I love Diana Olick. Not in a creepy way, I promise. It’s a purely professional infatuation. In my opinion, she is the CNBC reporter who most honestly covered the housing demise as it first began unfolding. It’s why I experienced such heartburn when I read the title of her most recent article.

Falling Mortgage Rates Spur Serial Refinancing

Why the heartburn? My first impression was that I was going to read that we were back in the “aughts”, that magical time before the bust, when the refinance business was going gangbusters.

Fortunately nobody tried too hard to spin that tall tale.

The drivers of the first refinance boom are now gone. Certainly there will be an uptick in the numbers now that rates are beginning to drop again. My loan officer friend Keith Yamamoto tells me that he has several applications sitting on his desk, each waiting for a particular rate to proceed.

But it would be unexpected if refinance volumes were to increase significantly.

The beginning of the article focuses on a married couple who refinanced four times in the last four years. For the vast majority of homeowners that’s excessive, though I admit that I’m impressed that this couple was able to perform such a feat in this lending climate. I think that tells us that this is not your ordinary couple.

Now it’s true that refinancing can save money. It may even be true that this exceptional couple benefitted tremendously.

But serial refinancing is a dangerous game that eats equity quickly, and can trap a homeowner in a cycle of debt dependence that causes them to make bad decisions, and by the sounds of it, that’s just what this couple did by moving from a fixed rate loan to an adjustable.

For this particular couple, let’s hope that when Tim Geithner is put out to pasture, that we don’t have a Volcker style treasury secretary who reigns in the Federal Reserve (the real reason for current low rates) and pushes rates through the proverbial roof. Because they will certainly lose their literal roof if they find themselves refinancing into the same equity trap that so many homeowners now find themselves in.

Justice… it’s not a word that we use often here. Banks are brazenly defying court orders and flouting the law. Perhaps that’s why it feels so good when it happens not just once, but now twice.

“After about an hour of being locked out of the bank, the bank manager handed the attorney a check for the legal fees”.

Such sweet, delicious justice… Be sure to click the link for the full story.

None of this had to happen if the “powers that be” had been actually enforcing consumer protections instead of paying lip service to them, but I digress…

When Darkness Falls

Do you feel more comfortable on “Main Street” than “Wall Street”?

In 1992, Wells Fargo certainly spent a few ad dollars convincing television viewers that they were the bank of the “Common man”, the “Common man” being a reference to anyone other than a “Wall Street” inhabitant.

After all, if you’re on “Wall Street”, you’re a “Master of the Universe” as they so humbly refer to themselves.

I don’t know about you but I certainly prefer “Main Street”. I hear those “Wall Street” types are sneaky and deviant tricksters who trap the “Common Man”, the producers of things of actual value, into debt bondage, and then strip them of everything not protected by bankruptcy laws.

Was that hyperbolic?

Perhaps…

John was understandably relieved that his independent loan originator had steered his loan to Wells Fargo. John smiled to himself as he waited on hold to hear the answer to his inquiry. After all, what he was asking was reasonable. He had gone along with “The Plan”.

Oh I’m sorry, have I not yet discussed “The Plan”? Well, allow me to correct that egregious omission forthwith!

“The Plan” was based on the bedrock tenet that house values only go up. They never, ever fall…

Ever.

To even propose such a thing was preposterous beyond comprehension!

The plan was simple. Apply for an Adjustable Rate Mortgage in order to qualify for a higher loan amount than otherwise possible with a fixed rate loan, then refinance if rates start to rise.

But what happens if rates rise while the prepayment penalty is still in effect? At one time it didn’t seem to matter much. The equity build up made the prepayment penalty seem like nothing but an annoyance fee.

The smile left John’s face when he hung up the phone. The “Main Street” bank he saw on T.V. was nothing more than a “Wall Street” bank in disguise.

They refused to work with John. He hung on for two more years before going into default in late 2010.

Next Up: A new hope on the horizon

When it all goes wrong

“At its founding, Wells Fargo & Co. gained success by harnessing the Old West.” So says a marketing paper written in 2008

I think when people envision the mythical version of the “Old West” that is referred to in this context, they imagine a world where a man’s word is his honor, where the strong protect the weak, where “fair play”…

After all, only a yellow bellied, lily livered, no good scoundrel would shoot a man in the back

…is a time honored tradition.

In 2008, when the economy hit the wall, John Doe began to feel the first effects of his poor choice of loans. As you remember, an independent loan originator steered John into…

A 6.5% Adjustable Rate Mortgage with an APR of 9% and a three year prepayment penalty

There it is… that darned prepayment penalty. Why was it there? It certainly didn’t benefit John. Was it required? Did the loan originator even explain it to John? Was there another, more appropriate option such as a HELOC?

A prepayment penalty on an Adjustable Rate Mortgage is a terrible idea when your home is at stake.

With rates rising now that his loan had recast, and with prices falling, eating away the precious equity that he so needed in order to refinance into a stable, fixed rate loan, he was well and truly trapped.

John called Wells Fargo directly and pleaded his case. Surely a company that extols the virtues of honor and fair play that is epitomized in the historic fables of the “Old West” would help John save the proverbial farm.

They would at least put him in a fixed rate loan, even if it meant stretching the payments out longer right?

Right?

Up next: When darkness falls

John and Jane Doe are the regular, everyday people in this country. They are the “Middle Class” who work hard to get ahead. John and Jane Doe in essence are you and me and the majority of your friends and neighbors.

They are the people who are bearing the brunt of this economic upheaval that is unfolding at a glacial pace.

One John Doe in particular was working hard at his business in 2006 when he decided to do what the smart money was doing and lower his operating costs by consolidating his various business debts into a single, low interest rate loan. By lowering his operating costs, John could expand and grow his business!

Unfortunately for John, he landed at the desk of an independent loan originator who acted out of either ignorance or greed.

John wouldn’t realize this until 2008.

As far as John was concerned, the loan originator seemed to know what he was doing. Not only that but he steered John to a loan offered by Wells Fargo.

According to their advertising department, Wells Fargo was the place to go if you were running a small business…

That’s exactly what this particular John Doe was looking for, a way to consolidate his debts and help fund the expansion of his business. Something like a HELOC, a line of credit, like a credit card, that he could access when necessary without having to pay for money he didn’t yet need.

But that’s not what he received. What he received was much different…

A 6.5% Adjustable Rate Mortgage with an APR of 9% and a three year prepayment penalty.

Not the HELOC that he could’ve prudently borrowed against to grow his business. No, all of his debts, including his original mortgage, were bundled up into one big payday for the loan officer and one more risky mortgage for Wells Fargo to mislabel and sell to investors.

Why did John take on such a risky loan? He should’ve known that he was taking an inordinate level of risk right? What could possibly have convinced him that it would be a good idea to follow the advice of his loan officer, who was certainly more experienced in the world of finance?

Now, I wasn’t in on the conversation between John Doe and his loan officer but, I know the script well.

• “Home prices are rising, that equity is free money!”
• “If you can imagine it, we can fund it”
• “This may be your last chance before rates rise”
• “If something happens, sell and reap the profits because home prices have never fallen”

This was the boom year of ’06 after all.

Where did the loan officer learn the script? He quite likely learned it from seminars run by lenders just like Wells Fargo.

Whatever the case, the cards were stacked against him. John is a smart man but finance isn’t his specialty. I don’t know how to say this gently, but conversations with even the most educated and sophisticated amongst us reveals that by and large we are poorly educated in matters relating to finance. This is a fact that the lenders who craved risky loans exploited adroitly.

John Doe walked into the loan originators office looking for a tool to help him build his business, but he walked away with an anchor that was guaranteed to sink him. He just didn’t know it yet.

Up next: When it all goes wrong

The Beginning

I’m here to tell you the real story about loan modifications.

It is a side of the real estate business that is both misunderstood and reviled. Thanks to the usual suspects, the idea of loan modifications is associated with opportunism at best and fraud at worst.

I’m afraid it’s a well earned association. When real estate crashed, many of the same people who sold predatory loans turned around and worked to modify those very same loans, usually unsuccessfully, always with non-refundable fees.

But the industry does have its honest players.

I have and continue to follow a group of dedicated loan officers and real estate agents who are doing their best to help save the homeowners who can be saved, and to help cushion the blow for those who cannot.

It is difficult to hear their stories and not become frustrated. So many people have been and continue to be hurt by the fraud, abuse, and unchecked greed that was nurtured during the bubble years. The wreckage of the crash of 2008 continues to pile up.

I have been documenting their individual stories. Most will be done anonymously, as people who are going through default or foreclosure tend to feel a great deal of shame regarding their situation… even when they have done nothing wrong except be the unfortunate victim of predatory lending.

Up next – John Doe: Part I in a series

About Kingston Mortgage Services

Several years ago, I started a working relationship that later turned into a friendship with a man by the name of Keith Yamamoto. Though I left the Real Estate business when my health deteriorated, I continue to maintain a friendship with Keith. What he tells me about the current state of the business is disheartening at best. There is a degree of, for lack of a better word, unfairness that permeates the system. The checks and balances that compel powerful institutions to “do no harm” to the consumer have been stripped away. Lawlessness abounds and while there is positive movement on the legal front, as the old saying goes, “The wheels of justice turn slowly”.

The work of Keith Yamamoto and Kim Henn with the distressed specialist group at Kingston Mortgage Services is serving to grease that wheel.

Call 206-250-9360 to contact Keith Yamamoto, and the specialists at Kingston Mortgage Services.

Who do you turn to when elected representatives fail to represent the electorate and instead enrich themselves by spiking legislation damaging to banks?

Who do you go to when the banks seek revenge?

The powerful are able to operate largely without repercussion and why not? The bankers haven’t yet been scared straight by the visions of their colleagues doing the “perp walk”.

We have the appearance of bribery of an elected official in Arizona.

We have the appearance of vindictive behavior by Deutsche Bank against a citizen, who dared to blow the whistle on the overt fraud she discovered was committed against her.

That a bank is using the judicial system for vengeance, or that an elected representative received $100,000 in forgiven principle should certainly raise eyebrows at the justice department.

Let’s hope someone with a backbone and a bad temper starts to take notice so we can finally start seeing the architects of this financial catastrophe hopping past the cameras in their fashionable new orange jumpsuits and handcuffs.

Losing your credit rating can be a difficult thing if you ever need to obtain financing. Financing is so ubiquitous in this world that perhaps, that’s the problem.

We’ve made it too easy to leverage our future (which is exactly what we do when we borrow money).

Now, leverage isn’t a bad thing. It is a very powerful tool. Used productively, you can benefit immensely and create wealth. Used on throwaway items such as vehicles and vacations, it amounts to partying now and working off the tab as an older, slower, hung over and flabbier you at some point in the future.

The concern should be less about “How will I regain credit”, and more about “How will I live without credit”.

Believe it or not, with small changes in behavior and expectations, you’ll find that you need credit much less than you actually do. Credit for many is a convenience. When purchasing online it provides additional protection. When you want to buy a larger ticket item, you can do so immediately as opposed to saving for a couple of months.

Convenience and expediency are expensive.

Oh, I know. Saving is so…. pedestrian. You may even get a sideways glance from the less thrifty of your friends. But as the cool kids are saying these days… ”thrifty is nifty”.

(Yeah, I know that nobody cool is saying that but you get the point).

Many people have already changed their spending habits and if they haven’t, they likely soon will. The gaudy, flashy, showy, immature spectacle of spending is blissfully over. The only people who still spend conspicuously are the perpetually clueless and unaware.

So how do you adjust to the loss of credit? First change your attitude about credit, and you’ll then find that the problem nearly solves itself!

This begs the question on whether a government shutdown will affect you if you are in the middle of buying or selling a home, or negotiating a loan modification with a government agency.

The short answer is “maybe”. Based on this article from Realtor.org, it appears that FHA may shut down certain operations while VA will still be processing and guaranteeing mortgages.

Both Fannie and Freddie will be operating as normal, as will HAMP and HAFA programs since HAMP and HAFA are funded through the Emergency Economic Stabilization Act, which is considered mandatory, not discretionary spending.

It appears that the biggest disruptions will occur with FHA and with USDA Rural Agricultural programs. If you are in the midst of a transaction that involves either of these agencies, speak with your lender today to ensure that you are able to move forward in the case of a shutdown. If not, you just might want to reconsider whether to lock an interest rate until Washington can decide how to fund itself for more than a week at a time.