Alarm Bells Ring over Refinance Mortgage Boom: Why Refis Are so Risky

Mortgage lobby throws hissy-fit over Fannie Mae’s & Freddie Mac’s new 0.5% “Adverse Market Refinance Fee,” which was a “result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.”

By Wolf Richter for WOLF STREET.

The mortgage industry is in uproar over the surprise announcement by Fannie Mae and Freddie Mac (the GSEs) Wednesday night that they would charge a 0.5% “adverse market refinance fee” on refinance mortgages that they buy – “a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty,” said Freddie Mac’s statement sent to lenders.

The fee is designed to reduce potential losses for taxpayers that back the GSEs, as these GSEs now see the mortgage market, and particularly refis, heading for trouble. Refis carry a lot higher risk than purchase mortgages. More on that in a moment.

This fee will be effective September 1. To refinance a $500,000 balance, the fee would amount to $2,500. It’s not the end of the world. Mortgage lenders pay this fee to the GSEs, but they’ll try to pass at least part of it on to the borrower. The fee will be applied to cash-out and non-cash-out refi mortgages.

Who profited from the refi boom and who carries the risk?

On Thursday, 20 lobbying groups representing the mortgage and real-estate industry – including the Mortgage Bankers Association (MBA), the National Association of Realtors (NAR), and the National Association of Home Builders (NAHB) – responded with a letter, opposing the fee, because it would threaten “the emerging, but unsteady improvements to the national economy,” and raise refi costs, which would be “particularly harmful for our nation’s low- and moderate-income homeowners,” and would be, therefore “contradicting and undermining Fed policy.”

Turns out, these 20 lobbying groups don’t represent anyone but their clients in the mortgage and real estate industry – mortgage bankers, mortgage brokers, real estate brokers, home builders, and others. And these clients have all hugely profited from the refi boom that the record low mortgage rates, which have dropped nearly 1 percentage point since January, have brought about.

And none of the clients of these lobbying groups carry the risks of these refi mortgages. The GSEs – Fannie Mae and Freddie Mac – carry those risks, and ultimately the taxpayer.

This then triggered two counter-punches from the American Enterprise Institute’s Housing Center, sent out by email on Thursday and Friday.

“The Housing Lobby has described the GSEs’ imposition of a new ½-point market adjustment fee to offset risk on refinance loans as: “outrageous,” “a cash grab,” and “based on jealousy, greed, and disdain.”  Nothing could be further from reality,” the AEI’s first statement said.

The GSEs are already strung out on refi mortgages, according to the AEI:

  • “The GSEs’ share of the entire cash-out refinance market is now at 90%, up from about 75% at the beginning of 2020.” That’s how exposed they are.
  • “The GSEs’ share of the entire rate and term refinance market is now at 80%, up from about 63% at the beginning of 2020.”
  • “Recently the combined volume of cash-out and rate and term refinance rate locks has been more than double the level a year earlier.” That’s how much the refi market has boomed under the record low interest rates.

The refi market share of the FHA, the VA, and private-sector lenders are down because they “have appropriately tightened credit standards,” the AEI said. The GSEs too have tightened standards, but “not been enough to slow their massive share and volume increases.”

“Mortgage lending history teaches us that lending into a vacuum is dangerous, and nothing indicates that more than a massive increase in share compared to one’s competitors,” the AEI said.

“The new ½-point market adjustment fee is not only appropriate, but it would have been a dereliction of regulatory oversight not to have taken action,” the AEI said.

Risks for refis are high because home “value” may be fantasy.

A cash-out refinance mortgage with 30-year fixed rate, fully documented, with a 65% loan-to-value ratio – meaning the loan amount equals 65% of the home’s “value,” seemingly leaving a lot of “equity,” thus seemingly very low risk – has the same default proclivity under stress as similar purchase mortgages with a 91%-95% loan-to-value ratio.

In other words, seemingly low-risk refis are as risky as much higher-risk purchase mortgages; and compared to purchase mortgages with equivalent metrics, refis are much riskier.

“And the GSEs’ currently guarantee cash-out loans up to 80% loan-to-value,” the AEI said.

The major reason why refis are so much riskier than purchase mortgages is the simple fact that there is no arm’s-length transaction and no arm’s length purchase price that determines the value of the home.

It boils down to this question, the AEI said: “what do you need the value to be?”

No appraisal, no problem.

This valuation risk has been further heightened by increased use of “automated appraisal waivers” that the GSEs use to decide when no appraisal is needed. So now, there is no arm’s length transaction and not even an appraisal.

“Given that this tool is embedded in the GSEs’ automated underwriting systems (AUSs), and a loan may be submitted multiple times, this system is subject to gaming. We saw this happen with waivers of income documentation back in the ‘00 years,” the AEI said.

“Automated systems make it much faster to distribute system-based underwriting rules and home price information to the marketplace,” the AEI said. “Given the GSEs’ 60% market share, it would be hard to design a system that was better at fueling refinance demand and risk.”

“Yet, like the AUSs of the ‘00s, the GSEs’ large scale use of automated appraisal waivers today has not been tested in a down cycle,” the AEI said. “In the ‘00s, we ultimately found out they were so wrong, that virtually all local markets were subjected to severe home price corrections the likes that hadn’t been seen since the Great Depression.”

Retail sales by category of retailer show how Americans have adjusted to the Pandemic and to a very, very peculiar financial situation. In 12 Whiplash-Inducing Charts. Read…  Fired up by Stimulus Money & Debt Deferrals, Americans Went Shopping. But Where? How Life Changed During the Pandemic

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  124 comments for “Alarm Bells Ring over Refinance Mortgage Boom: Why Refis Are so Risky

  1. andy says:

    Soon after this refinancing wave is over they will roll out 2% 40-year motgages for everyone with a pulse and above 620 credit score.

    • Joe Saba says:

      no doubt – I did 40 year mortgage for person who bought my property(seller carryback)
      it took almost 7 years before I had to foreclose

    • edmondo says:

      why stop at 40?

      an eternal mortgage can follow you after death.

      • lenert says:

        We’re headed towards hundred year leases.

        • California Bob says:

          re: “We’re headed towards hundred year leases.”

          Isn’t that the case in some European countries already (England comes to mind)?

        • Realist says:

          100 year leases is the model applied in Sweden.

        • Bosshog says:

          In the UK there are leasehold properties that operate that way, mainly apartments. Freehold properties, mainly houses, you own the house and the land the house is built on. Some newer build houses have been operating on this leasehold model recently. You own the house, but not the land its built on is my understanding and these yearly leasehold charges have been profitable for the holders.

        • Lee says:

          Right now in Melbourne people can’t even get new leases as a result of the bs going on here.

          Here are some of the rules as they stand now and for basically the middle of September:

          Tenants can engage cleaners and gardeners at the end of their lease if they are moving out and need to leave the property in good condition to get their bond back in a timely manner.

          It is still unclear how tenants can start a new lease, collect keys and move into a new property.

          Landlords

          Landlords can negotiate a partial payment of rent with tenants to ensure there is still money coming in.

          Those who do negotiate a rental reduction are able to apply for relief on their land tax bills to help with costs of their investment.

          It is still unclear how landlords can get a new tenant into a vacant or soon-to-be-vacant property.

          What a way to muck up the entire real estate and rental industry in 1/4th of the market in Australia.

        • Lee says:

          You can still find properties in Hawai’i that don’t own the land – not as common as 40 years ago as some have converted to fee simple.

          You can often find a mix of leasehold and freehold condos in one building too. Some have the land available for sale and other don’t.

          One famous property where things went pear shaped for the people who bought an apartment in a leasehold type arrangement was the Kahala Beach.

          Properties there used to sell for millions, but they are are leasehold and the lease is not going to be renewed. The owners even went to court and their case was rejected.

          You can ‘buy’ a nice 1258 square foot 2 bedroom/2 bath apartment on the beach for the whopping price of US$39,000 right now.

          Leasehold expires 07/31/27 and the lease rent is ‘only’ US$2566 a month along with $1206 a month HOA fees, and of course tax at only US$412 a month.

          Assessed tax value is still at US$1,058,100, but in reality there is no value there at all.

          At the end of the lease you own nothing……………..

          But people still buy these things for some reason with a 3450 square foot apartment sold on 7 August for US$50,000. The lease rent on that one is US$6555 a month, HOA fees of US$3042 a month, and taxes of US$4135 a month or about US$14,000 a month costs.

          This one sold for US$775,850 back in 2007 according to the property records.

          And in Japan you can find a few of these properties around too. A lot of them can be found in new apartment/condos built on reclaimed land in Chiba Prefecture by the bay.

        • Lee says:

          For those that want to see the wealth destruction that happened with aprtments in this building, here is a link to the Hawai’i government tax records showing the sales price of a similar 3 bedroom apartment:

          https://qpublic.schneidercorp.com/Application.aspx?AppID=1045&LayerID=23342&PageTypeID=4&PageID=9746&Q=256800392&KeyValue=350230020174

          This one sold for US$4 million in 1992. Was for sale at US$375,000 in June and is now in escrow. don’t know the actual selling price though.

    • MonkeyBusiness says:

      That’s basically everyone. Why? They’ll introduce “improved” credit scoring where the top score is 10000.

      And of course someone “woke” will say that credit scoring is ra****.

      Free credit and opportunity for everyone.

      • andy says:

        Btw, little known secret discovered thru experience. If you pay all your credit cards in full before even statement comes out, that will take you to 820 fico (out of 850 max). But, if you leave just few dollars on a statement(s), so that your “credit utilization” is positive and minimal (like under 1%), that will take you to 840+.

        • Wisdom Seeker says:

          Who care? There’s no rate difference afaik between any FICOs over 800. Right?

          Playing with money can be a bit like playing with food. Sometimes it’s better to just eat the veggies and move in to dessert!

          And leaving any balance at all to owe interest is like paying your banker to eat your dessert

        • Shiloh1 says:

          I’m confirming that strategy.

        • Ed says:

          That you get a higher score for paying the bank some unnecessary interest is hilarious.

          You’d think that *not doing this* would mark you as a careful and responsible consumer!

          But then there is the credit card industry term “dead beat”, applied to someone who pays every month on time.

        • andy says:

          Ed, I do not think you have read it correctly, so..

        • Javert Chip says:

          Andy

          I’m not buying this.

          I (auto) pay 100% of my credit card bills (3 of them) each & every month. Have done this for years (I’m an old geezer).

          Have also had 850.000 FICO score for years.

        • andy says:

          JC, clearly bs, I’m not buying you have 850 for years. Not even once.

        • andy says:

          JC, and why 3 decimal points? Do you break 850.001 sometimes?

    • David Hall says:

      The typical home owner owned a home 8 years.

      Carpet lasted 3-5 years. Landlords found themselves either steam cleaning, raking worn carpets, dying stained carpets dark brown, or replacing carpet after their tenant(s) left. They had to repaint except after some of the shorter term tenants left.

    • Sgt Grumble says:

      Ha! I’ve been telling the wife, once the eviction bans are lifted we’ll refi at negative real rates or even explicitly negative. She thinks I’m crazy but less so than formerly.

  2. Petunia says:

    What I can’t believe is that the govt allows “investors” to get multiple mortgages in the first place. Heard a guy, last week, complaining that now the govt wants several months of payments in the bank as a condition for a mortgage. Apparently this interferes with the expansion of his real estate empire.

    • They have always done that, remember the “second”mortgage?

      • Anthony A. says:

        Everybody in California (except me) had one or TWO of them when I lived in Thousand Oaks, Ca in the early 1980’s. My next door neighbor, a Ca native, had a second and maybe a third, but no living room furniture and four cars (two drivers). I remember he said he was “saving up” for a swimming pool!

        This was just after I moved to T.O. from Connecticut….I thought I was on another planet.

  3. lenert says:

    Loose refis are nothing new. Bought my first house in ’91 and the bank sent out an appraiser with a tape measure. Refinanced it a couple years later over the phone in about five minutes. Now it’s all drive-by appraisals. Nobody knows what they own.

    • MiTurn says:

      I recently refied. The gal came out with a tape measure and a flashlight. Didn’t peek in the crawl space though…

  4. 2banana says:

    There was a time, not that long ago, in which taxpayers guaranteed just a tiny fraction of mortgages.

    99% of all mortgages were a private contract between a bank and a potential homeowner. And banks ate their bad loans. And charged what they needed to cover actual risks of the market.

    And, guess what? There is NOTHING stopping this traditional method of mortgages.

    “The Housing Lobby has described the GSEs’ imposition of a new ½-point market adjustment fee to offset risk on refinance loans as: “outrageous,” “a cash grab,” and “based on jealousy, greed, and disdain.”

    • cb says:

      2 banana said: ” 99% of all mortgages were a private contract between a bank and a potential homeowner. And banks ate their bad loans. And charged what they needed to cover actual risks of the market.”
      ___________________________________

      society and individuals would be much better off if all loans were private contracts between a private lender and a borrower.

  5. Morty Mc Mort says:

    Vig’s Gotta Vig.. Big Boyz make money on the way up, and money on the way down.. Bail out or Bankruptcy.. Rinse and Repeat..

  6. cb says:

    This entire government supported and subsidized system distorts markets, raises housing prices, provides overpaid and unproductive employment to bureaucrats and others, expands government costs and burdens the taxpayer, supports the FED/Banker/Wall Street complex and gives cover to theft through monetary debasement, inflation and a reduced standard of living for laboring Americans.

    • 2banana says:

      But it buys votes.

      That’s all you really need to know.

      See my Mel Watt quote below.

    • Liberty Writer says:

      To cb: Well said. I call it Crony Communism.

      • Bobby Dents says:

        Nah, crony capitalism. Markets forces distorting markets. Libertarianism struggles to accept that. Where a capitalist is at, a government will surely be around to follow.

  7. timbers says:

    I suppose it would be too much to ask the Fed to charge a 0.5% (or more) “adverse market refinance fee” on the junkity junk bonds, non junkity junk bonds, and MBS securities it’s buying. Or better yet, to like raise interest rates to reflect possible an system wide “adverse market.”

    But then Fed has told us it’s “Not even thinking about thinking…” and “doesn’t care about bubbles (ie adverse markets).

    Weather a good thing or a bad thing, seems this fee is at odds with clearly stated Fed policy of giving free money to “adverse markets.”

    Could it be we’ve deeply ingrained systemic Fed policy vigorously furiously promoting “adverse markets”?

    Is gambling going on in the Fed’s casino? We can’t not have that.

    • lenert says:

      A financial transactions tax would cut a lot of wasteful arbitrage.

      • NoFreeLunch says:

        A tax that discourages liquidity seems fine now since there is ample liquidity. But when liquidity becomes scarce, as it was during the GFC, such a tax will backfire. The Fed will have to inject even more money to overcome that tax too.

      • NoFreeLunch says:

        When I am looking for ETFs with annual fees on par with the “tiny” proposed transaction tax, it would most certainly affect my decision on whether or not to make some of the 10-20 trades I make a year.

  8. 2banana says:

    Well, certainly a change in direction for this government agency.

    “It is intuitive – you think the higher somebody’s debt-to-income ratio, the more problems they are going to have, But that’s just not the best criteria to apply to be quite honest.”
    — Mel Watt, Director of the Federal Housing Finance Agency from 2014 to 2019

  9. Lance Manly says:

    So, I am going to out myself as the oldest person on the board. But I remember the S&L crisis in the 80’s, other than the normal corruption, it was fueled by the fact banks had 3% mortgages in a 10% environment. Long bonds can be very dangerous.

    • 2banana says:

      The good old days.

      1500 bankers went to jail for their roles in this scandal.

      John McCain was almost run out of office for all the S&L cash he took and his sweetheart S&L legislation.

    • RepubAnon says:

      Ah, yes, the S&L crisis, caused by Reagan’s deregulation of the S&Ls to unlock the power of free markets. Without government regulation, the scammers moved in and the looting started. As always, the inevitable crash resulting from pump and dump schemes took a few years.

      Another factor in the S&L collapse was the net negative interest rates on savings accounts – they paid about 2% below the inflation rate, so saving money was a mug’s game.

      Folks chasing interest income made increasingly risky choices, until the inevitable collapse. Sound familiar?

      • If we went back to a free market everyone would be protected and the system would flourish. No taxpayer risk as no taxpayer funds expended or guaranteed. No socialization of any loan! Everyone would be more careful without the moral hazard of taxpayer backup. No regulations to limit the lending pool either.

      • Rg says:

        I was in my early 20s and worked in northern Va during the Reagan years. Due to work requirements I had to take an after hours accounting course at George Mason University. It was taught by a guy that worked at the FDIC. I remember how wind up he got in class about the on-going S&L deregulation. He was livid that there would be all sorts of fraud resulting from the deregulation. I just assumed he was a disgruntled bureaucrat. In hindsight, he clearly knew what he was talking about!

        Of course, being in my 20s I had no insight into what shorting stocks was and no money to do it!

      • Liberty Writer says:

        To RepubAnon: To shoot deregulation is shooting the wrong dog.
        The fact the taxpayer was on the hook for the S&L losses is the problem.
        Pass the risk from lender to taxpayer, who cares about prudent lending.
        That is Crony Communism in action.

        • Bet says:

          I remember in the 1980’s when Reagan increased the fDIC from 50k to 100k. I remember reading an op ed with the fellow opining this would lead to riskier lending with govt increasing the back stop by 100%. Joe public also does not understand that when you put your money in a bank you are an unsecured creditor and the bank considers your money an unsecured debt, for them. Banks
          nice gig all around, govt sponsored and supported criminal enterprises

    • VintageVNvet says:

      Not so fast LM,,, I remember well the crash of ’56, when dad had no work for six months and mom just went and ”charged” all real needs at the local stores,,,
      And since I was in the SM at the time courtesy of spouse of God Mother, both wonderful caring people trying to educate me in spite of my thick skull, etc., I really learned a lot at that time, but kept in the SM until 82, when I realized I had never made real money without what is now called insider information, now apparently legally limited only to guv mint puppets…
      BTW, S&L crash in 80s was due to the corruption of the Bush youngsters/brothers trying to take advantage of being able to ”crony” that entire industry with more and more ”made to order rules and regulations,” similar to what had been/has been/ and is being done by bought and paid for ”regulators” in many commodities and other markets since the era of crony and corrupt capitalism started with JP Morgan ”cornering” the SM…Or maybe same elsewhere b/4 then, eh

    • sunny129 says:

      NOT if the rates going to NEGATIVE in the near future!
      There are already over 10-13 Trillionds in NIRP, in the World!

    • QQQBall says:

      The S&L crisis ran from appx 1990-1994. Ahh, the good ol’ days when the RTC sold off foreclosed properties and wound-down failed S&Ls.

      • Wisdom Seeker says:

        And sent the peeps to prison. When was last time THAT happened? Other than the occasional egregious scapegoat…

      • Wolf Richter says:

        QQQBall,

        “The S&L crisis ran from appx 1990-1994.”

        It started in the mid-1980s. At the end of my MBA program in 1985, I wrote an accounting thesis on the biggest offender. No one was discussing the S&Ls as a crisis. Baffled by my findings, my accounting prof took this paper to a buddy of his who was working at the FBI, and that guy told my accounting prof who told me that the FBI has been looking into this S&L and already had a room full of documents, but no one could figure out what they were doing… something to that effect.

        I don’t know if the details in my thesis were over time proven correct or not. After I was outa there, I had other things to do than trying to nail this down.

        • Liberty Writer says:

          Wolf: I was in the middle of Econ school in 1985. Our prof showed us how the criminals inside the S&L were bleeding their S&L dry. This was known to be backed up by the assumption the taxpayer would pay for the losses.
          I recall later reading the vast majority of failed S&Ls – which caused the crises – were located in 3 states: Texas, Oklahoma and Arkansas. The rest of the country had few failed S&Ls.

        • Wolf Richter says:

          Yes, I was at the University of Texas at Austin at the time.

        • Lee says:

          “I recall later reading the vast majority of failed S&Ls – which caused the crises – were located in 3 states: Texas, Oklahoma and Arkansas.”

          And there were huge bargains to be had in Texas real estate at that time when they were offloading stuff at any price they could get.

          People with money who bought at that time made billions as the market recovered.

        • Wolf Richter says:

          Lee,

          Yes, bought my condo in Tulsa, OK, in 1989, from the FDIC after the lender that had ended up with it failed. I’d stalked this unit for two years because it was just gorgeous (a 1BR and a 2BR combined into one wide-open unit), but it was tied up in court. Fraud stuff. A developer had bought the whole floor and had turned 12 units into 6. So I went for one of the big corner units. Great deal. But my future neighbor bought the near identical unit a year or so later from the FDIC and paid 15% less than I had. And that might have been the bottom.

          I sold it in 2000 for a big percentage gain and then put that money into my brokerage account to pay down my margin balance, and lost the entire amount in the stock market over the next three days :-]

        • S&L figured in “The Franklin Coverup”, which was essentially about the conduit between looted funds, and Iran Contra. Friend sent me the book, he met the author in NE. I dismissed most of it as tin foil hat, until a few days later events in the news confirmed the premise. The more sensational story, MKUltra, is the basis for antipathy toward the Deep State, and QAnon. The larger part of those FBI documents are sealed no doubt. This is the dark side of the Federal Reserve, which is the banker for all government activity, and why it shares bipartisan support for its monetary policy.

        • cb says:

          Wolf said: “I sold it in 2000 for a big percentage gain and then put that money into my brokerage account to pay down my margin balance, and lost the entire amount in the stock market over the next three days :-]”
          ____________________________________

          Glad you bounced back. It takes a lot of fortitude to overcome a knock like that.

      • RickV says:

        I worked for a California S&L in 1990 that was taken over by the RTC. I worked for them until the RTC finished winding the institution down a few months later. One of the RTC examiners told me at the end the FDIC had come through without a loss and no officers were charged with a crime, meaning the S&L should never have been taken over. My responsibilities included the Wire Room, and I remember overseeing sending out a $1Billion+ wire to BofA who had purchased the deposits and branches. At the time I thought it was a big transaction, and still do. I met my wife there so my time was not wasted.

    • Implicit says:

      That was when they prosecuted bankers’ misdeeds instead of rewarding them.

    • Petunia says:

      What? I actually had a mortgage in the late 1980’s, a one year adjustable. I remember it, not fondly, being 14%.

      • Anthony A. says:

        We moved to Ca in 1981 with an oil company. Thankfully, they backstopped an 18% mortgage from B of A for a 10 year period. I refied’ a few years later @ 10% and felt I hit a homerun (oil co was still giving me checks to cover the 18% one).

        Moved to TX in 1992 and picked up a fully assumable/non-qualifying mortgage @ 8%. Now it’s paid off.

  10. Fred says:

    Not a single comment about the fact that F/F EXISTS because of taxpayer bailout in 2008. These same taxpayers now get to pay extra for cashout refi privilege? Seems pretty corrupt.

    • sunny129 says:

      The whole thing about everything ELSE is NOT kosher since March of ’09!
      Why complain now!

      Remember : The suspension of Mkt to Mkt Accounting standard? Now we have FANTASY accounting in operation! The value of housing loan on the Bank balance sheets can be ANYTHING they want it to be!
      Who is complaining?

  11. sierra7 says:

    We are getting closer and closer to the edge………
    Any general downturn in housing prices will cripple the economy…….period.
    We are not going to have any real actual understanding of our future economy for several more months at the least…….tens of thousands of small and medium size businesses kaput…..multiple tens of thousands of newly unemployed without any gov assistance……get ready.

    • 2banana says:

      I have my thoughts.

      Yours?

      “get ready.”

    • Brant Lee says:

      Oh, I think it’s dawning on more people what the future economy holds. Hopefully, if a person is more or less set with things paid off they can get by without too much problem. But I’m sure the government will find a way to screw that up too someway.

      • Mr Wake Up says:

        But I’m sure the government will find a way to screw that up too someway:

        Maybe they screw the non debt home owners with a non debt tax?

    • sunny129 says:

      Get ready – For what?

      Fed is ready with Digital Macine printing $$ to spewout via helicop any day now. It will deposit digitall currency of (??? Million/Trillion) to every one’s bank account!

  12. Just Some Random Guy says:

    Brokers/lenders won’t pay the new tax. As is the case with all taxes imposed by the govt, the consumer pays it. And all this 2.5 months before the election. Deep State gotta Deep State.

    • Wolf Richter says:

      Just Some Random Guy,

      Taxpayer will pay the losses on these Fannie and Freddie refis during the next bust — and did pay the losses during the last bust. No problem with that?

  13. Saylor says:

    IMO, unless we start letting more immigrants in, insulate ourselves from this virus and the next few flu seasons and recover at least 85% (SWAG) of the businesses shut down since January…. our housing market ‘general downturn’ is pretty much baked in.

    That is a pretty big laundry list of ‘to do’ items.

    • sunny129 says:

      “Everyone talks about the “New Normal,” as if there’s a guarantee that life will return to normal. But the “New Normal” is De-Normalization, which I define as everything that was normal is gone and will not be replaced with some new normal. In other words, normal is gone, done, over: old normal, new normal, doesn’t matter: normal is history………”
      h/t Charles Hugo Smith

  14. Just Some Random Guy says:

    “The major reason why refis are so much riskier than purchase mortgages is the simple fact that there is no arm’s-length transaction and no arm’s length purchase price that determines the value of the home.”

    I’ve done a few refis over the years and each time an appraisal was required by the lender. No different than purchasing. For all intents and purposes the process of getting a purchase mortgage of refi mortgage was the same. Same info I needed to provide to the lender (income, assets, etc), same appraisal, same 700 pages to sign at the title company, same escrow requirement, same everything.

    Only difference was at the end, I didn’t move with a refi, but moved with a purchase.

  15. dpy says:

    Pretty much count on corruption whenever there are hoards of lobbiests in play.

  16. The problem is upper income home owners who carry a mortgage for the tax benefits, and cash flow which allows them to direct money toward more profitable investments, (or consumption). A Citi analyst said some years back, people will be borrowing money and putting it in their savings account. Same REFI game as 2008, if you put the money in a secure account, you were able to save your losses. Most people spent the cash, and many for medical bills, there was no ACA. Now we are forcibly being restrained as consumers, the real question what is a secure account?

  17. Paulo says:

    This article reinforces several things for me. One, It is exactly why I have always dealt with a credit union. When I had a house purchase appraised/approved in ’87 I commented on how thorough the appraisal was even though I had about 50% down, (before that I had dealt with RBC), the reply was, “We owe it to our members to be diligent to ensure we make no bad loans”. Two, buy a home and not an ‘investment’, and then pay the freaking thing off as soon as possible. Then, it doesn’t matter what the market does because you’ll always have a roof over your head. A 40 year mortgage means to me the person cannot afford to buy a home in that market. So does a 30 year mortgage. And finally, never never borrow against your home for anything, or any investment, whatsoever. (especially a car). I think the reason for this is self explanatory. For the majority who may disagree, talk to me when this sucker crashes. Losing your career, (like so many are right now), and knowing you have one or two major payments due every month would be hell on earth.

    Teaser rates, and ARMS are up there with payday loans, imho. REFIs are in the same category. At the very least these practices should be discouraged to promote social stability. But then I guess the buddy boys wouldn’t make so much money off working folks, whatever colour collar you might wear.

    • Anthony A. says:

      Excellent strategy with respect to how to live your financial life with respect to housing. That’s what we have done and me and my wife are “owners” of our home as is our daughter @42 years old with her home. They are not Mc Mansions, but nice 2,000 sq. ft. brick homes.

      We can handle a big downturn in most anything.

      40 year mortgages and 7 year car notes? Crazy!

      • Clete says:

        Paulo and Anthony,

        This is excellent advice and we have managed to carve out a nice snowbird existence by putting the cost of one really nice house into a modest sun house and a modest mountain house. Neither is fancy, but not having a mortgage is priceless.

      • nodecentrepublicansleft says:

        I’ve sold all my RE and am waiting for reasonable prices to return so I can do the same.

        I bought a cute and very unique 1925 bungalow in SWFL Florida (about 45 mins from Tampa) back in 2014 for $35K and spent $15K fixing a few things. Renovated 2/1 with 1200SF and commercial zoning for $50K.

        I could have lived there for the rest of my life quite happily. Nice, safe neighborhood. I checked w/the property appraiser on homesteading it. I would have been looking at a $240/year property tax bill.

        Living within or well below your means is possible.

        • Ethan in NoVA says:

          Depends on where you live?

          All these people referring to houses they bought before the huge run up in prices doesn’t really address the issues of the people now coming of age and trying to buy into the market. They can’t follow what you did easily.

          Also, it depends heavily on your job. More stability with people working for the government where work performance isn’t a requirement versus private employment.

          Hopefully the market correction will come and lots of inventory will be available.

          I have noticed that A LOT of friends recently bought, during corona. These are people that were renters, and now have bought houses in lower tier markets where they live. Probably pretty bad deals, but “cheaper than rent” maybe. My assumption is people are trying to find stability in unstable times. If this is common around the USA it could further remove the number of people from rental pool, hopefully putting downward pressure on rents.

    • lenert says:

      Make a loan, service a loan? But what about all the fees on those 4th order mortgage derivatives?

    • LifeSupportSystem4aVote says:

      “Two, buy a home and not an ‘investment’, and then pay the freaking thing off as soon as possible. Then, it doesn’t matter what the market does because you’ll always have a roof over your head.”

      ONLY if you continue to pay all of the pertinent taxing authorities their annual ‘protection money’. Failure to do that will result in the roof, all structure beneath it and the property it occupies belonging to someone else. You will still have equity from the tax lien foreclosure proceedings, but not the home.

      (This is for the US, I don’t know about other countries)

      • Anthony A. says:

        Usually, if you are financially savvy enough to buy and pay off a home mortgage, you should have no trouble paying the annual taxes for the services the town provides. I know there are exceptions, but that’s not the norm.

        • roddy6667 says:

          I have relatives and friends who retired with no mortgage, but still need $15,000 a year to pay the property tax. Never mind repairs, maintenance, heat, and utilities. $15,000 is about the take home pay for a $20,000 a year job.
          Property taxes will skyrocket. Towns and cities have no other source of income. Huge debts taken on in better times, under-funded pensions, and medical costs for current employees all will need a lot cash soon.

        • VintageVNvet says:

          R2/3,
          Municipalities, AKA cities and counties have the sales taxes, either from some state wide sharing agreement, or in some states, maybe all AFAIK, ( as I have not paid taxes in all states of USA, etc.,) municipalities can ADD their local taxes on top of the state sales tax; and I can testify that some states and their municipalities are very up front about each and every added tax; others not so clear.
          IMO, in spite of the blather about sales taxes being regressive, harder on the poorer folks, etc., etc… it is the most fair tax for all, if for no other reason than that poorer folks usually have more time to plant and harvest most or at least a significant portion of their foods,,, make their clothes if they don’t have a Salvation Army Family Store to buy clothes, pots and pans, etc at approx 10 cents on the dollar, etc.
          And it should be very clear that ”property taxes” of each and every type are not a problem for the more well off, but are a serious problem for the poorer folks.
          While I had to be almost literally dragged to the thrift store to see the $100 office shirts for $1, I did get the message. And, while fortunate to be in a state with annual limits on raises of property taxes, they, along with various taxes disguised as ”fees” are an ongoing and increasing burden not least because they frequently go up way beyond our SS COLA.

  18. sunny129 says:

    We’re already in a post-normal world because the expansion of globalization and financialization needed to fuel the Old Normal has reversed into contraction. This reversal is an extinction event for all sectors and institutions with high fixed costs: air travel, resort tourism, healthcare, higher education, local government services, etc. because their fixed cost structures are so high they are no longer financially viable if they’re operating at less than full capacity.

    Only getting back to 70% of previous capacity, revenues, tax receipts, etc. dooms them to collapse.
    h/t oftwominds/Charles H Smith

  19. Endeavor says:

    When it comes to government subsidized business sectors in the USA, anything less than perfect policy is unbearable to them There is no middle ground.

  20. Jdog says:

    Lobbying by special interests almost always push the country towards privatizing profits (for them) and socializing losses, making the taxpayers foot the bill for losses.
    Lobbying needs to be outlawed and the ties between corporations and elected officials severed if we are ever going to save this country.

    • lenert says:

      “No thoughtful person can question that the American economic system is under broad attack…It is time for American business — which has demonstrated the greatest capacity in all history to produce and to influence consumer decisions — to apply their great talents vigorously to the preservation of the system itself.

      Business must learn the lesson, long ago learned by labor and other self-interest groups. This is the lesson that political power is necessary; that such power must be assidously (sic) cultivated; and that when necessary, it must be used aggressively and with determination — without embarrassment and without the reluctance which has been so characteristic of American business.

      Strength lies in organization, in careful long-range planning and implementation, in consistency of action over an indefinite period of years, in the scale of financing available only through joint effort, and in the political power available only through united action and national organizations.”

      – Lewis Powell to US Chamber of Commerce, August 23, 1971

      • sunny129 says:

        ‘ American business — which has demonstrated the greatest capacity in all history to produce and to influence consumer decisions ..’
        ??
        Why bother about PRODUCTIVE Economy or Earnings when Buy-Back shares have have quarupled their stock options!
        No wonder it was ILLEGAL prior to 1986!

  21. Seneca’s Cliff says:

    Basing much of the refi market on electronic appraisals probably amounts to plugging in the “zestimate” from Zillow. Any one who has ever examined those numbers closely will realize a “bad moon is coming”.

    • Anthony A. says:

      Ah….. CCR……

      I see the bad moon a-rising
      I see trouble on the way
      I see earthquakes and lightnin’
      I see bad times today…

  22. MonkeyBusiness says:

    I feel like the solution here is to bring SoftBank to the picture.

    Inflating valuations is like their major skill. They can employ the valuation technique that valued the Imperial Grounds the last time around. And for people who don’t know, back in the days, the Imperial Grounds in Tokyo was valued way higher than the entire state of California.

  23. The Bob who cried Wolf says:

    Quoted from the article: “Risks for refis are high because home “value” may be fantasy.”

    I tend to think so. I’ve been a broken record on this site with regards to what housing prices have done in San Diego, specifically 92115. I’m going avoid mentioning real estates sites by name or linking to particular properties (gonna get moderated), but, Wolf, you remember a specific property I linked to back in May. That place sold in 2017 for 586K and closed in July of this year for 759k. If they turned around an put it back on the market today they’d probably list it for close to 800k. “value may be fantasy” is an understatement. Notice how I made sure to say prices not values in my opening remarks. I’m seeing stuff in our area that pre-pandemic would have fetched 650k but today is going on the market close to 900k; it won’t sell for that but things are so crazy here that people are throwing any stupid number out there to see what’ll happen. Junk near the main corridors is actually selling at 750k and houses in what most would consider bad neighborhoods has sold in the high 4’s and low 5’s. I’m talking post-war, flat roofed 750 sf 2/1 crap piles in scarytown, 1300 sf crap will cost you near 600k in the same scarytown. You San Diegans who know 92115 and nearby zips know exactly where I’m talking about.
    A slight up tick in rates will destroy this made up fantasy land stuff we’re seeing here. It won’t end well.

    • I blame the permitting process, and no growth initiatives. Land and cash, are trash. Maybe they can build houses on a sky hook. New home openers want the least property you will sell them. Maybe that psychology will change, but big houses like big automobiles, seem to be losing their allure.

    • sunny129 says:

      Have you forgotten the ‘suspension of Mkt mkt to accounting standard’ since March of ’09! That was intentional with blessings of the Congress and the hapless FASB !

      SAme way the Mkts are disconnected from REALITY thanks to EASY-PEASY money shower from Fed since ’09

      Chickens are coming to home roost!

  24. David says:

    Unfortunately most of the masses have selective amnesia. The lesson of the not-too-distant past has not been learned. They don’t recall or choose not to recall what happened in the 2008-09 bust. If it affected you severely, you never forget.

    The price of our house in the East Bay SF area crashed from an appraised value of $735K in 2007 to $265k in less than 2 years time. We had refi’d in 2007 but eventually had to foreclose because I was laid off from my job. The job loss was an unexpected, sudden shock which many are now having to deal with. We tried everything to save the house, but in the end the bank had no interest in working with us. They just wrote the bad loan off their books & kicked us to the curb rather than set a bad precedent of working with a customer who still had good credit & had never missed a payment.

    Anyone remember HAMP that scam of a government program that was supposedly set up to help homeowners going through similar situations? It was part of the TARP (Troubled Asset Relief Program) originally sold to the public to help out distressed taxpayers but instead was used to bail-out corrupt bankers & big corporations. Has a familiar ring to it today doesn’t it? The U.S. government uses the pretext of the past to fool the public into thinking it has our best interests, when in reality it’s always business as usual.

    • roddy6667 says:

      In all matters, politics, economics, anything, the public only has a ten year memory.

    • Bet says:

      sorry to read your story David. I went through something similar in the early 1990’s, health insurance they refused to pay I didnt get foreclosed on, i was able to sell it. But what I learned was to never ever trust a bank or an insurance company. ( except maybe usaa) we are and have been for some time not a democracy but a corprocracy. according to Citizens United corporations are people too.

    • nodecentrepublicansleft says:

      Perhaps my case was rare, but HAMP helped me save my home from foreclosure.

      The sick part is how my dumb ass got into foreclosure. I called customer service to inquire about my Loan Mod application.

      Customer Service Lady: “You’re up to date on you payments.
      Me: Yes Mam, I pay my bills.
      CSL: That doesn’t show any financial distress. You should stop making payments for 3 months and then re-apply.
      Me: If I do that, you’ll foreclose on me.

      CSL: No, we don’t foreclose until 5 months. Don’t pay for 3 months, then re-submit your Loan Mod application and make a payment. You’ll be behind, showing financial difficulty and we won’t foreclose.

      My dumb ass did it. I was so NAIVE, it never occurred to me that my bank wanted to STEAL my home. On day 91, I heard the knock on the door…..

    • I have this feeling that we ended up learning our lesson perfectly. Never again will we let another bubble collapse. This time, the combined Fed and government response was so big, asset price deflation has been avoided entirely! Is it smarter to pay off your mortgage or borrow the maximum amount, since we have negative real rates? If the mortgage interest rate is 3% and the money supply has grown over 7% annually, on average, for decades, how much risk is there really in borrowing as much as possible?

      Since mortgages create money and give it to the asset holders, it seems only logical that after the next currency collapse, we decide to ban mortgages (except for hard money loans), and use the printing press to give to everyone equally via UBI.

  25. Bobber says:

    Part of America’s decline is over-consumption, to the point where the government is subsidizing 3500 sq. ft. houses and luxuries like fancy countertops, $100k electric vehicles.

    And, I’ll dare say it, we are spending $2-5M per person in healthcare costs for many individuals who can’t seem to do without that pack of cigs, bottle of whiskey, and bag of donuts.

    There’s tons of fat and entitlement in our society.

    • MonkeyBusiness says:

      Tons of fat and entitlement == Monster GDP!!

    • robt says:

      That healthcare figure seems high for people just living a normal life, some of whom may need treatment.
      It may be more productive to demonize kids and adults who play sports and constitute a steady stream of patients requiring treatment for injuries.
      It is significant, but I won’t just toss a number out there.

  26. Mr Wake Up says:

    Although I have no interest in developing new construction in NYC I’ve been offered 90% financing on land purchases and 100% financing for the construction costs.

    Predatory lending on scale.

    In addition refinancing offers on commercial buildings has been aggressive. Not answering my phone nor returning voicemails is starting to get obnoxious.

  27. Educated but poor Millennial says:

    This is off topic but realated to real estate subjects.
    In Inc.com theere is an recent article :
    “Zillow Founder Rich Barton Explains Why Residential Real Estate Is Booming During a Recession”
    By pretending that RE residential market is great, Are these guys are just BS-ing? Dumb or smart, which group is buying? Are aliens buying? Lol

    • Ethan in NoVA says:

      Where I live in Northern Virginia housing is selling fast on the “cheaper” side (under $1 million?) I’ve heard a number of excuses as to why. Being stuck at home people want bigger places or places outside the city, or they were planning to buy anyway, or various other reasons. It’s insane, and hopefully there will be a price collapse in the future and some inventory hits the market at distressed prices.

      They keep extending the rental kickout dates, and of course the loan forbearance thing for mortgage holders. So who knows.

    • poor but educated jones generation says:

      I think money is leaking out of the bailouts to corporations and private funds and being invested in housing by REITs. I can’t prove it, can’t find it anywhere, but I am sure of it. People moving out of urban areas does not account for it all. I see more “we pay cash for houses” & “we will meet any price for your house” adds.

      Supposedly foreign investment pulled back, however, I can’t find any current data on that at all.

  28. Jesus42 says:

    Government spending makes up over 50% of the GDP. Most loans are guaranteed by the government or the Fed. Asset prices and markets are propped up by the same entities. Soon we’ll have UBI paid directly by the government app in Fedcoin. We don’t have sound money, we have debt notes, backed by the government. We already have socialism. Just like in any good old socialist dystopia, the oligarchy takes all the profits while the laborers get the scraps. How did it go so bad so quickly?

  29. Mark says:

    I’m still holding out for the negative yielding 30Y mortgage…

    Seriously though, it’s hard to think of a better deal right now than to max out and take some stupidly huge loan at 30Y at <3% interest.

    Sure, the house may lose some value in the next few years, but I’m certain the dollars used to pay that loan back in the 2030s and 2040s will be worth significantly, significantly, significantly less than today. And if still working and have a job that’s in high demand, wages will keep pace with that inflation.

    • andy says:

      Right you are, probably. What’s bad for lender is likely good for borrower.

    • roddy6667 says:

      Wow! A negative interest rate mortgage. The bank pays you. If you own enough properties, you can quit your job. Maybe Dave DelDotto will have an infomercial on it.

  30. BrianC - PDX says:

    I am living in a suburb south of Portland OR, and the mother of my boys is buying a townhouse across the street. About two or three months ago the holder of her mortgage approached her about a refi. They dropped her from 4.5 to 2.25 percent and reset the 30 year term. Net to her was about a $550/mo drop in mortgage payments. No fees, no added costs to her. The entire transaction took about 48 hours via phone/email.

    A couple of my neighbors have had the same thing happen. My guess is that they are trying to be proactive about managing their loan portfolio ahead of the bad that is coming up…

  31. Bobby Dents says:

    Besides exploded sign growth, your basically talking about the end of the dollar based credit bubble that has been operating since the 70’s. The end of extend and pretend.

    It starts when China moves against the $$$$. Chinese play the long game. As dollars are reduced globally, it will trigger a credit squeeze, reducing liquidity. There is not much the Fed can do either. With US debt illiquid, every attempt at increasing liquidity will further erode credit and trigger capital flight. The game has changed. The U.S. Economy would then have to decline 20-25% to get back in balance.

    I wonder if this is the real reason for the Trump/Putin trade war. The latter would prefer a basket of goods run by east asia, supported by China’s business class while the government just wants it all for China. By initiating a proxy trade war, the government by their own morals are forced to keep the currency down, maintain, the status quo.

    • MonkeyBusiness says:

      Whenever I hear how long term the Chinese are, I always roll my eyes. The amount of bad debts in their books is also huge. They too are playing some sort of extend and pretend.

      Look. The Chinese have done an admirable job lifting hundreds of millions of people out of poverty. Not even the US can do something like that I think, but the biggest enemies of this country live here, and yes they are Americans. Among other things, they sent good jobs away for greed, and they have been waging unnecessary wars for power and profit. Who needs enemies when we have friends like these.

    • Lee says:

      Sorry, but the entire Chinese financial system is nothing but a broken joke. A huge pumped up bubble that makes the USA look like nothing.

      Their system and country in reality is bankrupt.

      • Ethan in NoVA says:

        But at the end of the day they have new cities and are the center of the worlds manufacturing to show for it.

        The USA can’t produce the integrated circuits for it’s war machines or the chemicals for it’s antidepressants. Only thing to show for the debt is an asset bubble in poorly constructed housing and college educations for jobs that are largely outsourced?

        • jones generation says:

          search “rat tribe” and “ghost town” China.. It’s a sick joke. A new world vision.

  32. Rcohn says:

    Correct me if I am wrong , but the problem with Refis is one of fraud, fraud in housing valuations and /or fraud in income verifications .
    So we are talking about underlying criminal actions in the biggest or close to the biggest industry in the country . And the responsible government agencies do not pursue any legal action.

  33. Seen it all before, Bob says:

    I view the extra 0.5% Freddie and Fanny are charging as an insurance surcharge. This would be similar to trying to get a new home insurance policy when a hurricane is headed for a direct hit on your home. The current hurricane is the high number of forbearance claims that Freddie and Fanny are on the hook for.

    Or it could be thought of as a Covid fee. A friend just refi’d and it required an appraisal. Appraisal fees have jumped to $800 from $500 pre-Covid. I suspect title insurance fees have also risen since they have to send their notaries into a war zone to close.

    I wonder with all of these increases in fees, what the average APR is now on mortgages?

  34. Unamused says:

    Why am I not able to see the comments? The reader reactions are almost as interesting as the post itself

  35. Russell says:

    Fanny Mae and Freddie Mac shouldn’t even exist. Loans should only be written with proper credit and sufficient down payment. The risk should be fully carried by the lender or the insurer if a PMI is in place. Problem would go away immediately and tax payer would no longer be on the hook.

Comments are closed.