Tell us a little about yourself and your role at Deutsche Bank.

I recently joined Deutsche Bank this year as a Director of Agency Mortgage Backed Securities (MBS) Research.  Here I spend a lot of time examining the government mortgage market and the securities backed by Fannie Mae, Freddie Mae and Ginnie Mae.  I propose trade ideas suitable for institutional accounts as well as opine on housing policy and provide up-do-date commentary.  Prior to joining Deutsche bank, I held similar roles at the Royal Bank of Scotland, where I lead the Agency MBS research team, as well as UBS Investment Bank.

What do you like about researching and reporting on government-backed mortgage securities? How did you get into this area of the finance industry?

I became fascinated in mortgages because of their embedded optionality, i.e. determining if and when a borrower will prepay his loan.  That decision leverages on a quantifiable incentive as well as borrower behavior.  The combination of numbers and behavior has always intrigued me.  I have a bachelor’s degree in Mathematics with a minor in psychology, which is a rather unique background but a perfect fit for my role.  Research allows me to really explore opportunities in housing finance that are of interest to me.  With the whole mortgage finance model currently under a microscope, there is no shortage of things to talk about!

Many mortgage consumers don’t fully understand the relationship between government-backed mortgages like Fannie Mae, FHA and VA, and investors. Can you explain this?

When a homeowner takes out a mortgage, that loan is typically made by a bank or mortgage lender, not the government.  However, Fannie Mae, Freddie Mac, FHA and VA are all government entities that make mortgage finance possible.  They set their own eligibility requirements and if mortgage loans fit their parameters, the entities will guarantee the loans against default for the investors.  These loans then get guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae (the securitization outlet for FHA and VA loans).  Now, the MBS investor is not taking on the credit risk of the individual homeowner, but instead the risk of the US Government.  The role the Agencies play is critical to broadening the investor base for MBS which ultimately helps facilitate mortgage lending to borrowers nationwide.

Why are private investors interested in buying mortgages?

Mortgage Backed Securities typically offer investors a higher yield than other fixed-income assets.  Additionally, Agency mortgages carry the backing of the US government, so there is no default risk.  A common comparison is between Agency Mortgages and US Treasuries, since both are government products.  At current levels, MBS returns are approximately 1% higher. The risk to MBS investors is really prepayment risk, if a borrower moves houses or refinances his loan, the principal is repaid in full but the loan matures quicker and the investor misses out on a future stream of interest.

Contrary to popular belief, the government does not control mortgage rates. How does investor demand affect rates?

Investor demand essentially sets the price and rate for MBS securities.  If demand is high, investors will be more willing to buy at lower rates.  If demand is low, as it was at the peak of the crisis, the only way to get investors back is to push rates of return higher.  Unfortunately, this means charging the borrowers a higher rate.

You recently researched VA mortgage trends. What were a few of your key findings? Did anything surprise you?

It has been surprising how fast the VA loan population has been growing and what is more fascinating is that the trend is set to continue.  The VA estimates that the volume of VA loans is likely to surge 36% over the next five years as more young veterans return home from the military.  This means Ginnie Mae MBS Issuance could rise by $10-20 billion per year.

From your research, how does a VA loan compare to an FHA or Fannie Mae loan as far as the consumer is concerned?

A VA loan is unique in that it is a benefit only offered to veterans.  The advantage of a VA loan is that it does not require a down payment.  FHA loans require a minimum 3.5% down payment, but are available to all homebuyers (not just veterans).  Only recently does Fannie Mae permit a 3% down payment.  The real difference between FHA and Fannie Mae loans as far as the borrower is concerned is pricing: borrowers with higher credit scores generally receive lower rates through Fannie Mae, whereas FHA does not differentiate by credit score.

According to Ellie Mae’s Origination Insight Report, VA loan rates are about a quarter percent lower than those of Fannie Mae or Freddie Mac loans. Do investors view VA loans as safer, hence the lower rates?

Rate incentive is absolutely part of it, so from that perspective lower rates imply less prepayment risk and are in one respect safer.  However, VA has a much more efficient streamline refinance program where no appraisal is required.  As a result, VA loans can prepay faster than conventional (Fannie Mae or Freddie Mac) loans, which poses a greater risk to the investor.  MBS investors are constantly weighing these trade offs when making decisions.

The post Jeana Curro, Director at Deutsche Bank on Gov’t Backed Mortgages, Low Rates first appeared on My Mortgage Insider.

Tim: Veristone Mortgage helps people with “outside-the-box” lending that traditional lenders just won’t do. What’s your most popular product right now and why?

Aaron: For our investor clients, our “Fix and Flip” product is by far the most popular. This product offers investors an all-in-one loan program when acquiring, rehabbing and quickly selling a home for a profit. I recently read that nearly 40% of REO’s are being purchased with all cash, and our financing allows these investors to compete with those cash offers.

These loans are extremely easy for us to approve because the primary focus is the property/project. During the underwriting process, we will verify the contractor’s credentials, acquire the contractor’s budget and obtain a fully itemized scope of work to be performed on the property.

Tim: Is house flipping more common with seasoned investors, businesses, or beginners? What are a few things a beginner should do if they want to qualify for financing?

Aaron: There are certainly some large institutional investors in the market, but our primary focus is working with seasoned investors and beginners. Anyone considering their first real estate investment should consult with one of our account executives. The resources and expertise we offer beginners will help ensure they are prepared to make good decisions, and hopefully become a repeat buyer.

Tim: What are some of the reasons someone would want a bridge loan? For what situations are they best suited?

Aaron: In many situations, well-intended, but over-corrective policies are severely hampering the ability of qualified buyers to purchase a home. Our bridge financing offers consumers a short-term financing solution to overcome these hurdles. The most common issues we see are related to income and asset documentation, property condition and/or credit history.

Tim: Is bridge lending becoming more popular?

Aaron: It has definitely become more popular with inventory shortages in the real estate market. Buyers cannot afford to wait for issues to be resolved because sellers have multiple offers on their property. In these situations, buyers turn to us for short-term financing and their traditional lender works with them to refinance them into a long-term financing solution once they meet the qualifications.

Tim: Do you often save home purchases at the last minute because they fell through with a traditional lender? What are the top reasons transactions die toward the end?

Aaron: It’s surprising how frequently consumers need creative financing. I hear from multiple loan officers and real estate agents daily that need our help saving a transaction. The issues usually fall into one or more of these buckets: Debt-To-Income Ratio, Income Documentation, Asset Documentation, Property Condition or Credit History. A common example of income documentation currently are people that have not yet filed their 2014 income taxes, but they need this to be done prior to qualifying for traditional financing. A common example of debt-to-income ratio issues are people that are buying a home and selling their current home. They run into issues when the sale of their current home is closing after they will complete the purchase of their new home. If they cannot extend the closing on their purchase, they often need a creative financing solution. A common example of credit issues are people that had a short sale, bankruptcy or foreclosure in the past and don’t quite meet the required waiting periods with traditional financing.

Tim: How fast can you close a loan?

Aaron: We like to have at least 1 week, but we have closed loans in less than 72 business hours.

Tim: Does your company offer any other alternative financing options?

Aaron: We do have some long-term creative financing for consumers and investors, as well as financing for auction property financing and other unique investor products.

Tim: Any other thoughts or advice on bridge loans, house flipping loans, or any of your other non-standard loan types?

Aaron: Anyone having difficulty qualifying for traditional financing or frustrated by missed real estate opportunities should contact us to see if our creative solutions can help. Our underwriting process is extremely quick, and we usually offer same-day underwriting decision. Even if we can’t offer them financing right now, we can help them get on the right path to homeownership.

The post House Flipping & Bridge Loan Financing: Interview with an Expert first appeared on My Mortgage Insider.

Tell us a little about Urban Institute’s Housing Finance Policy Center and its mission.

Regulators and other policymakers are making critical decisions each day, and they need information, evidence-based analysis, and solutions.

The Housing Finance Policy Center at Urban Institute was created to fill this need. We provide timely, impartial data and analysis on housing finance and contribute to sound public policy, efficient markets, and economic opportunity.

You have quite an impressive résumé. You were the head of global fixed income research at UBS, a senior economist at the Federal Reserve Bank of New York, and you were even inducted into the Fixed Income Analysts Hall of Fame. What led you to join Urban Institute?

I spent almost 30 years on Wall Street, and I wanted a change. I had developed a deep interest in public policy issues, and specifically public policy toward housing and housing finance. I was looking for a platform to continue this research.  Urban was thinking of setting up a Housing Finance Policy Center. I heard about the center, and stuck my hand up to run it.

What are some of your core objectives in this role?

So much of public policy seems to be dominated by political ideology, and not grounded in data. Our primary goal was to provide data driven analysis of public policy issues to regulators and other policy makers that they could count on for relevance, accuracy, independence, timeliness and accessibility.

We do this through a vast array of written products including research papers, issue briefs, blogs and presentations. Secondarily, we hoped to serve as a hub for informed dialogue among policy makers, practitioners, advocates, academics, and other researchers, through convening of all types: data talks, seminars, symposiums.

Urban Institute is all about driving policy with data, not ideology. Name one or two of the biggest changes you would make to current housing finance policy based strictly on available data?

The data is clear that, in response to the housing crisis, we’ve overcorrected and it’s too hard to obtain a mortgage these days.  It is now extremely difficult for all but those with nearly pristine credit to obtain mortgages.

There is no single silver bullet but regulators and lawmakers need to take the actions we’ve outlined to ease access to credit.  Specifically, providing greater clarity about when loans can be put back on lenders and reducing the costs and burdens of servicing delinquent loans, particularly FHA loans would go a long way. FHA must also deal with lenders fears about being sued used under the False Claims Act.

What’s the biggest concern regarding housing finance policy in the next five to ten years? Why should future home buyers care about these issues?

First, that the GSEs are still in limbo.  The Federal Housing Finance Agency, first under Ed DeMarco and now under Mel Watt has done a great deal to move the organizations forward. They have introduced and expanded risk sharing deals to reduce the risk to the taxpayer. They are developing a Common Securitization Platform. They have moved to expand credit availability.

However, the ownership issues can only be decided by congress. One thing is clear: the mix of public support and private ownership was in large part responsible for their poor performance during the crises, and there is no easy resolution. The danger is if we don’t deal with this, and leave the GSEs in limbo, with little capital, it is hard to see how they would react to a future downturn in the housing market. And we are too reliant on them not to clarify this.

Second, over the next 15 years the homeownership rate will continue to decline in the United States and the demand for rental housing will dramatically increase in many communities.

We must at least double the current annual production of multifamily units to keep up with this demand. At the same time, if we don’t identify viable ways to ensure that more of these units are affordable, there will be an unprecedented and pervasive increase in the number of families that pay more than half of their income for rent.

You recently submitted a proposal to FHA highlighting possible lender pullback due to FHA’s severe penalties for underwriting mistakes. Why should home buyers be concerned with FHA’s rules for lenders? What were your proposed solutions?

The FHA serves first-time homebuyers, and many low-income and minority homebuyers. First-time homebuyers need to come into the market for existing homebuyers to be able to sell their homes and move on to their next home. When FHA policies restrict credit or make it more expensive for FHA borrowers, more than just FHA borrowers are impacted. Likewise, when entire swaths of the population – like minority groups or low-income families – find it hard to borrower money to buy a home, the many benefits of homeownership are disproportionately denied that group.

FHA has made some strides to deal with these issues. In particular, they have aggregated their 900 mortgagee letters (these mortgagee letters are the way they communicate program changes with lenders) into a single handbook that lenders can reference. They have recently finalized a Supplemental Performance Metric, which allows FHA to consider the mix of borrower credit scores when looking at lender performance.

Prior to this, lenders were compared against each other through the Compare Ratio. Those lenders with only pristine borrowers inevitably looked better, and lenders were penalized if they were more than twice the average. We had recommended some changes to the FHA’s initial proposal on the Supplemental Performance ratio; they took our suggestions.

FHA has also done a taxonomy, in which they had classified origination errors into four severity buckets. We would like to see specific remedies attached to each bucket. So if the error is minor, and the loan would have been made anyway on the same terms, maybe indemnification is not the remedy. For a fraudulent loan, which the originator should have detected, indemnification is the correct remedy.  Originators can be sued for treble damages under the false claims act. We would like to see this act applied only to the two most severe severity buckets.

On the servicing side, a number of changes are necessary. The FHA has timelines that are inconsistent with CFBP rules. The rules are also inflexible:  the FHA sets timelines for each stage of the foreclosure process, rather than the entire process, with onerous penalties for missing a deadline. This means if one part of the process moves slowly, the lender has no way to avoid the penalty, by trying to move more swiftly elsewhere.

In addition, the allowance for repairs is often too low, ($2500) for a roof repair for example. And there are maximums both on the total repair budget and on each piece of the budget.

Do you see FHA fading into the background as Fannie Mae, Freddie Mac, and various mortgage insurance companies roll out low down payment programs? Would this be good for housing?

No, FHA will never fade completely: they will inevitably be the lender of last resort, making loans to borrowers that are too risky for Fannie Mae and Freddie Mac.

It is important to realize that Fannie Mae, Freddie Mac, and the mortgage insurers do risk based pricing: More risky borrowers pay more: FHA does not do risk based pricing. Thus, more risky borrowers will usually find FHA lending to be their most attractive option from a pricing point of view.

You wrote a report about the disappearance of non-government mortgages. When do you see private banks and lenders coming back into the market? Are the days of non-government mortgage lending gone forever?

The private-label securities (PLS) market has supported mortgage lending in the United States for 38 years, and our report centered on how little of that lending is taking place.  This is less of a problem for prime borrowers with sterling credit who want jumbo loans, as banks are making loans to pristine borrowers, and holding these loans on their own balance sheet.

However, borrowers who don’t meet government lending standards and have imperfect credit have difficulties obtaining a mortgage at the present time. If banks retreat from lending before the PLS market restarts, other borrowers in higher cost areas who need jumbo loans will begin to lose access to affordable mortgages. We hope PLS participants will take the steps necessary, (detailed in the linked brief) to attract more investors, a precondition to re-opening this market.

Have you heard of any updates to the popular HARP program? Do you think underwater homeowners who do not have a Fannie Mae or Freddie Mac loan will ever have a chance at refinancing?

I have not heard of any updates to the HARP program, currently scheduled to sunset at the end of 2016.

Underwater borrowers who do not have a Fannie, Freddie, or FHA  loan will continue to experience difficultly in refinancing in the near time. Over time, fewer of these homes will be underwater, as we expect home price appreciation to continue. At that point, they will have options.

If you could give home buyers one piece of advice considering all you know about housing finance policy, what would it be?

Know what your loan terms are and don’t ever borrow more than you can pay back based on your current income.

Laurie, thanks for your in-depth and insightful answers. MyMortgageInsider.com readers appreciate your time.

You’re welcome!

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post Interview with Laurie Goodman, Director of the Housing Finance Policy Center at Urban Institute first appeared on My Mortgage Insider.