Wells Fargo announced today that they were closing their mortgage lending division that was originating subprime mortgages.  I started thinking again—–Wells Fargo did not originate has not been originating subprime loans, but they did buy Wachovia who bought World Savings and they certainly originated risky loans.  World Savings was the first wholesale lender that extended option ARM loans to mortgage brokers nationwide.  Option ARMs are the high risk loans that featured a negative amortization loan payment option.  That means that borrowers had the ability to pay less than an “interest only” and the deficit would be applied at the end of the year to the borrower mortgage balance.  These loans were the first of their kind, because borrowers could have their outstanding mortgage balance compounding negatively like a credit card.  For years World Savings succeeded with the negative amortization loans because they had strict underwriting criteria that required the borrower to demonstrate they had they ability to pay the loan back. 

To get approved for the Option ARM, borrowers needed to supply income documentation and have home equity that was assessed by a licensed local appraiser.  Self-employed borrowers loved the World Savings Option ARMS because it gave them the ability to pay less in month’s in which their cash flow was low.  World Savings offered bad credit mortgage loans to borrowers who had a significant amount of home equity and income that could be documented. After a while however, World Saving got sucked into the competitive mortgage broker market as Countrywide and WAMU were pushing competitive Option ARM products that paid high yield spread premiums that made loan officers wealthy.  All the while, Wells Fargo never jumped into the option ARM market.  The company maintained it did not want to put their prime loan portfolio in jeopardy because they did not believe the Option ARM product was a good risk.  Wachovia Corporation, another prime lender could not resist the option ARMs and the lure of these exotic home loans so they bought World Savings.

In 2006 the subprime mortgage crisis exploded when home loan lenders started going out of business as loan defaults started mounting.  Home values started plummeting nationally and in 2007 the economy took a turn for the worst.  In 2008 employment skyrocketed and mortgage giants like WAMU and Wachovia were on the verge of bankruptcy.  The government stepped in and brokered Chase to take-over WAMU and Wells Fargo to take-over Wachovia.    

Don’t you find it interesting that after years of refusing to originate the risky option ARM product that Well Fargo went out and bought, Wachovia who just failed because they bought the biggest option ARM lender, World Savings?  I find it strange that after nearly escaping the mortgage industry debacle because of their wavering from their conservative lending philosophy that Wells Fargo would make this kind of catastrophic investment.  Did they ever think to do a back-ground check on this billion dollar bank they were buying?  This is sad because 4,000 people would still have their job today at Wells if it were not for this impulsive and uncharacteristic transaction.  Maybe they should take a page from Obama and blame their mistake on Bush.  Regardless of this giant financial blunder, Wells Fargo is still a great company that will survive the series of crisis’s and continue to be America’s most trusted mortgage lender.   

Moving forward, I would anticipate Wells Fargo will originate more government finance programs like FHA and VA.  Since 1934, FHA home loans have performed better than conventional mortgage products and the government continues to insure FHA refinance and home purchase loans.  VA home loans are another good bet, because Wells know that the borrowers have the income in the military and again the government guarantees these loans as well. 

I would not hold my breath for Wells to reopen and of their subprime lending divisions anytime soon, nor would expect them to roll out competitive jumbo mortgage loan programs until the housing sector begins to actually rebound. 

I’m sure Wells will continue to originate conventional mortgages because that is what they have always done well.  The bottom line is that Wells Fargo maintains that good credit borrowers that can document their income deserve low rate home mortgages with minimal lending fees.  The company offers stellar customer service and typically their loan officers have extensive financing experience.  And who can argue with Wells Fargo on the prime lending criteria as it has performed well through 6 wars and they have been lending for more than half of the time that the United States of America has existed.  Some critics may consider the Wells Fargo layoffs to be a setback for the mortgage industry but it is my contention that Wells Fargo is taking a few steps back in an effort to regroup and survive.  Like the Los Angeles Lakers did after the 3^rd quarter in game 7 against the Celtics, sometime you need a time-out to shake off your mistakes so you get get back and focus on what you are good at.  Like the Lakers with basketball, people will associate Wells Fargo with mortgage lending for many years to come.

VA home loans are still available at record low rates as well.  If you already have a VA mortgage and want a lower rate talk to one of our VA lenders about qualifying for the VA streamline.

Freddie Mac Says Lowest Fixed 30 Year Mortgage Loans Since They Began Recording Rates in 1971

Conventional and FHA mortgage lenders reported averages of the 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.84% this week, down from 3.89% last week and 4.99% a year ago.

One-year Treasury-indexed ARMs averaged 3.77%, down from 3.82% last week and 4.93% a year ago. While not a record, this is the lowest the ARM has been since the week ending May 6, 2004, when it averaged 3.76%.

To lock into these home mortgage rates, the 30-year fixed-rate mortgage and both ARMs required payment of an average 0.7 point and the 15-year fixed rate mortgage required an average 0.6 point. A point is 1% of the home loan amount, charged as prepaid interest.  According to Frank Nothaft of Freddie Mac “Mortgage rates for all but traditional 1-year ARMs hit all-time record lows this week in our survey while activity in the housing market slowed in May following the expiration of the home-buyer tax credit”. “Freddie Mac began collecting rates for 30-year fixed loans in April 1971, 15-year fixed home loans in September 1991 and 5-year ARMs in January 2005.”

The thirty-year mortgage rates dropped 0.06 percentage point to 5.02 %, the lowest rate since mid-March.  Eligible borrowers seeking to take advantage of federal tax credits of $8,000 for first-time buyers and $6,500 for existing homeowners were required to sign contracts by last Friday and to close on their mortgage loans by June 30^th.  The big question now is whether the U.S. housing market has enough traction to continue recovering without government help. 

In addition to the tax credit, the Federal Reserve bought more than $1.4 trillion mortgage-backed securities intended to keep home loan rates down to revive the housing market. That program ended on March 31. “All the data that we’ve seen recently point to the fact that consumers are in a better place today than they were six months ago, and because of that they will likely be more active in the housing market,” Schenk said. The difficult labor market, however, will keep the housing recovery slow, he added.

Housing demand will likely falter after the recent influx of home sales ahead of the tax credit expiration, but then mount a slow upturn, many industry experts expect.  New home sales rose almost 27% in March, and sales of existing home increased by 6.8%.  According to UBS economists, “The pending home sales index, based on initial contracts, will likely be boosted again in April, with some payback thereafter. “However, we believe the combination of low prices, still relatively low mortgage refinance rates and the nascent recovery in employment will support home sales later in the year.”

The latest unemployment figures will be reported on Friday. April’s rate is seen holding at 9.7% for a fourth straight month, based on a Reuters poll, after touching a more than 26-year peak over 10% last year.  Homeowners have increasingly turned to the government for home financing with programs like FHA home loans.  These FHA loan programs including low down-payment home loan  products from FHA.  The MBA said that more than one-half of all purchase applications last week were for government mortgage loans, the highest share in two decades.

Prime credit borrowers are really taking advantage of their leverage in this market as no cost mortgage refinancing has become very popular with people who have ficos that exceed the 720 range.  It is important that you do the math on these no cost loans, because the interest rate is typically higher so you need to make sure it makes sense financially to payt a higher rate in an effort to eliminate closing costs.

There really is no security in this investment anymore.  Few, if any investors actually service the loans, and with the housing industry still very weak, and loan servicers holding almost all the power over the loans, investors are no longer flocking to purchase the loans from the original lenders.  The lenders control modifications, payment forebearance rights, collections pricesses, foreclosure proceedings decisions, etc. 

It is predicted that in order to entice investors, mortgage rates will have to rise dramatically in the near future.  We are hearing rates numbers in the mid 5% range up to “the sky’s the limit” types of rates.

Yesterday, the Federal Reserve announced they were keeping mortgage rates unchanged and extending the government mortgage buying program which is good news for Americans but great news for borrowers living in California.  2010 may be the year that California home values rebound and many distressed homeowners have found comfort with the Home Affordable Refinance Program because it enables borrowers with no equity to refinance their Fannie Mae or Freddie Mac loans up to 125%.

According to Mortgage Bankers Association, the home mortgage rates rose for the 2nd straight week to 4.92% from 4.88%, based on the MBA weekly interest rate report Home loan applications held relatively steady, too, increasing only .3% on a seasonally adjusted basis. Applications for refinancing represented 75.2% of all applications.

Mortgage refinance rates for a fifteen-year loan maintained 4.33%. These fixed-rate mortgage loans accounted for nearly 20% of refinance mortgage applications in October, Ruth Simon reports in today’s Wall Sreet Journal. That’s up from 9.1% a year earlier and 7.5% in October 2007.

Many loan applicants are interested in the fifteen-year mortgage rates because they have reached such low levels.  However, borrowers who are used to a 30-year mortgage payment may suffer from sticker shock, because even with a 4.375% rate, the 15-year mortgages have a higher monthly payment. Mortgage rates have been at near-record low territory for the last couple of months, but the good news for 2010 was received as the Federal Reserve announced they were extend their program in which the government buys mortgage loan securities in the upcoming year.

On a seasonally adjusted basis, home purchase loans applications declined almost 20 % from October to November.  Mortgage refinance applications rose by about 1% over that time.   MBA projects that mortgage loan originations will decrease from almost $2.0 trillion in 2009 to about $1.5 trillion in 2010.  MBA forecasts that purchase originations will increase from $718 billion in 2009 to $804 billion in 2010, while refinance loan originations are projected to fall from $1.246 trillion to $693 billion. The Federal Reserve and U.S. Treasury home loan programs continue to dominate the secondary market.  In November, Federal Reserve purchases of agency MBS accounted for about 80% of new MBS issuance from Fannie Mae and Freddie Mac.

FHA loan defaults and foreclosures have caused HUD to reconsider FHA requirements and loan guidelines.  Mortgage refinancing activity continues to be robust even through the Christmas season, because so many borrowers stand to benefit from a refinance loan that reduces their mortgage payments by hundreds of dollars.