Monday, October 31, 2011

Do You Want to See Something Really Scary?:

Do you remember Twilight Zone--The Movie? I did not see it--my mother was extremely strict and never allowed us to watch horror movies or even light comedy containing anything that smacked of the occult. But I remember my father coming back from a trip and telling us that he had been driving with his nephew on a dark, wood-lined road when his nephew told about the scene from Twilight Zone where a set of characters are in a car at night trying to scare each other. Finally, one of them says to the driver of the car, "Do you want to see something really scary?" When his friend agrees, he turns his face away, and when he turns back he has become a monster who kills the young man who is driving.

If Hollywood were making that movie today, rather than having the actor turn into a monster,  the director could have just had him go apply for a mortgage loan.  When he saw the list of conditions, the low appraised value of the property, and the length of time that it takes to get financing today, he would die of a massive fear-induced heart attack.

Sound like an exaggeration.  It isn't.  After 13 and a half years in mortgage lending, I have never seen housing finance even close to as bad as it is today.  Consider these real life Tales from the File Cabinet:

1. A pediatrician who wants to refinance her custom built home but cannot because her 685 credit score does not qualify her for 90% financing she needs in order to be able to pay off the existing note.  Her income is over a quarter of a million dollars annually and she has virtually no debt, but last year she had a small collection (under $60.00) with the U.S. Post office,  and that is keeping her credit score artificially low.  Since El Paso does not qualify for expanded conforming loan amounts, she cannot get an agency loan.

2. A self-employed business man with a credit score of 734 who filed and paid taxes on over $250,000, and qualifies under the existing HARP guidelines but is having difficulty getting a mortgage loan because his company's K1s report non-allowable losses for the current tax year.  The losses are non-allowable so he cannot write them off his 2010 taxes, but the underwriters want to subtract them from his income anyway, which means that he does not qualify.

3. A salaried borrower in Austin, Texas making over $150,000 a year in salaries and commissions who cannot get financing because even though the home he moved into in Austin, Texas has previously been used as a rental property and filed that way on his taxes, he does not currently have a tenant in the house, so Fannie Mae will not allow him to use a lease to offset the payment unless he can demonstrate 30% equity in the property--which he does not have in this current climate of depreciating values.

After using the enhancements to HARP for media coverage last week, this week even the Obama Administration is admitting that the new enhancements to the program will allow only modest gains for refinancing. In reality, because of extremely stringent guidelines even borrowers with good credit, beautiful properties, and high incomes cannot get loans.  These are people who want to refinance so that they can save hundreds of dollars a month on their mortgages, or because they want to shorten the term to a 15 year loan, ultimately saving them hundreds of thousands of dollars, or who would like to be able to take advantage of low interest rates and low housing prices to buy a new primary residence.  All have long credit histories which demonstrate both an ability and a willingness to pay.  And all have excellent documentable incomes.  But in the current environment, they are shut out of financing by guidelines so strict that they are geared to ensure that virtually no one get a mortgage loan.  That's pretty scary.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen.  For more information, visit her website at or like her on Facebook at

Thursday, October 27, 2011

So You Want to Refinance?

The biggest news in housing this week was the announcement of President Obama's executive order to revamp the Making Home Affordable Program (HARP) to make mortgage refinancing more accessible to millions more Americans. Making Home Affordable has been widely criticized as a failure since the original program had targeted about 5 million potential homeowners but was actually able to refinance less than 1 million into new lower interest rate mortgages. But this week in Las Vegas, Obama announced his new fixes to HARP to make the program easier for Americans to refinance their underwater mortgages into new, lower fixed rate mortgages.

Critics of the president's executive order say that ultimately the decision to refinance these underwater mortgages will further damage the credit system by making taxpayers responsible for homes without enough equity. That is really a bogus argument because the only loans being refinanced through HARP are loans which are currently owned by Fannie and Freddie (and these are currently being supported by tax payers). Proponents say that the new program will free up consumer funds which can be pumped back into the economy to stimulate consumer spending--with some estimates at over $20 billion in funds. That, too, is bogus, for several reasons.

The first and most important reason that both the critics and proponents of the new plan are wrong is that the new and improved HARP is not going to work any better than the original. In fact, it will be plagued by many of the same problems that kept the original program from working.

The original Making Home Affordable Program allowed homeowners to refinance homes at up to 125% of their appraised value. When the new adjustments to HARP were announced, many journalists and industry experts began announcing that the new program does not utilize appraisals. That is not true. If there is not a good automated valuation model for the property, an appraisal will be required. Borrowers refinancing into fixed rate loans will not have to consider the property's value, but those refinancing into an ARM will be limited to 105% of the value of their home.

But the excitement over basically discarding property values implies that being underwater in a home is the only issue that keeps homeowners from being able to refinance when in fact there are a host of other reasons that HARP failed the first time and will fail again:

PROBLEM 1: The new Making Home Affordable Program is limited to homeowners with less than 20% equity in their mortgage. FHFA says that this program is reserved for those who "really need it." As with the original program, the current mortgage must be with either Fannie Mae or Freddie Mac and must have been originated prior to May 31, 2009. The issue here is that many Americans who have less than 20% equity in their homes have loans with private mortgage insurance on them. As FHFA's announcement states, participation in HARP is voluntary, so mortgage insurance companies and lenders voluntarily decide to participate in the program. In the original HARP program, MI companies would reissue the MI certificates on the properties only if the loan stayed with the current mortgage holder. Unless  FHFA has figured out a way to change this, that means that anyone with a mortgage with mortgage insurance whose current servicer does not participate in the new enhanced program can't refinance through HARP Phase II. And those whose servicers do participate can refinance only under the guidelines offered by their servicers.

PROBLEM 2: Many borrowers who are underwater in their homes are underwater because they have a first and a second mortgage. Under HARP, a second mortgage cannot be refinanced along with the first. That means that the second mortgage must be re-subordinated to the first mortgage in order for the borrower to be able to take advantage of the lower interest rates. And not all second mortgage holders will do that. For example, a borrower recently called me about refinancing his investment property. At the time that he purchased the home, it was his primary residence, and he had a first and a second lien. Last year, he tried to refinance through Chase, who approved him for the loan but told him that the second lien would have to be re-subordinated in order for him to close. The problem is that the second lien holder, GMAC, will not re-subordinate the second lien because the house is now an investment property and without that re-subordination, he cannot get the loan. I have seen variations on this problem several times in the last few years.

PROBLEM 3: In Texas, properties qualify under HARP for refinance but they cannot be refinanced because at one time the owners took equity loans against the houses. In Texas, our state law says that once a home has had an equity loan against it, the provision of the home equity law always apply, which means that the homeowner must always maintain 20% equity in the property. So a homeowner cannot legally refinance an underwater property with a home equity loan against it no matter what kind of program FHFA and the President develop.

Besides equity in the properties, there are many issues that have kept borrowers from refinancing over the past few years. One of the most important is income. Over the last two years, income standards have tightened incredibly. HARP does waive lender warranties to Fannie Mae and Freddie Mac, and HARP promised relaxed underwriting guidelines, but the FHFA announcement does not make clear exactly how those guidelines will be relaxed. What we do know is that the Dodd Frank bill's defense to foreclosure provisions call for all loans to have income verified fully. Borrowers whose income is improperly underwritten can use poor underwriting as a defense to foreclosure for their mortgage loan. As a result, lenders are being incredibly strict about underwriting income.

As an example, I am working on a file for a hospital employee who has been on his job for thirteen years. This man has excellent credit and has decided to refinance his home from a thirty year note to a fifteen year note. He qualifies under the current HARP guidelines. I calculated his income using his year to date income based on his pay stub and determined that he fell just under the lender's 45% debt to income ratio guideline. But when I sent in the file, the underwriter informed me that he could not qualify for a 15 year loan--he would have to refinance at 20 years. When I questioned her about the income, she said that she has a worksheet she has to use, and she calculated the income at $300.00 a month less than my calculations.

HARP has published guidelines, but lenders have their own overlays which often exceed those guidelines to make sure that they are originating quality loans. Being able to refinance is about much more than having a decent credit score or sufficient equity in your home. It is about getting the underwriter to agree that you make enough money to pay the loan back based on an ever tightening set of underwriting standards regarding income. Income qualifications have kept a lot of borrowers from qualifying to refinance under the current guidelines, and unless HARP specifically issues an income waiver--which would be completely contrary to all of the provisions of Dodd Frank--many borrowers are going to continue to find themselves locked out of an opportunity to refinance.

PROBLEM 4: While it is makes a great soundbite to go to Las Vegas and announce that borrowers will be able to refinance in the parts of the country that have been hardest hit by the economic downturns, the reality is quite a lot different. As with the current HARP program, only borrowers who currently have loans with Fannie Mae and Freddie Mac qualify to refinance under the program. That means that borrowers with exotic mortgage products such as negative amortization cannot use this new program. People who had jumbo loans--which until a few years ago was everyone financing over $417,000, do not qualify. And consumers who financed into subprime loans do not qualify. While the Fannie/Freddie portfolio does cover a lot of consumers, it also misses a lot. In the years between 2003-2008, Fannie and Freddie's market share had shrunk significantly since they could not effectively compete with many of the other products on the market. So in Arizona, California, Nevada and Florida, where many people are underwater on their mortgages, many borrowers who would qualify are in the wrong type of mortgage to be able to get the loans.

As I said at the beginning of this post, critics are saying that the enhancements to HARP will cause Fannie and Freddie to take on the responsibility of underwater mortgages.  In fact, FHFA's goal is to encourage borrowers to refinance into shorter term mortgages so that they can recover equity faster.  If the program were successful and it worked as FHFA hopes, this would in fact cause many of these mortgages to recover equity and to in fact be paid off in fifteen years.  And this is probably the basis for the billions of dollars in savings that the White House and FHFA tout that HARP Phase II will give to consumers.   As a loan originator for over thirteen years, I can tell you that the savings of going from a thirty year to a fifteen year mortgage is huge over the life of the loan--depending on the size and interest rate of the current mortgage, it can amount to hundreds of thousands of dollars.  However, the economic impact of that savings will not be felt in the general economy for fifteen years when the houses are paid off.  If consumers were to follow the FHFA's proposals to refinance their homes into shorter loans, they would actually see an increase (albeit a small one) in their monthly payments in the immediate future, which would lead to less disposable income in the short term.  Of course, if consumers stay in their homes and pay them off, fifteen years from now they will not have house payments so then they could increase their spending, but that won't help the economy now.

In the short term, this program will provide fees and income for mortgage lenders and great video opporunities for the president.  University of Virginia professor Larry Sabato told CBS this week that people need to see the President on television "trying to solve problems."  HARP II creates sound bites, but beyond that it is not going to do much more than its predecessor about changing the fate of homeowners or the current housing situation in the U.S. either for better or for worse. At the end of the day, HARP II will produce very little change and more hype than hope.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information visit her website at

Thursday, October 20, 2011

Too Much Information

Last year I wrote a blog about a practice that FICO had just rolled out to help banks determine the credit worthiness of their clientele based not only on their history of paying their bills, but on other factors as well.  

At that time, the Fair Isaac Company--creators and owners of the FICO score system that governs our lives--had announced a new system marketed to banks to track depositor behavior. The then new system assigns each bank client a score based on deposit and withdrawal activity. Presumably, checks for non-sufficient funds and returned checks count against the borrower's score. The scoring system alerts the bank when there is a change to the borrower's financial activity--for instance, a direct deposit which stops may signal the loss of a job. Using up the savings may also signal financial difficulties. And that can be the bank's cue to cut off credit.

In addition to tracking bank information, credit bureaus are also using income estimates to determine potential debt to income ratio. Although credit reporting agencies do not have direct access to income documents or to IRS-filed tax returns, the Federal Reserve has cleared the way for lenders to use credit bureaus' income estimates to determine whether a particular borrower would be creditworthy for credit cards and credit lines. Using existing credit lines and the type, balance, and age of the consumer's mortgage, the credit bureaus attempt to determine what the client's annual income is. His stated income on a credit application can then be cross checked against the credit bureau's guesstimate to see whether the numbers line up.

The banks are also tracking the consumer's home's value.  A WSJ article from 2010 tells of Ken Lin, who had a very good credit score but was denied for a credit card. He was flagged as high risk because he lives in California where his property value had declined but his mortgage balance had remained steady, signaling that he was on an interest-only mortgage. 
The cash value of bank accounts and other "liquid assets" can be an important mitigating factor in determining credit worthiness, but previously credit reports did not disclose financial liquidity just as they did not disclose income. Now, however, Experian offers a service which estimates financial liquidity for consumers so that the banks can use this information to determine credit worthiness.

For more than a decade, the importance of a good credit score has been drilled into us, with the result that many more Americans know their credit score and understand its impact on their lives.  And as a result, many Americans have tried hard to maintain their credit through the tough times of the past two years, knowing that a poor credit score has long on-going consequences. 

Now, as experts speculate about whether we are officially headed back into another recession, FICO has introduced yet another new set of perimeters for credit reports. On October 10, 2011, they announced a new initiative through CoreLogic which will provide lenders with still more info on prospective borrowers.

The new credit scoring models will include previously excluded items such as child support payments.  Right now, child support shows up on credit reports only if it goes into collection.  Regular payments do not appear on a credit report.  The system will also score apartment rentals and applications to payday lenders.

In FICO's press release about the new system, VP of scoring and analytics Greg Pelling said that, "Lenders today need as much actionable consumer information as possible so that they can safely grow origination volumes and avoid future losses."  And indeed, some analysts are saying that the new information will help people with thin credit files get approved for credit more easily because the models will allow lending institutions to take into consideration payment histories that currently do not report. This can mean that borrowers who have paid all of their bills on time but not utilized much "traditional" credit can have an easier time being approved.

But for most Americans, increased scrutiny into their financial lives is going to increasingly limit access to credit.  People who are struggling financially--particularly small business owners who are living on credit cards while trying to keep their businesses open--have increasingly seen their access to credit and capital cut off on the last few months.  Cutting off credit to people who are struggling may be a prudent move for a financial institution, but for the small business owner or the family trying to make ends meet, not being able to get credit in tough times may mean the difference between weathering the current financial storm and drowning.  At a time when falling home values and stringent underwriting guidelines are causing many otherwise qualified Americans to be locked out of the ability to refinance their homes to take advantage of historically low rates and lower their payments, should we really be adding in another level of scrutiny to make it still harder for people to qualify for loans?  As we continue to scrutinize every aspect of potential borrowers' financial lives, we can find more and more reasons to deny more and more people access to loans that could dramatically improve their financial situations.

It will be interesting to see how FICO compiles and processes the information obtained.  For example, traditional credit reports report borrowers who have been late 30 days on a payment as delinquent.  However, apartments and other housing rental agencies tend to consider payments made after 15 days delinquent.  Will FICO report delinquent payments on accounts not past due 30 days if that is how the reporting organization listed them? 

All of this new access to info just means that for the consumer who is beginning to have some financial problems--loss of equity in a home, loss of one of the household incomes, etc. the financial service provider can identify those persons and cut off their access to credit even if they have had a perfect pay history.  It is a little like the credit version of "Minority Report"; we can now determine whether a person is at risk to default and punish them before they have a chance to make their first late payment.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information, visit her website at


Monday, October 3, 2011

The Occupation

We are now in the third week of the Occupy Wall Street protests, as thousands gather in New York and elsewhere around the country, to protest Wall Street, corporate greed, and capitalism.  Over the weekend 700 protesters were arrested for blocking the Brooklyn Bridge, but the arrests and the protests have brought increased attention to a group whose primary goal is to "demolish capitalism" and the free market system.

The Occupy Wall Street protesters have been joined by Susan Sarandon, Michael Moore and other leftist activists who support the assertion that Wall Street has too much influence over the world. (Of course, no one is going to stage an Occupy Hollywood protest to point out the fact that actors are notoriously over-paid and that Hollywood exercises undue influence over the world, but I digress.)  Billionaire George Soros has also signified his support and sympathy for the movement.

Interestingly, beyond the destruction of capitalism, Occupy Wall Street does not seem to have any clear goals, except perhaps to set up a counter movement to the Tea Parties which will promote socialism and  organized labor. The protesters want to replace the free market system with a new system in which presumably the government will be the only entity with undue influence.

Since promoting "freedom" is a goal of Occupy Wall Street, a blogger sympathetic to the cause asked fifteen of the protesters to define freedom.  I have excerpted some of the real answers to the question of "What does freedom mean to you?"  For a complete list of the answers, see  I found these definitions truly enlightening:

"Freedom is bound up with the idea of possibilities.  The idea of limitless possibilities is the ideal of limitless freedom...But we still live in a state of unfreedom...The goal of history and transforming society must be to make these possibilities available to everyone."

"Revolution means freedom from necessity."

"Freedom means living my life however I want to...The ability to do what I want with my life, without the confines of debt, without the confines of politics, without the confines of anything else."

"Being able to have enough activities, friends and the social basis of self respect..."

"Freedom means freedom from necessity."

"I think freedom is your ability to carry out what you want to do...If you are always working for a boss, you don't have freedom either. Freedom is always that you're emancipated from your physical necessities and your mental baggage."

"Freedom means the ability to speak your mind, to live your life free of worrying about how you'll pay your next bill or whether you'll have a roof over your head."

And the media is wondering that these people don't appear to have a clear-cut objective for the protest!  The Occupy Wall Street protests is spreading to cities as far from New York as Albuquerque, New Mexico, and the protesters are reportedly going to New York from across the nation to take part.  This week, protests are expected to include representatives from The Teamsters Union.

Unfortunately, the above quotes about freedom represent current attitudes about freedom for many Americans.  (And while some of the protesters quoted here are students who are not yet twenty years old, others are grandparents, so this is a fair cross-sampling of ages.)

None of these definitions of freedom includes personal responsibility or risk taking.  But in reality, no one can ever experience freedom without taking responsibility for his or her own life. When we take responsibility for our lives, we take risks and we incur debt.  But in doing so, we make both good decisions and bad ones, and we earn the right to chart our own course in life.  When we live in an entitlement society where the government meets our needs and provides all of our necessities, the government also determines how much we can have, where we can live and what we can achieve. 

The protesters who are standing outside in New York protesting capitalism are asking that the free markets be replaced by a cradle-to-grave entitlement society where they will not have student loans, or debts, or jobs they hate, or responsibility.  They are also asking for a society in which they will never experience success or aspire to truly improve themselves. If their dream of "freedom" is achieved, they will live in a society where a massive government becomes the source of everything. As Dwight Eisenhower said, "Every step we take towards making the State our Caretaker of our lives, by that much we move toward making the State our Master."

For more by Alexandra Swann, visit her website at