February Market Update
MORTGAGE APPLICATIONS SPIKE
Mortgage applications soared the week of January 10th by 30% over the previous week. With interest rates in a free fall due to economic slowing and growing fears of the Coronavirus outbreak, refinance transactions are anticipated to set records. The refinance rate index was 109% higher than the same week last year. – housingwire.com
With growing concerns over the slowing global economy, and the rising fears of a U.S. recession in 2020, interest rates are anticipated to stay low for the foreseeable future. This will fuel refinance transactions, and home buying demand. Despite economic woes, the housing market remains very strong.
TO CUT OR NOT TO CUT
With growing concerns over the slowing global economy and the rising fears of a U.S. recession in 2020, interest rates are anticipated to stay low for the foreseeable future. This will fuel refinance transactions, and home buying demand. Despite economic woes, the housing market remains very strong.
Conventional wisdom says the Federal Reserve won’t cut rates during an election year, to avoid looking like it’s favoring one candidate over another – unless there’s an economic shock so severe, it’s forced to act.
UBS, one of the world’s biggest investment banks, is predicting the Fed could lower interest rates three times in 2020, an outlook at variance with other forecasters that are calling for no change or just one rate cut this year. If it’s correct, it would put downward pressure on mortgage rates.
Damage from tariffs not covered under the Phase One trade deal signed by President Donald Trump on Wednesday will force the Fed to ease monetary policy, Arend Kapteyn, global head of economic research at UBS, said at the UBS Greater China Conference in Shanghai, China, on Tuesday.
Kapteyn is not saying there will be a financial shock to the system. Rather, Kapteyn is saying the slowdown already predicted by the Fed will be worse than expected. The central bank forecast at its December meeting that GDP growth will drop to 2% in 2020 from 2.2% in 2019. – housingwire.com
As of January, the Fed decided to stall on any rates cuts and continue to monitor the shifting economic tides.
ABILITY TO REPAY RULE TO BE ELIMINATED ON NON-QM MORTGAGES
Prior to the mortgage meltdown and housing collapse of 2008, there was no Federal regulation that mandated that lenders provide evidence that home borrowers had the ability to repay their mortgage. Read that again. How did the U.S. housing market take down the global economy just over a decade ago?
The Qualified Mortgage Rule was created by Dodd-Frank post Great Recession which included the Ability to Repay (ATR) rule that mandated that lenders document borrower’s ability to repay their mortgage. Fannie and Freddie were capped at a maximum of 43% total debt to income (gross income) to qualify on a loan with an “implied” guarantee from the Federal government. Although, the rule was amended with a QM patch, that allowed Fannie and Freddie to approval loans with a debt to income higher than 43% as long as the lender received an automated approval through the Agency automated underwriting engines, Desktop Underwriter and Loan Prospector. The QM patch is set to expire in January 2021. Those loans that exceeded the Agency parameters where considered Non-QM loans and carry a higher premium due to risk.
Non-QM loans are held to a lower set of underwriting standards, but still are required to prove the ability to repay. Non-QM loans are not capped at 43% DTI. Borrowers could also qualify using bank statements to source income verses traditional documentation requirements like W2s and tax returns.
Now, with pressure from such lenders and banking associations as Bank of America,
Quicken Loans, Wells Fargo, Caliber Home Loans, along with the Mortgage Bankers Association, the American Bankers Association, the National Fair Housing Alliance, have requested that the CFPB do away with the ATR rule for Non-QM loans.
What could go wrong? There is no way the Consumer Financial Protection Bureau, the very agency designed to protect consumers and the U.S. housing market would eliminate the requirement for lenders to verify whether a borrower had the ability to pay their mortgage.
One of the leading causes of mortgage defaults leading up to the 2008 Great Recession.
Yet, it looks like that is exactly what the CFPB is going to do.
In a letter sent last week to several prominent members of Congress, CFPB Director Kathy Kraninger said the bureau has decided to propose an amendment to the QM Rule that would “move away” from DTI as a factor in mortgage underwriting.
Specifically, Kraninger said the CFPB has decided to shift from the DTI standard and move to an “alternative, such as a pricing threshold (i.e., the difference between the loan’s annual percentage rate and the average primate offer rate for a comparable transaction.”
According to Kraninger, the proposed alternative would be “intended to better ensure that responsible, affordable mortgage credit remains available to consumers.”
“Responsible, affordable mortgage credit remains available to consumers.” Stress “responsible.”
Kraninger stated that the CFPB expects to issue a new rule amending the current ATR no later than May 2020.
Is it responsible to eliminate the debt to income requirement on Non-QM loans in order to approve more borrowers, that may have difficulty evidencing that they can pay for their mortgage? Fueling the U.S. economy through housing by originating high risk loans will flood the industry and Wall Street with profits, until the housing market is tested. The economy has been on an eleven-year winning streak, and with consumer debt, mortgage debt, and student loan debt at all time historic highs, a minor downturn in the economy could put great stress on an over leveraged population. Now is the time for “rational” lending; but no one seems to be listening.
PENDING HOME SALES TAKE BIGGEST DIVE IN A DECADE
December stats for pending home sales did not fair too good, falling nearly 5% from November. According to the National Association of Realtors, this was the largest drop since May of 2010.
The seasonally adjusted index measuring signed contracts fell because of a shortage of homes on the market, according to Lawerence Yun, NAR’s chief economist. It was the largest drop since May 2010, according to the data.
“The state of housing in 2020 will depend on whether homebuilders bring more affordable homes to the market,” Yun said (NAR’s Chief Economist). “Home prices and even rents are increasing too rapidly, and more inventory would help correct the problem and slow price gains.”
The latest Case-Shiller Home Price Index showed a 3.5% annual increase in home prices in November; due to strong demand and low inventory.
With falling interest rates, and a continuation of a strong job market, there will even more pressure on home inventory in 2020.
MORTGAGE FRAUD ONCE AGAIN A PRESSING ISSUE
As the government rolls back regulation to make the home lending more accessible to more borrowers, and to ease the process, mortgage fraud is on a steep rise. There is simply less checks and balances to ensure that consumer documentation is legitimate. Making home ownership easier, does not necessarily make it better; for anyone. Rising fraud, creates rising costs; which are rolled back to all consumers.
One of the rising causes of fraud is falsified income documentation, and fictitious employers.
Back in 2018, Fannie Mae issued a warning to lenders after identifying more than 30 apparently fake companies that were appearing on borrowers’ mortgage documentation as their place of employment.
Things went quiet after the list of companies grew to 45, but now, the GSE is warning lenders that there are more potentially fake companies out there.
In total, there are now 65 potentially fake companies that Fannie Mae has seen on loan documents. According to the GSE, the 65 companies were listed as the borrower’s purported place of employment on an unknown number of mortgages, but Fannie Mae could not verify whether the companies actually existed or not. – housingwire.com
According to Fannie Mae, the newly identified potentially fake companies are:
BK Precision, located on E. Lowell Street in Ontario
CY Petfood, located on Boyle Avenue in Los Angeles
Galaxy’s Auto Parts and Accessories, located on Stellar Drive in Culver City
GBF Freight System, located on Easton Drive in Bakersfield
Gold Coast Transport, located on Imhoff Drive in Concord
Golden State Electronics, located on Evans Avenue in San Francisco
Gonz Fidel Books and Engineering, located on North Milpitas Boulevard in Milpitas
Ideal Pro Systems, Barnard Avenue, located on Barnard Avenue in San Jose
Public Mark Productions, located on Sherman Way in Reseda
Ricardo’s Beauty Wholesale Supplies, located on Pirrone Road in Salida
Rodell Network Communications, located on Lakeside Drive in Santa Clara
Sac Bar and Kitchen Supplies, located on Raley Boulevard in Sacramento
San Fernando Service, located on Sherman Way in North Hollywood
Senior Home Health Care, located on Industrial Boulevard in Victorville
West LA Dental Studio, located on Overland Avenue in Los Angeles
According to Fannie Mae, there are a series of red flags that lenders should be on the lookout for on loans that could include a fake employer or other potential mortgage fraud issues, including:
Third-party originated/broker loans
Originated 2015–2019 (present)
Employment (occupation) does not “sensibly” coincide with borrower’s profile (age or experience)
California (geographic common denominator)
Borrower on current job for short period of time
Prior borrower employment shows “Student”
Starting salary appears high
Purported employer does not exist
Employer’s purported location cannot be ascertained
Paystub templates are similar for various employers across other (involved) loan files
Paystubs sometimes lack typical withholdings (health, medical, 401(k), etc.)
Gift letters are substantial and are not (or cannot be) supported through re-verification
As for what lenders can do to identify and address these issues, Fannie Mae lays out a series of steps.
“Prudent origination, processing, and underwriting practices should include looking for red flags in the loan documents that raise questions about the transaction,” Fannie Mae said.
“Verify that the borrower’s place of employment actually exists and obtain supporting documentation. If one of these entities is disclosed as the borrower’s place of employment, exercise due diligence in reviewing the entire loan file,” Fannie Mae continued. “Lenders must exercise caution in these situations and take appropriate steps to prevent the institution from being the victim of fraud.” – housingwire.com
Ironically, Fannie Mae and Freddie Mac (i.e. the U.S. Government) who is warning lenders of mortgage fraud, are the very entities that are enabling it, by lowering lending standards and streamlining the mortgage process. By changing policies and procedures to help expedite the mortgage process, they have been eliminating the checks and balances that help prevent mortgage fraud.
Maybe borrowing hundreds of thousands of dollars for the purchase of a home should be more challenging than applying for a Macy’s credit card.
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