More homeowners refinancing into shorter loans: survey

NEW YORK ― More homeowners prefer to pay off their mortgages sooner as interest rates have stayed near rock-bottom and weak labor conditions have caused them to reduce their debt loads, a survey showed on Monday.

The current trend in refinancing into shorter-loan terms is a stark contrast to the one during the height of the housing boom, when families were taking out bigger mortgages against the rising values of their homes.

Of those homeowners who refinanced a 30-year fixed-rate mortgage during the second quarter, 37 percent moved into a 15-year or 20-year fixed-rate loan. This is the highest since the third quarter of 2003, mortgage finance agency Freddie Mac said.

In the second quarter, interest on the 30-year mortgage averaged 4.65 percent, compared with a 3.84 percent average on 15-year mortgages, the company said.

“It’s no wonder we continue to see strong refinance activity into fixed-rate loans,” Freddie Mac Chief Economist Frank Nothaft said in a statement.

Refinancing has comprised the bulk of U.S. mortgage activity since the housing bust that led to the 2007-2009 global financial crisis.

During the second quarter, the refinance share of mortgage applications, versus the share of applications for loans to buy a home, averaged 70 percent, Freddie Mac said.

U.S. banks pushing for legal shield on mortgages

WASHINGTON ― U.S. banks still wrestling with legal troubles springing from the subprime mortgage crisis are lobbying the new consumer agency for strong legal protection for future home loans.

The Consumer Financial Protection Bureau is finalizing a proposal to entice banks to offer straightforward loans ― without interest-only payments and excessive fees ― by providing a legal shield. The question is whether to give banks full protection, known as a “safe harbor,” or a more limited legal shelter.

“It is critically important that the final rule provide a safe harbor,” Bank of America Corp. wrote in a July 22 letter. “If the final requirements instead increase the liability exposure of creditors … the result will be increased costs and further reduction in credit availability to the very consumers that the reforms were designed to protect.”

The Federal Reserve issued a proposed rule on the matter earlier this year, but then punted it to the consumer agency, which now has jurisdiction. The agency, which was created by the Dodd-Frank oversight law, opened its doors on July 21.

This rule will be one of the first big tests of how tough the consumer agency will be on mortgage markets.

The proposal has already launched a flurry of letters from large banks such as Wells Fargo & Co, JPMorgan Chase & Co. and Bank of America Corp.

Those banks and others are hobbled by stalled foreclosures nationwide due to legal questions and multibillion-dollar lawsuits from investors such as American International Group Inc. that claim the quality of securities backing the mortgages was misrepresented.

The banks argue the safe harbor for future high-quality loans would promote lending and assure investors who buy mortgage-backed securities that legal battles are not on the horizon.

On the other side of the issue, consumer advocates charge banks want to take away one of the few legal tools available to borrowers who believe a lender pulled a fast one on them.

“The bureau’s position on this rule will be an indicator of its ability to work independently of the bank lobby,” said Alys Cohen, a staff attorney for consumer advocacy group the National Consumer Law Center.

The consumer agency is expected to issue a final regulation by early next year.

An agency spokeswoman declined to comment.

Wells Fargo mortgage buybacks could top $1.8 billion

CHARLOTTE, N.C. ― Wells Fargo & Co may have to buy back an additional $1.8 billion in toxic mortgages from outside investors on top of claims it already received, the fourth-largest U.S. bank by assets said in a securities filing on Friday.

The San Francisco-based company said its possible mortgage repurchase claims could exceed their established reserves under a worst-case estimate.

The lender becomes the latest large U.S. bank to project what its worst-case losses might be, if it were required to buy back billions in toxic mortgages.

Outside investors can require a bank to buy back loans if the original mortgage did not comply with guarantees it made about its quality ― known as representations and warranties ― when sold.

Wells Fargo’s repurchase claims have declined for four consecutive quarters, since the second quarter of 2010.

Second quarter 2011 claims were for roughly 10,000 loans whose original balances totaled $2.24 billion, down from $4.31 billion a year earlier.

How to understand and navigate the new mortgage climate

Janette Mah, Senior Vice President, Manager of the Residential Mortgage Group, Wilshire State Bank

Before the financial meltdown in 2008, prospective home owners breezed through the lending process while pursuing the American dream. Now, even veteran borrowers can be stymied by today’s strict lending environment, especially if they rely on previous knowledge and experience to navigate the process. Fortunately, education, preparation and a little perseverance can help novices as well as seasoned borrowers surmount modern obstacles and realize their dreams.

“The pendulum has swung too far the other way and now lenders are looking for picture-perfect borrowers,” says Janette Mah, senior vice president and manager of the Residential Mortgage Group at Wilshire State Bank. “Borrowers can avoid frustration and disappointment by educating themselves on the underwriting process, meeting with lenders and securing pre-approval for a loan before they start shopping for a home.”

Smart Business spoke with Mah about the current mortgage climate and why borrowers need education and preparation to prevail.

How has the lending climate changed, especially in the greater L.A. area?

Lenders are being somewhat cautious because the economy and the housing market are sending mixed signals about their overall health. Unemployment is still very high, the economy is struggling and some areas in Southern California are still working through a backlog of foreclosed properties, which is keeping residential real estate prices from stabilizing. While the federal government will continue to play a role in securitizing long-term mortgages, the future of Freddie Mac and Fannie Mae is up in the air. After synthesizing all this information, it’s clear that homebuyers and lenders must approach the market with caution and diligently assess the risks before finalizing a transaction.

What should borrowers know about the current underwriting rules and mortgage qualification process?

Borrowers can no longer state their income; they must provide sufficient documentation to verify their earnings and assets in order to prove they can repay the loan. In addition, lenders are using a new set of standards to underwrite and evaluate risks, and while the requirements may differ for some programs including FHA loans, these are the general guidelines.

  • Minimum credit score of 640 to 660 and a history of financial responsibility and saving. Borrowers can drive a better deal if their credit score is 740 or higher.
  • Employment stability.
  • Sufficient liquid assets to survive a temporary financial set back.
  • Minimum down payment of 20 percent, and the funds must be in the borrower’s account for at least two to three months.
  • Total monthly housing costs for principal and interest, taxes and insurance should not exceed 33 percent of gross income, while total monthly expenditures for all liabilities should not exceed 45 percent. Remember, even deferred payments on a student loan will count toward your monthly liabilities.

How can borrowers prepare for the lending process?

First, know your credit score by pulling a copy of your report and taking the time to clear up any issues before you approach a lender.

Second, research the various loan products to identify one that meets your needs. If you plan to stay in your home for more than seven years, then a 30-year or 15-year fixed rate mortgage might be the best choice, while a loan that offers a fixed rate for just five years might be appropriate if you plan to sell the property in a few years.

Third, study the lending process so you’re familiar with the paperwork and the requirements you’ll have to satisfy along the way.

Finally, calculate your income-to-debt ratio and research the real estate market, so you know how much money you need to buy a house and approximately how much you can borrow before you meet with a lender.

What’s the best way to approach a lender and avoid mortgage scams?

Contact two to three lenders to request face-to-face meetings and a quote. While it’s a good idea to survey the market by searching the Internet, borrowers generally get the best deal from a bank where they have an existing relationship. Vet the contenders by asking for their license number and searching for information on the licensing authority’s website. New legislation has granted consumers additional protection from fraud and scams following the crisis of 2008, so now mortgage originators are required to register and undergo a background check in order to comply with the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act).

Total out-of-pocket costs for a 30-year fixed rate loan should average $1,500 to $3,000 and buyers should ask for a written estimate before agreeing to a deal. Lock in your interest rate for as long as possible so you can boldly tout your pre-approved status to realtors and sellers and negotiate with confidence when shopping for a home. Finally, remember to allow plenty of time when you finally locate the home of your dreams, because the underwriting and escrow process takes a minimum of 30 days.

Janette Mah is a senior vice president and manager of the Residential Mortgage Group at Wilshire State Bank. Reach her at (213) 427-1490 or [email protected]

Banks cutting principal on some mortgages, according to report

NEW YORK ― Bank of America Corp. and JPMorgan Chase & Co. have started modifying tens of thousands of mortgages where the banks deem the loans especially risky, even if the borrowers have not asked, The New York Times reports.

In some cases, the paper said, the banks are slashing the amount borrowers owe, citing one case in Florida where a woman’s principal balance was cut in half.

The paper said the banks are targeting holders of pay option adjustable-rate mortgages, a type of loan where borrowers have the option of skipping some principal and interest payments and having the amount added back onto the loan.

Such “option ARM” loans were seen as especially high risk in the wake of the financial crisis; the two banks collectively still have tens of billions of dollars of such loans in their portfolios.

One law professor quoted by the Times said the banks were behaving in contradictory ways, modifying some loans that should not be and not modifying some loans that should be.

Spokespeople for the two banks were not immediately available to comment.