who doesn’t want any handout yet his current lender who the government has helped to bailout was trying to screw him and have him tap into his withering retirement account. Quite frankly, that offends not just me but the Bakers.

The Financial Regulatory Reform Plan submitted by the Obama Administration would affect people like the Bakers tremendously. The plan puts the blame for the financial crisis on the point of sale people.ie, the mortgage brokers, the Realtors, appraisers,etc. The plan points out that government has not done enough, although many if not most of the problems we have now are because of things that the government did. The plan did not take on the Wall Street and Bank oligarchy or the rating agencies that ultimately caused the current crisis. Instead, it is regulating the heck out of the small business person and furthering the consolidation of lending power in America to just the very few that in my opinion helped to write the plan. There will be many more people like the Bakers affected if this plan were to be approved.

Specifically, requiring originators of loans to hold back 5% of the loan amounts. That will close down the rest of the mortgage banking world. Setting up a trust or having lenders pay commissions over time using the insurance model. Well, that may seem OK….however usually it doesn’t take 30-60 days to buy auto insurance where it does for the loan process. Are small mortgage brokers exempt from getting cash flow? If you worked on something for 60 days or more without getting paid, would you want more than a penny for your efforts.

If the average mortgage banker, small mortgage broker, realtor or appraisers are so bad, why weren’t there more foreclosures in the 1980’s and 1990’s. It is simple. Because the loan products were different. Securitization worked to expand lending opportunities when there were not the risky loan products. The bottom line is do not over regulate small businesses that have spent 20-40 years building their businesses.

In conclusion, the mortgage markets have basically already been nationalized with the take over of FNMA and Freddie Mac and the increase of FHA Loans in some areas to more than 50% of the new originations. There are things that can be done that would make the current financial crisis more bearable. However, the banks that caused the crisis have yet to be called on the carpet and that must stop!

Please call me at 619-977-1193 to discuss anything that you may need clarification on. Thank you very much.

Yours Truly,

David McDonald
5426 Annie Laurie
Bonita, CA 91902