Homie, a Utah-based tech startup has had success in cutting out the buyer’s real estate agent from the transaction. Flat fee and discount real estate brokers are pretty common now so that is no big deal. But, Homie says it can be transferred to the mortgage business to give the lowest rates in Utah.
They will have salary-only LOs instead of commissioned-based originators. That is hardly new either. But companies like Homie soon realize that you are paying the LO for all of the time they spend where no loan is produced so commission is not as expensive as some think. On the other hand, the company may find that only sucking in the top end of the market, which is what you get in this paradigm, can get you in hot water with Fair Lending rules very quickly.
CBS MoneyWatch is taking aim at the revival of ARMs saying, “Among the many participants whose reputations were ruined, few took more damage than the mortgage brokers who sold adjustable-rate mortgages. Known as ARMs, they became a four-letter word within the industry.”
A chart in the article shows ARMs had as much as 50% of the market in the 2005-2007 era. Bad ARMs associated with subprime mortgages are not the same as Fannie/Freddie ARMs of today.
Fin Tech Sindeo Shutters Its Doors
A company with a similar sales pitch to Homie is unable to continue. Sindeo had promised, “We’re removing the anxiety and hassle associated with getting a mortgage." They claimed they could
approve a loan in 5 minutes and “we’ve saved our customers an estimated $17 million by getting them a better mortgage.” Although it was funded with tens of millions of dollars, it took just one investor pulling funding to collapse the company. When reality set in founder Nick Stamos admitted, “But, startups are hard and simplifying the highly regulated, complex business of mortgages is even harder. I believed we had overcome the biggest hurdles, but unfortunately, we didn’t.” Up like a rocket, down like a stone, a familiar story in the mortgage business.
September May Be When Fed Begins Bond Taper
The Federal Reserve is so confident people will be willing to buy Fannie/Freddie bonds that they are going to slow down and eventually stop buying them. They made that clear at their most recent meeting. Philadelphia Fed President Patrick Harker on Wednesday said the September meeting could be a good time for the U.S. central bank to begin the process of shrinking its balance sheet. When the Fed raised short-term interest rates, it has had little effect on mortgage rates. There is little doubt that bowing out as the major purchaser of mortgage bonds will have an effect on rates.
Flood Bills Advance in House
The House Financial Services Committee passed five flood insurance bills this week. The first bill, H.R. 2868, passed unanimously. It would reform and reauthorize the National Flood Insurance Program which is set to expire on September 30, 2017. The bill would protect NFIP policyholders from unreasonable premium rates and require FEMA to conduct a study on how to cut costs. Two other bills passed unanimously as well. Two bills met some resistance. H.R. 2874, would try to use new techniques to lower costs, including pushing for more competition for FEMA from private insurers. It passed by a much smaller margin, 30 to 26.
Would Freeing Fannie & Freddie Wreck the Bond Market?
Moelis & Co. created a blueprint, which firms including Paulson & Co. and Blackstone Group sponsored, that calls for raising tens of billions of dollars in capital for the GSEs. The plan, released earlier this month, would also limit the amount of federal money available to offset any Fannie and Freddie losses to $150 billion. Scott Simon, former guru at PIMCO says, “I don’t think you could sell virtually any of this debt overseas if it wasn’t government-guaranteed.” He believes existing holders of Fannie/Freddie bonds would say, “Sell it all.
CFPB Opens Up Ability to Repay Rule. Your Comment is Important
The CFPB is assessing the Ability to Repay rule, also known as the Qualified Mortgage rule, they released in January of 2014. Under the rule, we have a 43% ratio that essentially only applies to private industry loans and a 3% cap that really only applies to mortgage brokers
because of all of the exemptions. This is your opportunity to comment. Certainly, I would recommend that they remove lender-paid compensation from the 3% cap. That would give an even playing field for all originators, that the CFPB claims to want to create. Secondly, the government loan exemption from the 43% ratio expires in 2021. The CFPB must decide in this iteration if that should be extended. Changing to a 50% DTI would be the best choice but we really need to extend the GSE/FHA/VA exemption if raising the DTI is not their choice. They also need to make certain streamline refinances remain QMs.
Rate Outlook
This was not a week with a lot of economic news and rates have pretty much shown it by moving sideways.
The biggest news of the week is that home sales are still hot and home prices continue to go up to new records. People are beginning to wonder how long this can continue without pricing too many out of the market. Right now, renting and buying are pretty close for the average buyer but you get a decent tax break if you can itemize when you buy. You also get protection from rent increases. So, the scales still tip toward buying, especially when you have 1% down programs.
New home sales come out tomorrow. One would think new homes would be selling even better than existing, but builders have several problems. First, there is so much red tape that it takes a long while to get a home built. Then, there are spiraling costs. It is tough to build a new home for the $250,000 median home price in many markets.
Home price escalation has not been lost on policy makers. Federal Reserve Vice Chairman Stanley Fischer believes the long period of low interest rates may have contributed to "high and rising" home prices. It seems the Fed would like to see mortgage rates go up.
This morning initial jobless claims came in at 241,000, which is about where they have been for a while. The FHFA House Price index rose 0.7% versus the expected 0.6% increase, not unexpected.
Tomorrow brings new home sales which is not likely to change rates.
Coming up is the FHFA House Price Index for April (from the overseer of Freddie & Fannie), as well as May Leading Economic Indicators and the dollar amounts of next week’s 2, 5, and 7-year Treasury auctions.
John Councilman, CMC, CRMS of AMC Mortgage Corporation in Ft. Myers, Fla. is past president of NAMB—The Association of Mortgage Professionals. He may be reached by phone at (239) 267-2400 or e-mail [email protected].
