Mortgage Shopper

Housing : US proposes 20% minimum deposit to buy a home

Will a 20% down payment plan help or hinder the US housing recovery?

The Future of the American housing market is still unclear 4 years after the subprime bubble burst.

From that we know that things that were tried so far have:

1. Not worked,
2. Had limited success, or
3. Are not sustainable. 

What would a 20% deposit minimum mean to home buyers?

One thing we all know is that getting a home loan will no longer be a walk in the park for borrowers or for mortgage brokers.

First home buyers will be the first to suffer. They will have to be motivated to save a deposit, before they qualify for a home loan.

That will have several implications.

1. Less home buyers will mean lower demand and house prices.
2. First home buyers will build smaller homes.
3. Low income earners maybe precluded from homeownership.
4. Mortgage brokers will leave the industry, looking for an easier way to make a living. 
5. Home buyers will be more reluctant to pursue a home loan, and save the deposit, and that means that homes will be a lot cheaper. 

U.S. bank regulators decided to propose a high standard for home buyers to get the best mortgage rates:

• Only those who can make a 20 percent down payment and have not had problems paying mortgages in the recent past would be eligible for the lowest rates. 

What about mortgage insurance?

Well what about mortgage insurance? Think about it.

The lender was saying "I don't want this loan unless you the borrower stumps up insurance to protect me, the bank from you defaulting."

Is that in the lenders or borrowers interest? Some would argue both, because it meant that you did not have to save much by way of deposit. But it had the effect of allowing more buyers to enter the market and that meant more demand and higher prices. These meant that new home buyers had to pay more and that's what a higher deposit will prevent.

It also meant that easy finance, meant more home buyers, and more buyers meant higher demand and higher prices.

So to see how this would play out.

let's suppose that only people with clear credit and big deposits get cheap loans.

One of the key new regulations would require mortgage lenders to invest in the loans they make, so that if the loans went bad, the lender would suffer.

In the years leading up to the financial crisis, lenders could hand off loans, many of which were known to be high-risk or never to be repaid, to other companies at a discount.

By selling the risk to others, they could then continue to make even more risky loans risky loans till the deal went toxic.

The twenty percent rule and a rate for risk scenario

But these rules would exempt banks from having to retain risk in loans made to borrowers who can offer a 20 percent deposit.

They also would exempt Government guaranteed loans, such as by federal-backed mortgage companies Fannie Mae and Freddie Mac.

What's wrong with the 20% deposit rule?

Home buyers’ advocates have criticized the 20 percent down payment rule.

Regulators had considered mandating a 10 percent down payment and this seems to have had broader support.

1. Many feel that a 20% deposit, and clear credit rule combination maybe too steep an ask for people to save, especially first home buyers.
2. Second home buyers can do this on the equity in the home, if there is any in the US housing market right now. 
3. The 20 percent requirement might preclude banks from making any loans that are not Government Guaranteed. 

Summary

There up to eight different proposals in bills that are trying to resolve the US mortgage industry and revive the housing market.

One thing is for sure. It was a lot easier thing to trash the US finance markets than it is to find a solution.

But all solutions point to making credit harder to lend or borrow. That will have to mean that house prices will be lower for some time to come. In the end home buyers and eventually first home buyers will be better off. But homeownership will become harder to initiate in the years ahead, but an easier thing to continue. In the end, it will be worth it.

Mega Bank profits: Are the glory days of mortgage lending profits over?

The big banks have never had it so good. Will new Government Reforms take this away from them?

Increased Mortgage Lending competition for the big four banks, and major banking reform from the Gillard Government could see the major banks profits shrink.

The problem is that every government reform aimed at the banks in Australia over the last 20 years have eventually added to the bottomline of the big mortgage lenders. Has this been more because of the banks wiles or the lack of foresight of the Government Policy? Maybe a bit of both.

Mortgage Exit Fees: The Fly in the ointment

 Before Christmas I wrote to the Prime Minister and advised her of the "fly in the ointment" of the Wayne Swan proposed solution to our mortgage woos. His solution was a simple one.

Make it a no brainer to switch lenders by removing exit fees on home loans and the rates would fall.

Mortgage Reform problem No 1

The problem was that mortgage managers, the securitised lenders that helped to reduce mortgage interest rates by 3% were the very ones that would be most hurt by the reform.

Why? Because mortgage managers charged the highest exit fees, by way of deferred establishment fees on their mortgages loans

These deferred fees had a sunset clause of about 5 years, so most people never paid these anyway. But it gave a way for lenders to pay mortgage brokers a commission to compensate them for their efforts. Any government reform must address this vital issue. Otherwise it could kill mortgage competition in Australia and set us back 20 years.

Ralph Norris cries Crocodile Tears over the Mortgage Managers plight.

The funniest thing is that the CBA who have all but destroyed the mortgage managers loan sector, with the help of Kevin Rudd's Banking Guarantee support, now says he is hurting for the small end of town. This is just a ploy, but Mr Norris does make the same point I rose last year. 

Australia's Banks. Are they too big to control?

Based on Ralph Norris's [CEO of CBA] comments and the reality of the power and control of the Big Four Banks, its time to ask the unthinkable.

1. Are the banks too powerful to control? 
2. Have they become the Mafia of Austalia, where they can do what they like and still be supported by the government? 

Sometimes the lines between the profit motive, the public good, and business ethics are blurred and this I believe is where we are in the banking debate right now.

The business Power of the banks

A case on point Norris claims that:

The moves to limit excess fees on credit cards and improve credit protections will have a similar perverse effect as far as the reaction from the major banks.

 The new national credit protection regulations means that banks simply have a higher cut off level for those to whom they are willing to provide credit.

Does this not smell of a lender who thinks he owns the lenders and credit space?

If so is he right. I say yes to both propositions!

The law of unexpected consequences

The best intentions of government regulations often create unexpected consequences.

The Government needs to focus more on the purpose of the reform and how it will affect the mortgage industry as a whole.

Any bank and mortgage reform aimed at lowering mortgage rates, and exit fees has to be balanced with the planned growth non bank lenders. That means a no bank involved sector. Not the miss-mash we now have. Allowing banks to own their competitors is a stupid idea that keeps repeating itself in the mortgage lending sector.

 Author: Rick Adlam, Mr Mortgage

Mortgage Brokers and MERS get the blame for Banks wrong doing

Why mentioning mortgage brokers in the MERS mess is so annoying!

I am casually following the mess that the US still finds itself shackled to in 2011 and have just read a New York Times article entitled:

MERS? It May Have Swallowed Your Loan

By MICHAEL POWELL and GRETCHEN MORGENSON

You can read the full article here

Whilst I recommend the article as it contains a lot of useful information, there is a annoying reference to mortgage brokers at the beginning of the article that riles me in quotes.

Mortgage brokers hip deep in profits handed out no-doc mortgages to people with fictional incomes.

Wall Street shopped bundles of those loans to investors, no matter how unappetizing the details. And federal regulators gave sleepy nods.

That world largely collapsed under the weight of its improbabilities in 2008.

But a piece of that world survives on Library Street in Reston, Va., where an obscure business, the MERS Corporation, claims to hold title to roughly half of all the home mortgages in the nation — an astonishing 60 million loans.

Why I believe that Mortgage Brokers aren't to blame?

Well hip deep in profits is a stretch of the imagination. The banks got the money,not the mortgage brokers. Most mortgage brokers are now "broke" 

Why do I find this objectionable? After all Mortgage Brokers were part of this scam.

right? I say wrong, dead wrong.

Firstly you'll see that mortgage brokers have been given primacy in the article, that is they are the first characters to be mentioned in the plot, and portrayed as the people would got the "profit." What a load of rubbish!

Who benefitted most from selling bad mortgage loans?

The Banks that created the loans, as well as Real estate agents and developers, new home builders, and home homers who sold on the highs of the market.

Mortgage Brokers come in a sorry last, but get to be mentioned first, because they seem to be at the front of the line.

Most of these sectors are not given a mention. They got the money and are seen as blameless. But we seem to forget that Real Estate agents made bigger commisions and drove the values of properties up to unrealistic highs. Heights that could only sustained with loans that were given to the buyers that they forwarded to home sellers. Buyers that could not afford to repay those loans.

We are all are finding out that what goes up [too high to make sense] must come down when the truth is outed. Whilst all works of fiction have a starting plot, this is not where the action starts in the mortgage business. It starts with the creation of the mortgage funds, for the purpose of making profit. That would be. let me think... be the banks?

So why weren't these real culprits not mentioned up front where they belong?

Maybe its because the big banks and insurance companies spend a lot of money with the New York Times, and nobody wants to bite the hand that feeds them?

And did Mortgage Brokers have to be mentioned at all? Mortgage Brokers are just comission sales people. I believe that Mortgage Brokers are less at fault in this than the Drug mules that they catch every day in airports around the world, are the cause of the drug problem that developed Nations such as Australia and the US are plagued with.

Because the drug mule is desperate and knows what he or she is doing is illegal and harmful, whereas mortgage brokers thought that they were in a legit business based on trust.

To further the drug analogy, the drug mules are just a small part of the distribution system that is the massive secret narcotic trade.

There had first to be growers and manufacturers of the narcotics and a ready end retailing distribution system of territories of the drugs dealers involved.

Doesn't this sound like the story that the New York Times just painted about what went wrong with the mortgage business in the US that started to unravel from 2006, not 2008 as mentioned in the article by the way.

Except that they are saying that the in their scenario the custom officers were not diligent.

The article made a reference no doc mortgages. If that was the case, then no mortgage broker would have to create fraulent documents to support the  loan application, because none wold have been required.

Why do I say that Mortgage Brokers were not guilty?

Mortgage brokers were basically sales people that had little training in finance. They were paid essentially commissions on sales. Yes they were well off when these "low hanging fruit" sales were being made.

But most did not grasp the big picture nor made the huge profits that the banks made.

There was a saying in the industry that if you did not have a college eduction, then you could still make over $100,000pa  as a mortgage broker.

Many of these mortgage brokers are now flat stoney broke!

So leave the mortgage broker out of the picture and focus on the real creators of this disaster. Make the heads of the corporations that actually got the profit for creating the mortgage mess in the first place, pay for their behaviour.

Article by Mr Mortgage

 

Mortgage Smoothie Wealth Machine. How Westpac Bank convinced nearly 30% of Australians to hand over more bananas for their mortgages in a single year!

Unfortunately for its customers, its not "Always work hard, tell the truth, put the customer first and fear God" I was once told that analogies are the most powerful force in persuasion. This is the secret that Westpac Bank used on its staff, managers and customers, and it seems to work like a charm, even if your facts and figures are all out of whack, or the analogy is not relevant. 

via mortgageshopper.typepad.com

ANZ Bank air outrageous ads on Australian TV, as it desperately tries to stay in touch with the bigger banks.

In one of the worst cases of hypocrisy by a bank ever seen by Mr Mortgage, the ANZ uses its own bad behaviour as an example of how customers are treated by other banks. They include using deceit to snare a customer, then being sarcastic and surly with the customer when the customer make a complaint to the the bank assistant.

via mortgageshopper.typepad.com