By Ramsey Su
My lender, Bank of America (BAC), called and offered to refinance my mortgage. My rate is now lowered by 1.5%. They told me that I will be saving approximately $1000 per month, not mentioning that the "savings" came from adding 5 years to my term. My true savings, that is if I amortize the new loan over the remaining term of my old loan, is $130 per month. As for the other minor details, my FICO is over 800, the loan to value is under 30%, my debt to income ratio is unknown, because they really did not even fill out a fully completed loan application. The loan was approved within days, after submitting only four sheets of paper via fax.
So much for all the cumbersome application processes and stringent underwriting standards that I was told about. My refinance required even less documentation than it would have back in the sub-prime days. Why is it so easy? Is it because I have such a pristine credit history? NO. It is because their "computer printout" said that my loan was sold to Freddie and the loan qualifies for a fast track MHA (Making Home Affordable) refinance.
What is Making Home Affordable?
Delivering Mortgage Relief
The Making Home Affordable Program (MHA) ® is a critical part of the Obama Administration's broad strategy to help homeowners avoid foreclosure, stabilize the country's housing market, and improve the nation's economy.
Maybe your expenses have increased due to medical bills or you're picking up the pieces after a separation or divorce. Maybe you're trying to get by with less because your hours were cut or your business stumbled. In any case, it's important to be proactive. MHA® can help you get real help and real answers right now.
As it turned out, for whatever MHA program I qualified for, the only requirements were to be current on payments for the last six months, and no more than one delinquency in the last twelve months. For the record, I did not benefit from some government giveaway program. Bank of America actually told me that my rate would be lower if I had less or no equity. Come July 1, the new program will be even better. It is specifically for borrowers who must be delinquent for 90 days, but not for more than two years. Maybe I should stop paying now and get an even better offer in three months, is that what they are telling me to do?
Coincidentally, FHFA just released the Foreclosure Prevention Report for the 4th quarter of 2012. As I dutifully analyzed the 49 pages, it dawned on me that for the 1st quarter of 2013, I am going to be included in the statistics, as one of the "fortunate borrowers" that avoided foreclosure because of these sound policies.
Before I stray too far, I do have a point. Not that we ever had great data, but what we have today is pure junk. There is nothing worth analyzing. Unless you are one of those top rating agencies who can somehow turn junk into AAA investments, the real estate data today are worse than reading tea leaves.
As I illustrated above, all the refinance and default data are bogus. No one really knows how many homeowners are still stressed with a reduced payment, or, as in my case, just labeled as another prevented foreclosure.
How about actual foreclosures? Nevada has criminalized procedural errors. California has passed the Homeowners Bill of Rights. Florida courts are still processing an unknown number of judicial filings. If we had something resembling a free market and some respect for the rule of law, how many foreclosures would there be today?
Freddie and Fannie are no further along in exiting conservatorship after 4.5 years. They are both now "profitable", but I have no idea what that means. How can you factor in all the default and foreclosure interventions, not to mention the unlimited buying by the Federal Reserve? If these companies were publicly traded, how would you value them? How can F&F not profit when they have Bernanke buying $40 billion of their products every month? If Bernanke were to announce an end to QE3, what would happen to these two agencies?
Data today are useless because factors exogenous to the fundamentals are in total command of the real estate market. Instead of making blind predictions, just examine the three scenarios: UP, DOWN or FLAT.
If the market goes up, can Bernanke continue his QE unaltered? The market has lived with QE for so many years now, can it handle the withdrawal pains? If the market goes down, what type of wilder policies may we expect from the Fed or White House, or both? If the market stays flat, the outcome is even more unpredictable, It will depend on who is in charge and how they define "satisfactory progress".
Speaking of who is in charge, Bernanke's term expires in January of next year, which is less than 10 months away. Is he going to stay on for another four years? What if Obama decides that Heli-Ben's helicopter is not big enough and brings on Yellen, or his fellow Nobel Laureate Krugman? What if Obama decides to take the pain with someone like Volcker for a repeat of his most unpopular policies, or a Stockman?
As you can see, fundamentals do not matter. Regardless of what the day to day data tell us, we have not remotely addressed any of the issues such as the fiscal cliff, debt ceiling, record deficit, medicare, pension underfunding, record student loans, record student loan defaults, record food stamps …
If the aforementioned are not addressed, policies will continue to be unpredictable, be it on the fiscal or monetary side, not to mention the wild cards such as local politicians or State Attorney Generals. What if the permanently-temporary acting director of FHFA, Edward DeMarco, is replaced by someone more accommodating to the idea of principal reduction? Then there should be no foreclosures anymore, nor any defaults, right? How do you value real estate in a market in which in the event a house's value goes down, so does your loan amount? (For the record, DeMarco has been against principal reduction which is probably costing him a permanent appointment to the directorship)
In summary, analyzing real estate data in today's environment is an exercise in futility. It is obvious that the central banks of the world have printed too much money, all went into the wrong hands and now has nowhere to go. The lowly consumers have not seen their household income increased by a fraction and yet the Bernankes of this world are trying hard to encourage them to take on even more debt, while making it most unrewarding to save. Home buyers of the next generation are not only starting their working life with a huge student loan, they will also have to pay for the entitlements that the older generations have granted themselves.
Then again, maybe Krugman should be the next Federal Reserve Chairman and then we can all sing this old song that some of you may remember:
Up Up and Away