• Louis Baca

Refinances are back!


On July 31st, the Federal Reserve lowered short term interest rates 25 BPS; the first drop by the Fed in over a decade. Long term rates, not directly correlated with the Fed Funds Rates, are also declining.

The Federal Reserve is lowering rates in hopes of spurring a slowing U.S. economy. The Fed is predicted to lower rates further this year due to economic weakness.


According to the most recent data from Black Knight, at the end of June, 8.2 million homeowners could benefit and improve their financial situation from refinancing their home mortgage. Have you benefited yet?


In April, 360 Mortgage Group announced that they were now offering a no-income, no-asset mortgage product; know prior to the housing collapse as a NINA loan. Although the product is only available on non-owner occupied transactions, the borrower does not have to qualify using income or assets. Qualifications are largely based on equity (LTV) and credit score.  Regulation, much of which the current administration wants to roll back, prohibits this loan product for owner-occupied transactions, but will allow it for speculative investors.

Subprime, now coined as Non-QM has been coming back for many years. With the current “regulation is bad and is stifling economy gain” mentality of the current administration, more financial institutions are entering this non-Agency non-government space. And with increased competition, institutions are lowering the price of these Non-QM loans, and expanding the guidelines needed to qualify for such loans.

According to a newly released report from Fitch, the volume of loans with alternate documentation has more than doubled in the last two years.

And while alt-doc loans have performed well since the crisis, Fitch is still concerned about their strength should the economy take a turn for the worse.

 "Although alternative document residential mortgage loan products that were introduced in the US after the financial crisis have performed better than our expectations, we maintain a cautious approach to these loans because of their limited history,” Fitch said in its report.

 As Fitch writes, non-QM lending has evolved recently from loans that just missed the Fannie Mae,Freddie Mac lending standard to an environment becoming more increasingly dominated by alt-doc loans, which include bank statements for owner-occupied properties and non-traditional debt service coverage ratios for investor properties.

 According to Fitch, these types of loans appeal to borrowers who may be seeking a streamlined loan closing process and to borrowers who are unable to qualify for a loan using traditional underwriting.

 “Bank statement loan products may attract borrowers who do not fully disclose all of their taxable income, increasing the risk of income disruption in the future,” Fitch writes.

 “Non-traditional DSCR loan products may attract borrowers that are not eligible for a GSE loan with a lower coupon because of a high personal debt-to-income ratio.”

 In its rating of non-QM mortgage-backed securities, Fitch said that it is treating these loans similarly, or worse than, the “stated income” programs that became common in the run-up to the crisis.

 “Alt-doc loans performance to date has been strong even after taking into consideration the unusually supportive housing and economic environment experienced since the products were introduced,” Fitch writes, noting that actual defaults to date remain “well below lifetime expectations.”

To date, Non-QM loan products have performed exceptionally well. This is partially due to rigid guidelines which in recent years have become increasingly lax. Also, the economy has been quite strong in the last decade, and the housing market has not come under any strain; i.e. these loans have not been tested in a down market.

Non-QM loans have filled a necessary void for many borrowers that are high credit score, high net worth, and have a relatively low credit risk. Regulation has been critical in not allowing high risk borrowers from obtaining these loans; as of now. It is imperative that if regulation gets rolled back further, and financial institutions and investors look for a higher return on capital, that the mortgage industry does not slide back to its irresponsible ways prior to the mortgage meltdown. Today, Non-QM lending could arguably be more responsible than many government loans the industry originates. As the competition increases in the Non-QM space, and regulation gets rolled back, guidelines that kept this segment of the industry safe could rapidly dissipate.


The QM (Qualified Mortgage) Patch for Fannie Mae and Freddie Mac is set to expire in January 2021, and it initially appears that no one is going to prevent that from happening.

“The national mortgage market readjusting away from the patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection,” CFPB Director Kathy Kraninger said in a press release announcing the proposed change. “We want to hear all perspectives on how to move beyond the GSE patch, the impact on credit, the role of the private mortgage market, and possible modifications to the definition of qualified mortgages and the rules governing the documentation of debt and income. The bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE patch.” - CFPB

A product of Dodd-Frank regulation, the Ability to Repay QM Rule stated that borrowers that had a debt to income over 43% became a Non-Qualified mortgage; which meant that lenders that originated loans with a DTI over 43% would not have the same protections as those originating loans that where Qualified. Less protections equates to higher risk, and higher costs to the consumer. To not exclude a large percentage of the home buying population, a Patch was added to the rule until January of 2021 allowing a very important exemption. Fannie and Freddie would be about to exceed 43% debt to income ratios for borrowers that received and automated approval through their underwriting engines, Desktop Underwriter and Loan Prospector. With compensating factors, borrowers could qualify with a debt to income up to 50%, and still obtain the QM protections.

The political playing field has changed since the implementation of the patch. The CFPB has greatly been weakened, and Fannie and Freddie’s existence are on the chopping block. The Administration wants all to be a memory. The current environment wants to put home financing into the hands of Wall Street.

Federal Housing Finance Agency Director Mark Calabria shared a reaction to the move, with the FHFA tweeting on Calabria's behalf: "The QM patch should expire so that we can level the playing field, foster competition in our nation’s housing finance market, and bring us one step closer to comprehensive housing finance reform."

The FHFA oversees Fannie and Freddie, and the Director is pushing for policies that would negatively affect the profitability of those entities.

Analysis from CoreLogic showed that the Patch accounted for 16% of all mortgage originations in 2018. If the Patch is allowed to expire, those 16% would have a harder time qualifying, and likely pay a hefty premium on the price to qualify. This percentage is also growing as home affordability continues to be an issue, and with wages being far outpaced by home prices.

In another study, the Urban Institute showed that the QM Patch “disproportionally serves minority and low-income borrower, who would not qualify for a loan without its less restrictive standards.” –

Janet Seiberg from the Cowan Washington Research Group believes this is a move from the Trump Administration to shrink the footprint of Fannie Mae and Freddie Mac.

“We believe this is the first concrete move by Team Trump to shrink the enterprises. That should be significant as investors try to decide whether to recapitalize Fannie and Freddie as smaller enterprises are likely to generate less revenue. In our view the market will want to better understand the ramifications of ending the QM patch on Fannie and Freddie before they commit upwards of a $100 billion to recapitalizing them. It is another reason why we believe recap and release will not happen quickly though it is inevitable.” – Seiberg

David Stevens, former President and CEO of the Mortgage Bankers Association raises concerns over the patch expiration years ago.

“If we had to underwrite loans solely based on the written QM rule without the patch, and the permanent exemption for the (GSE) programs, credit would be much tighter,” he said at the time. “When the patch expires, or if GSE underwriting changes substantially, a whole segment of qualified potential borrowers will be frozen out of the market. The QM rule needs to stand on its own two feet. It should not be a rule that essentially punts all credit decisions to two companies that are not even regulated by the same agency,” stated Stevens.

Whether you are for or against Fannie and Freddie, the only reason you can obtain a 30-year fixed mortgage at 4.0%, is because of government intervention and an implied government guarantee. The GSEs are social programs created for government intervention in home financing allowing for more affordable housing for all.  The private market, without an implied guarantee, is more expensive to consumers. Letting the Patch simply expire will have a devastating effect on housing.

On a positive note, crashing values will help affordability.


On July 1st, 2019, America celebrated its longest economic expansion in history. Did you participate? Are you more financially well off than you were 10 years ago when this historical expansion began?

While it has been the longest economic expansion in U.S. history, it has also been the slowest. And it is slowing further. Why has the expansion been so slow? Largely due to regulation.

Dodd-Frank created consumer protection and safeguards for banks to follow which prevented everyone for overextending credit. Banks and consumers were curbed from taking irresponsible risks that lead up to the last market crash in 2008. There was no boom, and there has been no bust. Just slow, sustainable growth. This slow growth has lead to a record high stock market, and record highs of home equity.

There are signs that there are troubles in the water. Mainstream media seems fixated on a strong U.S. economy, but the strength in the economy is mostly reflected in the stock markets, or corporate profits. Companies are more profitable. The stock market has been on fire. Yet employee income, after being adjusted for inflation as barely moved in over two decades. There are a new of signs of pending problems that seems to be overshadowed by a continuous stream of record-breaking highs for stocks.

Tax cuts benefited corporations, not workers. Most tax cuts for workers are set to expire. Those to corporations do not. –

Tax cuts propelled the national debt to a record $22 Trillion in the first quarter of 2019.

Median household income fell 0.6% in May –

Consumer debt breaks $4 Trillion; an all-time high.

Auto loan defaults hit all time high.

GDP predicted to slow to 2.1% in 2019. 1.5% in 2020. – Fannie Mae

25% of adults have no retirement savings. – Federal Reserve

40% of Americans could not pay (in cash) for an unexpected $400 expense. – Federal Reserve

It is not all doom and gloom. Again, due to regulation, irresponsible lending has largely not occurred. There are significant signs that some trouble awaits, although we are not in a “boom” cycle, due to reckless credit and lending practices. A slowdown appears imminent, but currently, a “crash” seems unlikely.


Mortgage delinquency (loans that are 30+ days late) sits at 3.6% nationally. Lowest in over 20 years. – Corelogic

(Chart: Corelogic)


In June, the median price of single-family homes in the United States high an all time record high of $266,000. An increase of 10.8% from the 1st quarter. – Attom Data Solutions


Trade tensions and a slowing global economy is causing foreign investors to flee the U.S. housing market. Foreign investments in U.S. housing in the last year (ending March):

Chinese: Down 56%.

British: Down 48%.

Mexicans: Down 45%.

Canadians: Down 24%.

All foreign investments in U.S. housing, combined, fell a total of 36% to $77.9 Billion. – National Association of Realtors


As the median home prices hit record highs, pricing climbs are slowing. In May, home prices had an annual increase of 3.4%, down slightly from the month before. Seattle, the only major city posting a loss of 1.2%. Las Vegas and Phoenix still strong posing 5.7% year over year gains. –


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