Home Valuation Code of Conduct (HVCC)

If you have not heard about HVCC, the Office of Federal Housing Enterprise Oversight (http://www.ofheo.gov/) has just passed the final version after extensive legislation. The document is posted on their website, although at this moment it is not accessible.

This legislature’s intent, credited to New York’s Governor Mario Cuomo, is to clearly separate production personnel who are monetary invested in loan approval from appraisers who are to remain independent and not be influenced by pressures to accommodate loan production.

These regulations will apply to all mortgages funded by FannieMae and FreddieMac, who are pretty much the only source of mortgages except for FHA and VA loans. I have not read the final version nor do I profess to know how to comply with the regulation. As with most laws, we will leave the lawyers to tell us what to do.

How is this law going to affect the mortgage process is being hotly debated. Many feel a set of ridged rules governing how and whom is to order the appraisal and how and who can contact the appraiser creates more problems than it solves. Instead of repeating the comments you can Google HVCC and read all about it.

What I think the impacts are; 1) we will have almost no control over who appraises the property; 2) we can not discuss with them for an indication of value before the appraisal is ordered; and 3) we can not dispute the appraised value after it is done.

In all my years in the mortgage industry I have had many borrowers complain about low appraisal valuations, rarely or never have I had anyone complain about a high valuation. I not sure how that complaint can be addressed in the future. The scenario of getting an appraiser to give us in value range before ordering the appraisal is now prohibited. While recent foreclosures have exposed deficiencies in collateral, I tend to think of that as a market function. Collateral is only part of the loan approval process. Credit and capacity, meaning the ability, to repay the loan are critical part of the equation.

When loan approval hangs on the appraised value of the property, the loan is “iffy”.
After all, the appraised value is just a guide. Actual transaction price can easily be 10% to 20% different than appraised value in any market condition.

In the past, I could order an appraisal for my customers and then choose a lender to match a more favorable loan parameter. I could discuss slight valuation variance that impacts the loans with an appraiser. I could control the cost and the turn around time of the appraisal. All of these actions will be restricted.

The good news is as of right now, we have not been issued the new guidelines, and supposedly it will take effect in March 2009. So if you are considering refinancing and have concerns with valuation, it probably is the best time to act now.

Wild Gyrations

With the Fed announcement to lower the Fed Fund rate, the long term bond yields have dropped to the lowest level since the 1950s. What it means is the 30 years fixed mortgage rates, which tracks the long term bond yields, has also dropped to its lowest levels. In the past mortgage rates usually crept up after Fed announcement of cut in rates. This has created a great opportunity to refinance to a long term fixed rates and lower your monthly payments. By now, having seen so many refinance cycles in the past twenty years in the business, I thought I had seen it all. It is almost a cliché to say this time is different.

The reason this time is different is due to several converging factors. The underwriting guidelines have changed; lenders are more stringent in loan approvals; property values have dropped making some refinances impossible; cash-outs of 75% are no longer as easy; and existing seconds or piggybacking seconds are much more complicated to refinance. In addition to the underwriting changes, the pricing mechanism of the mortgage rates has also changed. By this I mean the rate/point structure. In the past, for each 1/8 decrease in rate it would cost you around ½ point, vice versa for a 1/8 increase in rate you would see a rebate of ½ point. In the past, this made refinancing using the rebate points to offset closing cost very attractive, but with the current structure most borrowers would benefit more by choosing the lower rate and pay the points.

Something else different than the past is the speed the rates are changing, sometimes rates can change by more than ¼ % in an hour or less, three or four times a day. While in the past a spread of more than ¼% change in a week would be unusual.

What does all this mean? Well, for the qualified borrowers, this is the best opportunity yet, lenders are allowing you to lock-in to a very low rate, and if the market changes they are willing to renegotiate with you for a lower rate. Granted this will be a give and take scenario, with all three parties: lenders, brokers and borrowers compromising and reaching an agreement so we can get your loan closed. For other borrowers, it becomes even more important to work with someone you trust to help navigate through these turbulent times.

Low Rates or Rebate Points?

In the last few weeks, I have seen a lot of our previous borrowers come back to us applying to refinance. At that time most of us thought the rates would never be that low again. I remember a few lucky borrowers who were able to lock in at under 5% for a 30 years fixed rate without having to pay points. We can get that rate on a good day - even for loans bigger that $417,000.00.

But one major difference today is the amount of rebate points lenders are offering. Borrow123.com customers know that rebate points can be used to offset closing costs. In the past you might get ½ point rebate for taking a 1/8 point higher interest rate – now lenders are offering less. For this reason I feel it is probably more advantageous today to pay the closing cost and lock in the lower rate.

The reason I feel this way is because the majority of borrowers are solely looking to lower their monthly payment. Obviously, the way to do that is to lower the interest rate as much as possible. And as long as the borrower is willing to stay in the home for a few years, the lower monthly payment will save the borrower more money.

As an example, we will refinance $400,000 at 5.375% versus $405,000 at 4.875% (it is $405,000 because we will roll the closing costs into the loan, so the borrower still does not have to pay out of pocket).

The $400k loan will have a payment of $2240/month and the $40500 loan will have a payment of $2143/month. After 5 years, you will have a higher balance on the $405k loan by a couple of thousand. This may seem surprising – until you factor that the borrower paid $100 less each month for 5 years and has saved $6000.

With the way the stock market is going, you are probably better off investing your money locking in a low long term rate for you mortgage than other investment alternatives.

The Happy Problem

What an amazing run on mortgage rates in the last two weeks. Ever since the announcement from the Federal Reserve to buy mortgage backed securities and the Treasury Department announcing intentions to drive mortgage rates lower to as low as 4.5%, we have seen rates drop to the lowest levels in recent years.

Of course, what everyone wants to know is: will it go lower? How low? When will it be the lowest? For the past twenty years in the industry in the industry I have been asked these questions. I've consulted with a gamut of gurus who can predict the exact trend of rates. Some of them charge money for their advice, some of them did it as a favor and others just did it as a hobby. Some of them were right - and sometimes they were wrong.

I do remember one person who was right all the time. He was uncanny in his predictions; as if he could see the future. It's too bad I lost track of him. It seems his success in his predictions allowed him to retire early. He left mumbling something about planting ginkgo trees...

Jokes aside, my borrowers ask me these questions because they want the best advice in regards to their particular loan application. Nailing down and locking in the lowest rate is like hitting a moving target. It is always tricky if not impossible to do. Rates change and a good rate today may not be a good rate tomorrow. And if you don't lock in today, come tomorrow that rate could be gone. It looks like a game with no winners.

From lenders to brokers to borrowers we are all flustered by the market dynamics. So what is one to do?

My best advice has always been that it depends on each individual situation. What is important to a borrower closing on a purchase transaction can be very different that someone looking to lower their rate with a refinance. Some times the type of program makes a difference, and sometimes a higher point/rate structure actually makes sense. This is what makes working with a mortgage professional so essential. We have a number of tools available in order to maximize the opportunity to lock in the lowest - such as float down options, quicker loan processing and closings, streamline applications and other methods.

The bottomline is this: rates are very good right now, so this is a happy problem. Especially in the age of the internet there will always be someone to promise a lower rate. Sometimes they are true and other times they are not (and you would be surprised how many times they are not). However, I believe we would all be better mentally prepared to solve this problem if we realize that we are struggling for a gain and not a loss.


Joe Wang is the owner and founder of Fortune Mortgage Company and Borrow123.com. You can reach him directly at joewang@borrow123.com