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VA home loans and FHA mortgages could be shut off as early as April 15, 2020

Want to hear something scary? Mortgage industry association executive Anthony Casa thinks VA and FHA lending will cease to exist as soon as April 15, 2020. He breaks it down for mortgage brokers in this 9-minute video.

 

If you don't want to watch Anthony's video, mortgage trainer Barry Habib explained the VA/FHA liquidity crisis in this long article.

 

I might suggest that you watch Anthony's video and read Barry's article if you are a REALTOR who services veterans and first-time homebuyers. If you don't want to watch the video or read the article.

 

Here is an explantion (pay close attention to emboldened statements)

 

There are four major particpants in the mortgage market:

 

1- lenders (originators)

2- servicers (collect monthly payments and remit them to investors)

3- investors (for VA/FHA loans, those are GNMA pass-through securitires)

4- Wall Street (hedges interest-rate risk for lenders and packages loans sold from servicers to investors)

 

Servicers buy loans from lenders and sell them to investors (through Wall Street) for a cost of about 1% of the loan amount-- they earn about .35%/year in fees for servicing the loans. Thus, servicers need to hold a loan for about 3 years before they make a profit.

 

Lenders lock interest rates for borrowers, guaranteeing the terms from the application date through funding date. Without getting into the technical details, it costs lenders about .25% of the loan amount to hedge that interest rate risk through contracts with Wall Street.

 

When the Federal Reserve makes a huge drop in the Fed Funds rate, and intervenes in the market by directly buying mortgage-backed securities, it has unintended consequences:

 

1- Borrowers break interest-rate loacks with lenders and switch the loan to another lender-- lenders who "paid" that .25% to hedge the interest rate risk dont recover it with a loan funding and are out that money-- that eats into the lenders' capital and Wall Street requires them to put up more cash as collateral for future rate locks (which they may not have)

 

2- When loads of people rush to refinance the loans they took out less than 18 months ago, servicers "lose" the premium they paid for the servicing contract, Servicers typically borrow against their servicing contracts to buy more loans, using those servicing contracts as collateral. If that collateral disappears, Wall Street issues a "margin call" to the servicer, asking them to put up more capital (which they don't have)

 

This is no big deal is it happens over a period of 3-12 months (as it has in the past) but when it happens in a 2-3 week period, the whole mortgage industry gets hit with a margin call-- both lenders and servicers are scrambling for capital they dont have.

 

3- But wait, there's more bad news. You know how the federal government is trying to "help' borrowers by staying foreclosures for a 90-day period? That hurts the servicers even MORE. When the borrowers dont make their mortgage payments, the servicers STILL have to remit those payments to the investors, draining their capital even MORE. It's like that scene from the 90s movie Goodfellas.

 

There is some hope. GNMA announced yesterday that they will try to alleviate the third problem but the first two problems still exist: lenders are getting burned on locks and servicers are losing their shirts on rapid refinances.

 

The problem wont last forever but we may see major changes (for the next 4-12 weeks) in the VA and FHA loans markets. Here is what to expect:

 

1- borrowers may not be able to lock rates until they have full loan approval

2- some lenders could go out of business altogether

3- some lenders could delay loan closings because they have a liquidity crunch

 

Call us to plan for this market interruption. 

Mortgage Questions And Answers

Consumers want answers to mortgage questions in a low-pressure environment.  I created a forum for consumers with five topic headings:

• Jumbo Loans
• VA Home Loans
• FHA Mortgages
• Should I Lock or Float My Rate?
• Grab Bag

It's pretty slick because it allows you to sign in with your credentials from Facebook, Google, Yahoo, Twitter, Myspace, or Twitter.  I'll get an email that shows your question and come back and answer them daily.

Ask your questions here.

Mortgage Loans to IRAs Available For Real Estate Investors

Investors with money stuck in an IRA,or old employer's 401-k account, have traditionally shunned real estate as an investment.  Custodial fees were high and there was no way to leverage the property through an IRA.  There may be a solution.

Consider a non-recourse, loan to the IRA.  Real estate investors can get a commercial loan, directly to their Individual Retirement Account, through our IRA mortgage program.  A brief rundown:

• the mortgage is non-recourse
• down payment of 35% required (50% down payment in certain states)
• ARM products and fixed rate loans available
• rates are typically higher than conforming mortgage rates
• 25 year amortization only

Not all IRA custodians will be able to administer real property holdings.  A short list of custodians for real estate investments includes:

Lincoln Trust Company 
Trust Administration Services Corporation
PENSCO Trust Company
Sterling Trust Company
Equity Trust Company
Sunwest Trust Company
Self-Directed IRA Services, Inc.
Provident Group

FHA & VA Mortgages Are Assumable

One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable.  What this means is that a buyer can "take the payments over" from a seller, if the existing loan is a FHA mortgage or VA home loan. 

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%.  I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher.  Left unchecked, inflation could drive mortgage rates into double digits by 2012.  The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough...unless you can offer the buyer a below market interest rate.  Let's assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan.  His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%.  The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that's over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market).  Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called.  Pragmatically, that doesn't happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years.  You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash.  That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.  Low prices and historically-low mortgage rates make these loans a consideration when comparing them to a conventional loan.

The Trust Deeds Boom of 2007

I moved to San Diego in early 2003 which means I am approaching my fifth year in America's Finest City.  The summer of 2003 was quite a culture shock for me.  Twenty-somethings were making mid six figure commissions broking mortgage loans that can best be described now as "risky".  Everybody was buying and flipping houses fueled by the loose lending guidelines.  Sadly, everyone but me.

I felt old and I felt like a failure.  I had a cushy job as a National Sales Manager but I was missing out on the big bucks!  I contemplated moving back to Phoenix where my comfort zone was.  Then I found Ron Feinberg and Wally Blazyck at World Wide Credit Corporation.  They introduced me to broking trust deeds.  I chucked the prospect of partnership in the mortgage banking concern (Thank God for that; I'd be in big trouble, now) and immersed myself into learning my new craft.

Hard Money Lending is essentially asset-based lending.  We originate loans at low loan-to value for investment by private investors.  Real people lend this money not faceless institutions so you have to be extremely careful about the due diligence and packaging.  If you screw deals up, you're messing with someone's retirement money.  We've been careful but successful in our pursuit.

The sub-prime mortgage market is falling apart.  Wall Street firms are being stung by the bad sub-prime loans they bought and demanded that the lenders who sold them buy those loans back.  The sub-prime lenders didn't have the money to do so.  Those Wall Street firms simply swapped the debt for ownership in the firms.  Once the camel got his nose underneath the tent, he didn't like what he saw.

The sub-prime mortgage market is completely tightening its lending standards.  The wholesale account executives, once compensated like a proven reliever for the Padres, are applying for night gigs as bartenders to supplement their income.   The words "stated income" are becoming more politically incorrect than a racial slur.  The new sub-prime lender  will emerge as the prostitute who found God.

Which brings me to the opportunity.  There will be a lot of borrowers...many, in fact, who need the help of a private mortgage lender.  There will be so many borrowers who are shunned by the "new and improved" sub-prime lenders that a trust deed investor will have her pick of the litter these next 12-18 months.  She'll be able to significantly upgrade the credit grade of her portfolio without sacrificing loan-to-value or double digit yield.

Vacuums create opportunities for those wise enough to recognize them and nimble enough to seize them.  Let's cash in on The Trust Deeds Boom of 2007.