THE PERFECT STORM: AGAIN? YESSIR SAYS HUD SECRETARY SHAUN DONOVAN. The HUD secretary has decided to allow all FHA-approved lenders to provide short-term bridge loans to eligible home buyers to help them buy a house. Translated that means to help them, the home-buyers, as well as us mortgage brokers and real estate agents, close the loan, to finalize the deal because many times this, cash, is the only thing stopping the closing and many “intelligent” businessmen and politicians are saying that it is a “perfect storm” for homebuyers because of the low interest rates and this new bridge-loan.
     Today, the fed-funds rate is 0.25%, in other words ¼ of 1%. This is the overnight rate, the rate at which the fed banks lend to the fed’s 12 regional banks and the primary way that the Fed Chairman, Ben Bernanke, has of influencing the economy. In other words Barnanke, the government’s bank(er) loans the 12 regional federal reserve banks their money at 0.25% and then they loan that money out at 0.50% to all the other banks who then set a prime rate, the rate at which they are SUPPOSED to loan money to their “best” customers. That rate, as of today, published in the Wall Street Journal, is 3.25%, BUT the banks are not passing that rate on, as the Obama administration has DIRECTED them to (Obama really has no power in a Capitalist, free-market society over the bankers) as we can see by the average 30-year fixed rate, as of today at 5%. The banks are attempting to repair their books at the public’s expense, taking the extra profit instead of passing the 3.25% onto the homebuyers.
     Then there’s the servicing of the loan to ponder upon; which most homebuyers don’t know about or take into consideration. The banks make the bulk of their money servicing the loan (you make your payments to them, over a 30-year period) and/or selling the loan to another bank, who then make their money servicing the loan. The banker sets a “par rate” for his rate sheet; the par rate is an interest rate that’s used as a reference point for which a lender will neither pay a rebate (yield spread premium to the M.B.; negative points) or require discount points for a mortgage (cash from the borrower to lower the interest rate). This rate is also that lender’s reference point that THAT BANK uses to buy other mortgages; he will pay (at HIS par rate) 100% of the principal on an existing mortgage that has that rate and will pay a premium for mortgages with rates above their par rate and a discount for mortgages with interest rates below their par rates. Now, if you are a homebuyer with an 800 FICO score and the prime rate is 5%, then you SHOULD get 5%. If, however you get 5.25% instead, the banker and/or mortgage broker have just made more money on the loan The banker does not, legally, have to disclose to you any yield spread that he makes on his loan, so that he can loan you 100K at 5.25% when you are actually eligible for 5% and make another 1% of the loan on yield spread. On a $100,000 loan that would be, of course, $1,000. The mortgage broker can also do this and it is called yield spread premium. The only difference between the M.B. and the banker is that the banker has no obligation, under the law, to disclose to you that he has made this money and the M.B. does, it’s disclosed on the Good Faith Estimate and the Truth In Lending statement. Of course the mortgage broker has to make something to do the loan and if he/she does their own processing they will typically charge you a $495 or $595 processing fee and usually a 1% (or higher) origination fee; 1% of the loan amount in the mortgage business is generally considered more than fair, in fact it’s probably the best you will find, even though some banks will advertise ‘no fee’ loans, they make considerably higher yield spread because they don’t have to, as I’ve said, legally disclose this fact and they also have either an administrative fee or a processing fee, or both.
     And so, this “perfect storm” that is going to “jumpstart” our economy again, as the politicians and businessmen are predicting I also see as a “perfect storm” but more of the variety that will sink the ship instead of rescuing it. The Treasury bond rates are escalating, which happens when prices go down, which means people are being tight with their money, which means the economy is slowing even more and inflation looms like an ugly reminder of the past, which means that the interest rates have to rise, which means that the housing sector will likely suffer even more. I have seen, and lived through this cycle before, in 1978-‘82 and, if you lived through the boom/bubble from 2004 until the beginning of 2007, you know how inflated real estate can become. Right now they’re low but this is because of foreclosures and short sales on mostly un-kept houses, homes that will require money to bring them up to livable conditions, and many will now be sold to homebuyers that are required to put “nothing” down, if they are qualified for the $8,000 dollar bridge loan. The perfect storm …? I remember a time when homebuyers were qualified with no-doc loans, low-interest (first year) ARMs, with no money down and payments that they could never afford … especially when the rates reset or if they lost their job … BTW, today’s unemployment rate in Hernando County, as of March 2009, is 12.9%. So, like I was saying, there was this time that I can remember when they were giving out money and people were standing in line and, oh, by the way, Goldman Sachs just said they were borrowing 3.25 trillion from their good buddy Tim Geithner this year and … ah well … just sayin’ …