transparent mortgage rates

Infectious Hyperbole in The Mortgage Industry

Market bubbles and depressions tend to be more social phenomenon than rooted in fact.

Credit Crunch, Mortgage Meltdown, Sub-Prime Crisis, Alt-A Debacle, Housing Doom, Bursting Bubbles…the cliches are as creative as the financing options that used to permeate the marketplace. But what are the real numbers behind such doomsday hyperbole?

They’re not quite as sexy nor remarkable:

National Foreclosure Rates…

The Spin: National Foreclosure Rate Almost Doubles in 2008! | Foreclosures Hit Historic Highs | Homes in Foreclosure Top 1 Million

Reality: National Foreclosure Rate = 0.7%…up from 0.4% around this time last year. Roughly 7 out of 1000 homes are in foreclosure.

National REO Rates...REO or Real Estate Owned property is the ‘inventory’ banks hold, homes they likely foreclosed on and have yet to resell back into the marketplace.

The Spin: Bank REO’s up 100% From 2007

Reality: National REO Rate = 1.0%…up from 0.5% last year.

With all of the suspect to downright criminal practices that have been unveiled in the mortgage industry over the past year and a half, coupled with mainstream media spin, one would think that the housing and mortgage markets are in a state of pending armageddon, as in the end of days are upon us. It’s simply not true. Yes foreclosures are up and will likely continue to rise but they are the result of unprecedented, unsustainable expansion and growth…what goes up must come down at some point.

During times of lower trending mortgage rates, property generally appreciates as consumers can afford ‘more house’, sales flourish. Consumer defaults and subsequent incidences of foreclosure remain low because money is cheap. When rates rise the same consumer cannot afford the higher costs, appreciation levels or dips (depreciation), defaults and foreclosures increase. -Masters in Rocket Science not required to understand these fundamental market corollaries.-

Much of the skewed perception results from looking at the state of the union through the wrong set of glasses. Map mash-ups like this one:

…do well to point out which States have:

A. The highest degree of mortgage fraud/predatory lending.

B. Fundamentally impractical (stupid) appreciation.

C. Deteriorating local economic conditions.

D. All of the above.

A more useful set of information would compare common interest rates (and their indices) against home sales, values and the relative number of delinquencies/foreclosures across recent history.

Since I can’t find this chart, nor have the time to create one, I’ll use a few others’ ‘chart porn’.

According to this Calculated Risk chart, between 2002 and 2007 there were ~37,950,000 home sales.

What caused this historically explosive growth? Historically cheap and easy money.

The indices in the chart above represent those that are tied to popular mortgage programs. The COFI, MTA, and CMT directly effect (the terribly abused) Option ARM programs while the LIBOR is the index for many conforming ARM mortgages. It’s easy to see that home sales and prices blew up as rates bottomed out in late 2003, early 2004. Lower rates = lower payments. Lower payments = lower income needed to qualify for a mortgage. Lower qualification requirements = more qualified applicants…you get the point.

Consumer demographics that historically would have never qualified for a mortgage suddenly and briefly did qualify. Lenders threw gasoline on this spark and continued pouring it on by further dropping long standing underwriting qualification criteria. Wall Street greatly subsidized the raw fuel to further this incendiary trend: money, gobs of it. The Dream of Homeownership was sold like hard candy. For those consumers that f into the brief

The indices above reached their peak around July 2006, not coincidentally the wheels began to loosen on the market shortly after this and the sky began to fall shortly thereafter…

Advancing to February 2008, median home values and sales are actually increasing. What, Why, How? Rates have recently trended downward again, relieving some of the downward pressure in the housing market.

Studying the data above, it’s relatively surprising that the ‘housing epidemic’ hasn’t actually become one on par with how big the ‘housing bubble’ actually got. The mortgage and housing markets may be suffering from a bad cold, but it’s far from terminal. Much of the same infectious exuberance that permeated the housing market from 2002-2006 has today mutated into a plague of doomsday hyperbole. Market bubbles and depressions tend to be more social phenomenon than rooted in fact. A disjunctive phenomenon can drive an otherwise practical market into uncharted, volatile territory…alas hindsight is 20/20.

So, knowing what we now do, how can the highly contagious, overly optimistic peaks and financially draining valleys be mitigated in the housing and mortgage markets?

A logical first step is transparent access to better mortgage data, I know someone who has a line on this Next would be understanding how to best disseminate through and correlate it against housing market data using meaningful, effective strategies.

The relatively new real estate futures market could serve as an effective tool to hedge against impractical social phenomenon like bubbles. Futures markets are speculated by highly informed and educated people who have access to quality data that can spot potential bubbles well before they get too big. If they begin selling short, its a good idea to curb the enthusiasm. In the alternative, if they’re bullish or going long, lower interest rates, property appreciation, new housing starts and higher sales are likely.

It’s about time these Industrial Age marketplaces started using Information Age practices to stem future ‘epidemics’ and other like hyperbole from unnecessarily spreading…

The Need for Transparent Mortgage Rate Search

I’ve had some heated (and circular) conversations with many in the mortgage industry regarding how unregulated the industry actually is, how it would be near impossible for legislation to clean up the mess. The Mortgage Industry needs something more than new Statements and Policies from regulatory agencies, with a few sacrificial lambs served up for show.Does anyone see the parallels between the Enrons, WorldComs and the mortgage industry? These books are cooked ‘X-tra well done’…ahhh, I can hear the paper hum of all the paper shredders as I type this.

Via my blogging here and ActiveRain it’s become very evident that unless you are inside the mortgage industry, you’re an outsider, and if you’re an outsider, you’ pay in cold hard cash. Even Realtors, designated and educated real estate professionals, have little idea about how the mortgage industry ‘works’. This amazes me since most Realtors tried to tell me how to do my job..?

There’s no other industry that makes you pay for what you don’t know quite like the mortgage business. Michael and I like to call the greater traditional mortgage shops out there: The Mortgage Cartel.

The Mortgage Cartel has been busy burning wagons and taking scalps since the mid 1980′s, with the dawn of the mortgage broker. It was the Wild West and the Gold Rush all wrapped in one. Brokers jumped claims and worked the angles including something known as yield spread premium (YSP).YSP was introduced by the banks as a way for borrowers to finance closing costs through a voluntary increase in their interest rates. At least that was the idea. It was only a matter of time before brokers hijacked YSP and turned it into a clandestine profit center financed by unwitting consumers who had no idea what interest rates they actually qualified for. It was a recipe for disaster.

The passage of Regulation X in 1992 defined and outlawed hidden lender kick-backs. Post Reg X, brokers were forced to be more creative in order to maintain their hefty back-end “rips.” While typical loan fees ranged from 1%–3%, there was almost always another 1% – 3% in hidden YSP camouflaged by ambiguous documentation and verbal gymnastics.

The problem with Reg X was that it only addressed the mortgage broker—leaving mortgage bankers, for all intents and purposes, untouchable. To this day, direct lenders like DiTech can lawfully withhold information from the borrower during the process of mortgage program and rate selection. Things were bad, but they were about to get worse.

By the late 1990′s, networked information technology had reduced the task of pre-qualifying a mortgage to a point and click affair. Online brokerages like Ameriquest, DiTech, and eLoan emerged, waving a red cape at a bull market of consumers eager to reap the benefits of the New Economy. By 2002, the Disinformation Age of real estate finance was in full swing.

Operating beyond the reach of Reg X, online uber-shills sucked billions of dollars in overpaid interest expense out of the economy through such notorious schemes as DiTech’s “$395 Flat-Fee Loana Trojan horse packed with up to 3 points in hidden yield spread courtesy of an inflated interest rate.

At the peak of the refi boom, the Mortgage Cartel had effectively turned the Internet against consumers making the process of obtaining a mortgage online nothing more than a faster ride down the same dark alley. The disturbing truth is, if you got a mortgage between 1987 – 2007, the overwhelming odds are your monthly payment harbors a broker’s secret payday. And if you got your loan through a direct lender, you can all but guarantee it.

With bankers on one side and brokers on the other, the consumer was bound to get squeezed. When comparing identical offers from a mortgage broker and a mortgage banker, consumers routinely chose the more expensive loan.

Faced with the most uneven of playing fields, many brokers rationalized a culture of deception. One look at a typical HUD-1 broker closing statement is all the proof you need. Nevertheless, it was the online direct lender that posed the most imminent threat to consumers.

Why? Because it wasn’t perceived as one.

Also See:

e-Lenders: When Thieves Compete, you Lose
Transpareny in the Mortgage Service Industries
The Mortgage Industry’s internal Civil War