Some homeowners will get some relief through this settlement but most will not.  The agreement only affects borrowers whose loans are owned and serviced by those five banks.  According to one statistical source, about 62% of California home loans are owned by Freddie Mac and Fannie Mae, who are exempt from this settlement.  There is no relief for those borrowers at this time any maybe not at all.  Also, if the loan is an FHA or VA, it is not eligible, and if the borrower has been in foreclosure or bankruptcy in the last two years, they cannot refinance either.

The funds are designated for borrowers to accomplish paydowns of principal balances on existing loans that are higher than current property values, to help refinance borrowers to lower interest rates who are current on their loans but are underwater on their equity position, and to provide some measure of restitution on properties foreclosed on between 2008 and the end of 2011.

It is unfortunate that so many homeowners bought when property values were near the peaks and have suffered the loss of home value and ultimately lost the homes through foreclosures.  In most cases this situation came about when the borrower put little or no down payment on the home purchase, and the loan balances quickly exceeded the reduced home values.  This provided little incentive for a borrower to do what was necessary to make payments on the loan, retain the home ownership and not let the property go into foreclosure. 

There are certainly some winners and losers in this plan.  Winners would include the lucky homeowners who can receive some relief from this plan (almost like winning a lottery prize).  Politicians can claim that they took on the evil banks and won.  And I guess we can claim that Freddie Mac and Fannie Mae (and ultimately the taxpayers) were winners by being exempt from this plan.

Losers will include all the rest of the borrowers who will not get mortgage relief, or beneficial refinances, or cash payments provided to them because they put larger down payments on their property purchases, or fought harder to make their mortgage payments because they wanted to preserve their home for their family.    The big banks are losers also, because they became the most visible remaining entities for the mortgage mess, and their reputations are damaged at this point.

It will be great when we can put this whole era of the "mortgage meltdown" behind us; when we can have all the foreclosed properties work their way through the market and values can start increasing again; when those increased values will eliminate the short sale situations that are prevalent now.  At that point we may have a chance to begin to get the government out of the lending environment and let the free market (which does not exist at the present time) begin to take a foothold again.

It would be so much healthier when the banks can create loans for their own portfolios, or if they do want to sell them in the secondary market to other banks or investors, that the structure is in place to make sure that the loan quality is what the investor expects.  A healthy market like that could keep the ponderous government regulations from being an anchor on the business of creating quality loans for credit-worthy borrowers.

The mortgage market did work for a long time.  We need to get back to that point and make the process so transparent that all the parties – and that means the investors, the banks, the brokers and the borrowers – have a big incentive to do the right thing.

The policy comes amid mixed signals in the economy.  On the one hand, there are indications that the economy is improving although at a very slow pace.  Typically, there is less manipulation of interest rates when the economy improves.  On the other hand, since the growth in the economy and in the housing sector is not very robust, and since inflation is considered to be at a very low rate right now, keeping interest rates low is designed to be a stimulative tool.  There is a risk that inflation could increase as a result.

Another factor that could contribute to inflation is the Fed policy of QE (quantitative easing), another term for infusing money into the economy.  We have already seen QE and QE2, with indications that QE3 is on the horizon, with the exact timing of the infusion still unknown.

The risk to the economy is that the government may be creating an artificial bubble by its control of interest rates and money supply.  When the free market is allowed to enter into the equation again, we may find that rates increase rapidly and the cost of borrowing to individuals, companies and even the government may be significantly higher.

Think of the consequences for a borrower who has borrowed short-term (or has an adjustable rate loan with periodic rate reviews) and has been enjoying low interest rates.  When the time comes for the loan to be renegotiated or adjusted and rates are higher, the borrower will be facing higher payments than they have been accustomed to.  This situation may create a severe hardship for the borrower to meet their new, higher obligations.  The solution for a borrower is to lock in the low interest rates for the long term, such as the 30-year fixed programs.  This allows them to enjoy the benefits of low interest rates and they will not have to face the uncertainty of what rates may be in the future.

Companies and the US Government do not have the luxury of locking in interest rates for long periods of time.  There was a time when borrowing long-term was considered the prudent thing to do for all the reasons stated above.  In the last 20 years or so, the immediate gratification of lower interest rates was considered more appealing than the certainty that came from longer term borrowing.   The result has been that government borrowing is predominantly in the short-term category and when rates start to move upward, there will be significant increases in the cost of borrowing.

For you as a borrower, now is the time to pay close attention to interest rates and to see if you can qualify for these low, long-term rates.  If there are issues preventing you from qualifying right now, let's work together to develop a game plan to help you take advantage of the savings while the Fed is committed to keeping rates low.

One of the key items of all new tax cuts (or extensions of existing tax cuts) is that they are supposed to be "paid for".  Meaning if the revenue eliminated from the tax cuts is no longer available, then the money needs to come from some other source.

In this case, the source of the funds is coming by way of Freddie Mac (FHLMC) and Fannie Mae (FNMA).  The announcement included the following:    “On Dec. 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011. Among its provisions, this new law directs the Federal Housing Finance Agency (FHFA) to increase guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises) by no less than 10 basis points from the average guarantee fees charged by these companies in 2011 on single-family mortgage-backed securities.

This requirement is effective immediately, meaning that the average guarantee fees charged in 2012 need be at least 10 basis points greater than the average guarantee fees charged in 2011 and that this increase be remitted to the U.S. Treasury, rather than retained as reserves by the Enterprises. The law also requires FHFA to determine a schedule for guarantee fee increases over a two-year period that must satisfy other requirements of the law.

To begin implementation of these requirements, President Obama directed Fannie Mae and Freddie Mac to announce before year-end to their seller-servicers that, effective April 1, 2012, the guarantee fee on all single-family residential mortgages shall increase by 10 basis points.

In early 2012, FHFA will further analyze whether additional guarantee fee increases are appropriate to ensure the new requirements are being met. FHFA will announce plans for further guarantee fee increases or other fee adjustments that will then be implemented gradually over the two-year implementation window, taking into consideration risk levels and conditions in financial markets. FHFA will monitor closely the increased guarantee fees imposed as a result of the new law throughout its effective period, which ends Oct. 1, 2021.”

What this means to you as a borrower is that despite any changes in the interest rates that are determined by market forces, you can expect the cost of borrowing to increase by at least 1/10th of one percent in fees.  That may not sound like a lot of money, but on a loan of $250,000 the increase cost will be $250 which is merely a distribution from borrowers to wage-earners who are receiving the benefit of the payroll tax holiday..  And the fee will most likely increase, since it is very rare for the cost of anything that the politicians approve to not be much higher than the original published estimate.

So, if you start hearing of higher interest rate and fee quotes in the near future, it may not be because the market is making a move upward.  It may only be because the politicians have identified a resource to use in the shell game of taxes, fees and cuts. 

After there were so many losses from the mortgage meltdown that the taxpayers had to step in and cover, there was a lot of discussion and apparent commitment to reduce the government's role in FHLMC and FNMA.  It does not look like there is any plan to disengage from government participation in FHLMC and FNMA if they are using the Government Sponsored Enterprises as a funding source for other shortfalls in the system of revenue collection.  It would have been nice to have more transparency in the process and not make costs to borrowers higher in order to help some other constituency.

All in all, 2011 was a good year.   I had some major accomplishments including the publication of my book – Home Sweet Home Loan, Essential Concepts For Winning The Mortgage Game – and my recent appearance on KWSD Fox 5 San Diego.  I was also able to help many borrowers with successful transactions and by sharing my knowledge to help them move forward in reaching their goals.

I want to extend my reach even farther in 2012.  I have a goal of helping 1000 borrowers during the year, and I would like to ask for your help to make that happen.

First of all, I define helping borrowers as sharing my knowledge and experience with them to help move them in a positive direction toward their goals.  Zig Ziglar, the noted motivational speaker, has said that "you can get everything you want in life, if you help enough other people get what they want".  I know that if I have enough meaningful conversations with prospective borrowers and give freely of myself, that a certain number will choose to work with me and become clients. 

To reach my goal, I need reach about 3 new people a day.  This could come from live conversations, new subscribers to this newsletter, or from people who obtain my book.  I will be attempting to have more media appearances and I am reaching out to others on my mailing list to ask for their enthusiastic referral of their acquaintances to me.

What I would like you to do is make an entry in your phone for "Mortgage-Doug Brennecke" with my cell phone number of 619-846-4322 and e-mail of dbrennecke@roadrunner.com.  When you encounter a friend, client, or acquaintance that is commenting on needing a new home loan, or is talking about a less-than-great experience that they are having with a current transaction, please provide my name and contact information to them and encourage them to give me a call.

You know me and how I work with my clients.  My goal is always to listen to my clients, educate them, and tell them the truth.  I will do my best to assist your referred contacts with the information that they need at the time to help them move from Point A to Point B.

I don't know at this point if I will be able to reach my goal.  But I do know that I can't do it by myself, so I want to thank you in advance for your help in moving me in the right direction.  I also know that if I want to reach 1000 prospective borrowers and fall short, I will still have reached many more than if I had not set the goal in the beginning.

I hope that you have big goals in 2012 as well.  Please let me know how I can assist you in achieving those.

I look forward to the challenge, the adventure of talking with so many new people and having 2012 be a significant year with your participation.

Here's to a great New Year!  Cheers!

It was my first time to be interviewed on television, and I had some nervous anticipation as I tried to prepare for any questions that would come my way.

What I found interesting was that some of the questions were a bit surprising to me, but they really should not have been.  It was a reminder that it is easy to spend each day answering e-mails and phone calls, reviewing lender guidelines, and working toward developing new business.  Sometimes, what gets lost in the day is learning more about what is important to the general public, and what is on their minds about the mortgage industry.

Erica Fox's questions gave me a renewed glimpse as to what consumers may be thinking about if they are not actively seeking a loan at the present time.

Here is the link for the video:  http://www.fox5sandiego.com/videogallery/66767197/Business/Do's-and-Don'ts-of-Mortgages

My goal in providing The Brennecke Report is to educate you as prospective borrowers about the changes in the mortgage environment and to prepare you for when you are ready to take action.  I will continue to do my best to address timely topics that I think may be of interest to you and I would like to request that you give me some ideas of what you would like more information about.   

So, please comment on this post with topics that you would like me to address, or if you prefer, please send me an e-mail at ideas@dougbrennecke.com with your suggestions.

Thank you for your interest in The Brennecke Report, and I hope that each of you has a blessed holiday season.

In the past several years, the role of FHLMC and FNMA have changed from being private enterprises with government backing to becoming government agencies. With all of the taxpayer losses that have developed by the government needing to step in to keep things from becoming complete chaos, Congress is trying to define the role of FHLMC, FNMA and FHA going forward.

After the mortgage meltdown began, and the quality of themortgages were less than what the investors thought they were buying into, the availability of new mortgage money was vastly reduced. Private investors (like pension funds and Wall Street bond traders who bundled mortgage-backed securities) pulled out of the market especially in the jumbo loans above $417,000.

At that time, Congress allowed for FHLMC and FNMA to begin purchasing loans above $417,000 – a category that became known as high-balance conforming loans. The limit that they allowed was as high as $729,750 for homes in certain areas.

And, although this was originally planned as a temporary measure, Congress extended it a couple of times to try to allow for a housing recovery in the economy. Effective October 1, 2011, in an effort to reduce the taxpayers exposure, the limits were reduced to $625,500 in some areas.  In San Diego, the new limit is now $546,250.

So, with conventional financing we have conforming loans that still go to $417,000, high-balance conforming loans that go to $546,250 in San Diego, and above that figure is the jumbo loan category. There has been some re-entry of private money back into the jumbo loans, but it still is not as robust as it was before the mortgage meltdown, and the interest rates are higher for those jumbo loans as well.

Where the government inherited the loans that were created for FHLMC and FNMA and assumed the risks and liabilities in those loans, they have always had the control and management of the FHA insured loan program.

FHA differs from conventional financing because it collects borrower-paid mortgage insurance to create a fund to cover potential losses from bad loans. Everyone who obtains an FHA loan is required to pay mortgage insurance.  They amount that they pay and for what period of time differs based on the loan amount and the loan-to-value ratio of the loan.

Currently FHA requires a up-front mortgage insurance premium of 1% of the loan amount that can be financed, along with mortgage insurance based on a 1.15% of the loan amount annual premium, that is paid monthly with the regular payment.

One of the advantages of considering FHA include a much lower down payment of as little as 3.5% of the purchase price (as opposed to 5% to 20% on a conventional loan).

Another advantage is that there is no longer the level playing field between FHLMC/FNMA and FHA  regarding loan limits as there was in the past.

In some areas, FHA will still allow loans as high as $729,750, so if you need a higher loan amount or if you are not able to place a large enough down payment on the home to satisfy the conventional loan programs, FHA will be a viable option.

If you were to get an FHA loan of $600,000, you could finance the up-front mortgage insurance premium making your final loan amount $606,000.  Your monthly mortgage insurance would be$580.75.  You can see that there is a cost/benefit analysis that you need to assess for yourself.

If you are able to buy the home that you want, with a down payment as low as 3.5%, and youcan qualify for the monthly payments including the mortgage insurance, it may very well be worth the cost of the mortgage insurance to make that dream a reality for you.  This could be especially true if you were able to get a great deal on the price of the home.

We are waiting for all of these new changes to work their way through the system.  Once Congress passes the enabling legislation and the agencies produce their regulations, we then have to see which of our lenders and investors will offer the new programs and if they impose any additional limits to what may be allowable by the regulations.

My advice would be that when you are ready to shop for a new home or a new loan, just give me a call and we can explore all the options that I have available at the time. We can then strategize as to which program may suit your needs the best.

Well, Standard & Poor's did downgrade the US credit rating.  And we were all concerned about what that would to to mortgage rates.  Surprisingly, rates actually went lower!

So what are the prospects for rates staying low?  Let's take a look at some indicators and see how well we can forecast what may happen.

First, the downgrade occurred because S&P was convinced that the long-term effect of the debt ceiling deal was not beneficial to the health of the economy.

The idea that the country could continually increase the amount of its borrowing without a plan to reduce future expenditures was viewed as being short-sighted and irresponsible.

In theory, the downgrade of US debt instruments should have triggered an increase in interest rates, which would translate to an increase in mortgage rates as well.  If an investment is more risky, it usually requires an offer of a higher interest rate to attract investors and offset the risk.

After the downgrade occurred, it was if the investors still felt that the US debt instruments were still of the highest quality, despite S&P's opinion.

And maybe, because there was such a vocal and public airing of different opinions on how to go forward, the investor community may have felt that progress was being made.

The other reality is that if the investors wanted to take a chance on where to put their money, they felt that the US was still better than almost any other choice.

Second, the Federal Reserve said that they intended to keep rates low for the next couple of years.

This announcement was a way to keep the markets calm and to signal that increases in interest rates would not be initiated by the Fed.

And the announcement seemed to have the desired effect.

Instead of investors waiting on the sidelines for interest rates to increase and get a better rate of return, they went ahead and  put their money into the US debt issues.  They felt comfortable with the perceived risk of the US credit rating and committed their money into those investments.

So, the continual inflow of money at the offered interest rates meant that rates did not have to go up to attract money.  The result was a bit of a self-fulfilling prophecy:  invest now at these rates because they won't be any higher.  And once they did invest, the Fed did not have to increase rates to attract money.

Third, the economy is in such bad shape that all sectors need to have a chance to recover and to contribute to growth and prosperity.

If the Fed did not do everything it could to keep interest rates low, which means that mortgage rates remain low, they will stifle and kill any chance for housing to be able to recover.

And housing is a huge part of the national economy.  Think about all the segments of the workplace that are involved in housing: lumber, building materials, construction companies, architects, real estate salespeople, the mortgage industry, appraisers, title and escrow companies, appliance makers, flooring companies, landscapers, and the list goes on.

If the housing sector can get more robust, all of these providers can increase employment and earnings and help the economy grow.

Finally, there is always China and the fact that they own so much of our debt.

Despite the Fed's domestic policy of trying to keep rates low and engineer a recovery of our economy, there is always the chance that something will happen in the international economy that would affect that decision.

If China were to become reluctant about continual investment in US debt issues, possibly because of concerns about being paid back in inflated dollars, there is a chance that the Fed may no longer be able to control interest rates the way they are planning.

To summarize, although there are many indicators that lead us to believe that mortgage interest rates will remain low for the foreseeable future, there are also "wild cards" that could come into play at any time without warning.

If you are in a position to purchase or refinance a home at the present time, I would recommend taking action to capture rates while they are as low as they are right now.

The risk of interest rates going up very quickly without warning is much higher than the hope of interest rates moving down much lower.  Don't regret not taking action to secure the low rates in the market.

The big change that is coming, unless Congress passes legislation soon, is that the high-balance conforming loan limit in San Diego will go from $697,500 to $546,250.  This means that a loan request in that range will need to be considered by lenders as a jumbo loan that is generally funded through Wall Street sources instead of a loan that is funded through FNMA and FHLMC at traditionally lower rates and fees.

Over the last several years, FNMA and FHLMC have adopted a category of loans that they will purchase from lenders that is commonly known as “high-balance conforming” or “conforming-jumbo”. As a reminder, the regulatory loan limit for FNMA and FHLMC has been $417,000 for a single-family home. This is commonly known as a conforming loan, because the loan amount conforms to FNMA and FHLMC guidelines.

The high-balance conforming loan category was created to fill in some gaps after the mortgage meltdown. When so many loans started to unravel, the mortgage lenders who created loans above the $417,000 limit – traditionally known as jumbo loans – chose not to invest in mortgages until the market corrected itself. At that point, to replace some of the liquidity that the market needed above the $417,000 limit, Congress enabled FNMA and FHLMC to purchase loans in the new high-balance category. In San Diego the loan limit is $697,500.

Bottom line: If you need a loan this year between $546,250 and $697,500 (in San Diego), don’t wait too long. As we approach September 30, 2011, we will be dependent on Congress to take action to extend or amend the limits of loans that FNMA and FHLMC are allowed to purchase. If they decide to reduce or even roll back to the conforming loan limit, you will be dependent on the non-govenment related lending sources to fill that gap. And, once the announcement is made later this year it will take some time for lenders to put their new lending programs in place.

And, as a practical matter, the loans being originated up to $697,500 need to actually be delivered to FNMA and FHLMC.  This requires some time after the close of your loan for delivery by the lender to those two agencies.  We may find that lenders create a cut-off date substantially before September 30 to give them time for auditing, packaging and shipping of these loans.  Time is running out to start a loan application in the $546,250 and $697,500 range and have it completed in time.

But, if your last experience obtaining a home loan was several years ago, you may not be fully prepared for how many hoops you will be asked to jump through to finalize your loan request.

Let’s go through some situations that will involve your continual supply of paperwork and participation to satisfy requests from the underwriter of your loan.

Income:

When I initiate the loan application with you, I will request copies of your pay statements for the previous 30 days.  This gives me an accurate idea of your base pay and accumulated overtime or bonus income that you have received this calendar year-to-date.

If the overtime or bonus income is necessary for qualification for the loan, we will need to verify that it is continuance is likely. We usually document this by getting a letter of explanation and verification from your Human Resources or Payroll department.   A dditionally, as we advance through the processing period the underwriter will want to see the updated pay statements to show continuity of the earnings. 

So , it will not be uncommon for you to keep supplying each pay statement as received during the escrow period. The lender will also need to verify that you are still employed at the time of closing.  This usually is done with a phone call to the HR department on the day of funding of the loan.  Believe it or not, there have been instances of the borrower no longer having their job at the time they are trying to close the loan!

   S ometimes this is done through an automated phone system that the employer has set up to avoid calls to the HR department and to provide standard information.  If your employer uses such a system, you will probably be asked to provide log-in and password information for the funder to use. 

  Assets:

 The major objective for the underwriter is to show that you have sufficient funds for the down payment, closing costs, and recommended cash reserves after closing.  The easiest way to accomplish this is to obtain copies of your most recent bank and investment statements for the past 60 to 90 days. 

Once the underwriter reviews these statements, there are often requests for additional information about the statements.  For example, the guidelines ask the underwriter to document the source of any non-payroll deposit to your accounts that exceed $1000.  

So, if you have sold something or received a gift from a family member or transferred funds from another account, be prepared to provide a “paper trail” for the loan file to track the source. Also, when you are putting the funds together to bring to escrow to close the transaction, be ready to show the transfers from the various accounts that are consolidated into the final bank wire for closing. 

If you sell stock, bond or mutual fund investments for part of your closing funds, we will need to document that those transactions took place to match to the new deposit to your bank accounts.  

A lot of this activity comes right at the end of the transaction, and if you are not prepared, it can be a source of frustration.  Especially when you have already begun packing your paperwork for your anticipated move.  The underwriters go through all of this because there have been instances where a borrower has gone out and obtained a new loan for their closing funds rather than use their own money to close.

And if they obtain a new loan they now have a new loan payment and it could affect their qualifying based on their debt-to-income analysis.  So it is important to the quality of the file to know exactly where all the funds are coming from.

Credit:

When the underwriter reviews your credit report, they will also take a close look at any new inquiries that show on the report.  You will be asked to complete a form that addresses each of the inquiries and indicate if there are new loans as a result of those inquiries.  

So, be prepared to provide new paperwork in the final days before closing, and try not to get too frustrated.  The auditors want to see that there were no loose ends in the file, and the underwriters are complying.

I have made it a point in my mortgage career to Listen To My Clients, Educate Them, and Tell Them The Truth.  Writing this book was another way that I can offer important information to help educate my clients and provide them with principles that help them make better decisions.

The book allows readers to:

Discover the 4 "C's" of the loan process that will make it more easy and understandable.  Without these, they may find it difficult to see how the pieces fit together.

Learn what the #1 most important thing people who have been through the mortgage process say after they have gone through the process.  They need to get this figured out before they start the shopping process.

Understand the important difference between Mortgage Bankers, Mortgage Brokers and Retail Lenders.   Knowing the differences may save them hundreds of dollars or more.

Realize that before they look for a home, that they can't skip this important step – it's the key to having the financing for the home purchase go as smoothly as possible.

The book is available on Amazon.com and is priced at $19.97.  But, because you have been a loyal subscriber to The Brennecke Report, I would like to make a copy available to you for free as my gift to you.

Please go to www.DougBrennecke.com/book-request/ and request your free copy.  I will be happy to make it available to you and I sincerely hope that it provides some helpful information to you.