Refinance Boom or Bust: The Scoop from Melissa Stashin of Pacific Residential Mortgage LLC

Melissa Stashin, Pacific Residential MortgageMelissa Stashing

Pacific Residential Mortgage, LLC
4949 Meadows Road, Suite 150
Lake Oswego, OR  97035

(503) 699-LOAN (5626)
(503) 905-4999    Fax

Over the last few months refinancing has seen what could be deemed a “boom” in our current lending climate; yet, according to the Bloomberg report, the refinance index decreased 3.1 % in the beginning of September, so why the recent slow? When I turn on the radio, open a paper or see a pop-up in my email, I am bombarded with phrases like; “Lowest Levels on Record! Historic Lows! Lower Your Payment! Rates as Low As.”  Mortgage companies are using confidence boosting words to create hype in their marketing strategies, and this is important, but more crucial is providing information and education to consumers so they understand their options.  In a time when we have some of the best rates in history, getting the word out about refinancing options is fundamental.

One of the best things you can do is dig through your file cabinet, find your mortgage statement and check your current interest rate. If it’s anything over 4.5% it’s worth a phone call. Just like your mom said, “you won’t know until you ask” and really, there are a lot of options. Many consumers who refinanced two years ago may have an incentive to refinance again and this is a good thing. From a local perspective, when consumers seek a lower monthly payment it increases disposable income which creates consumer spending and helps Oregon’s economy as a whole.

So here’s the scoop, there are programs that allow you to refinance without equity in your property or very little. There are options for large loan amounts and those for small. Each program has its own set of guidelines which we, the mortgage banker, will walk you through. Credit issues may not disqualify you if they can be resolved; it’s just a matter of looking at everything carefully. It’s our job to determine the best program for your situation and your ability to repay. The magic recipe for low rate bliss requires four basic ingredients from you: assets, income, credit and property. Although this may seem daunting, if you tell us what your situation is and we can verify it, you may be able to save a significant amount of money. The reality is that rates still are historically low and there is a lot of opportunity for consumers to improve their interest rates. Choosing a local company like Pacific Residential Mortgage helps make for a smart consumer because we have the skills and local expertise to educate our borrowers. In this new mortgage market, the difficulty isn’t in qualifying our consumers it’s simply a matter of gathering information, stirring the ingredients together, and you may be the one that takes the cake!

~ Melissa Stashin

Sr. Mortgage Banker/Branch Manager

NMLS# 40033

At Elizabeth Warren’s debut, a spotlight on incomprehensible mortgage disclosures, by Timothy Noah,

If you’ve ever purchased a house or an apartment, you’re familiar with the blizzard of papers you must sign at closing. Sign here, sign there; read the fine print if you like, but, remember, the seller hasn’t got all day. As your writing hand cramps up, you become dimly aware that the purchase price and the interest on your mortgage aren’t the sole costs associated with this transaction. There are also any number of mortgage fees and conditions and rules and contingencies, all of which you’re expected to understand even as your heart races and your brow dampens at the thought of signing the biggest check you’ve ever written in your life. If it isn’t the biggest (and if you don’t happen to be rich) then your troubles are probably only beginning, as purchasers of subprime mortgages learned the hard way in the housing bubble.

From dual perches in the White House and the Treasury, Elizabeth Warren is overseeing the creation of the Consumer Financial Protection Bureau mandated under the Dodd-Frank financial-regulation law. Warren has long been irritated by the way mortgage companies “disclose” those fees and conditions and rules and contingencies by drowning the buyer in agate type. On Sept. 21, Warren and her boss, Treasury Secretary Tim Geithner, convened a semi-public forum on the problem with mortgage companies and consumer groups. (I say “semi-public” because the only press allowed were National Public Radio, the Washington Post, the wire services, and a handful of photographers. Hmph!) “Fine print obscures the cost of credit and makes it impossible for families to compare products,” Warren said at the forum. “Streamlined disclosure can level the playing field and give families better tools to make better choices.”

Mortgage lenders’ obfuscation arises in part from a ridiculous government turf war created by two conflicting statutes. The Truth in Lending Act, first passed in 1968, made the Federal Reserve Board the guarantor of consumer protections for mortgage holders. The Real Estate Settlement Procedures Act, first passed in 1974, gave the job to theDepartment of Housing and Urban Development. Rather than resolve the problem, HUD and the Fed spent most of their energies fighting each other over jurisdiction. It didn’t help that the laws themselves contained different disclosure requirements. “It’s the mortgage industry’s Vietnam,” one mortgage industry consultant told the American Banker. The Dodd-Frank law sought peace with honor by transferring mortgage consumer-protection authority to the CFPB, of which Warren is now de facto director, and by mandating that two existing forms be melded into one.

But do mortgage companies want peace? Warren has noted in the past that home-buyers are often ignorant of the most basic information about their transaction. A 2007 Federal Trade Commission survey of home-buyers in the Washington, D.C., suburbs found that 87 percent could not identify their total up-front charges. “Most respondents began the interviews with positive views of their experience obtaining a mortgage,” the FTC report observed. “But as the interviews progressed, it became clear that many respondents were unaware of, did not understand, or had substantial misunderstandings about important features of their recently obtained loans.” As the interviews progressed, “the attitude of many respondents deteriorated.” In this limited sense, mortgage bankers fit the definition of the confidence man that the University of Louisville linguist David Maurer gave in his classic 1940 study, The Big Con. “The trusting victim literally thrusts a fat bank roll into his hands,” he wrote. “It is a point of pride with him that he does not have to steal.” Ideally the victim should never learn that he’s been taken.

The deadline for action under Dodd-Frank is July 2012. Warren and Company are committed to producing a consolidated form “well ahead” of that deadline, according to a Treasury Department press release. Beating a timetable that extends nearly two years into the future shouldn’t be difficult. Finding a simple way to resolve conflicting statutory requirements, on the one hand, and overcome mortgage bankers’ natural resistance to accountability, on the other, will be a lot harder.

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Mortgage Bond Rally Centers on Least Likely to Refinance: Credit Markets, by Jody Shenn and Alan Goldstein,

Investors in U.S.-backed mortgage bonds are shifting into securities tied to debt from homeowners who are the least willing or able to refinance as the Federal Reserve helps keep interest rates near record lows.

Fannie Mae-guaranteed securities with 5.5 percent coupons that are backed by 30-year mortgages with average balances of less than $85,000 have jumped to 2.4 cents on the dollar more than similar generic debt, according to FTN Financial. The gap has more than doubled from 1.1 cents in late July.

Homeowners with smaller loans don’t benefit as much from a drop in monthly payments as borrowers with bigger mortgages, while facing similar closing costs, and are thus less likely to refinance. Premiums for debt tied to mortgages with low balances have generally soared to the highest since at least 2004 after refinancing applications climbed to the most in 16 months.

“Prepayment protection is worth a lot more than what you’ve seen historically,” said Bill Bemis, a portfolio manager who oversees about $7 billion of securitized debt at Aviva Investors in Des Moines, Iowa. “Payups” for mortgage bonds filled with smaller loans “have gone a little bit too far” because it may take investors as long as two years to recoup such premiums through the extra interest payments by borrowers keeping their loans outstanding, he said.

Willing Fed

The Fed, which said yesterday it’s willing to ease monetary policy further to spur growth, has helped drive down borrowing costs by purchasing government and mortgage bonds, increasing its assets to $2.3 trillion from about $906 billion at the beginning of September 2008. U.S. two-year yields fell to a record low after the central bank’s statement.

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt was unchanged at 171 basis points, or 1.71 percentage point, the lowest since May, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.512 percent, down from 3.566 percent.

The spread is narrowing at the same time as the number of U.S. companies at greatest risk of default dropped to the lowest level in two years, in part due to Federal Reserve efforts to bolster the economy, according to Moody’s Investors Service.

Companies rated B3, or six steps below investment grade, with a negative outlook or below that level declined to 195 as of Sept. 1 from a high of 288 in June 2009, Moody’s said. Clear Channel Communications Inc. and Energy Future Holdings Corp., formerly named TXU Corp., were among the biggest companies on the list.

IStar Debt

IStar Financial Inc., the commercial real estate lender seeking to restructure some of its $8.6 billion of debt, may seek bankruptcy protection after creditors blocked it from amending loans. IStar expects to begin meeting with creditors in coming weeks to discuss potential terms of a so-called pre- packaged bankruptcy, which wouldn’t occur until sometime next year, according to people familiar with the matter who asked not to be identified because the plan isn’t public.

Outside of bankruptcy, the company is weighing a proposal to extend maturities on its debt as well as a potential exchange offer, according to two people familiar with the situation. Andrew Backman, a spokesman for iStar, didn’t return a phone call or an e-mail message seeking comment.

IStar’s $501.7 million of 8.625 percent bonds due in 2013 fell 5.6 cents to 78 cents on the dollar, the lowest since March, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Chrysler Financial Corp. plans to issue $2 billion of bonds backed by auto loans this week in its first asset-backed securities sale since March, according to a person familiar with the transaction who declined to be identified because terms aren’t public. Toyota Motor Corp. is marketing $1.29 billion of similar debt, also slated to sell this week, a person familiar with that deal said.

Auto Loan Delinquencies

While delinquencies are down 23 percent from a year ago, late payments on auto loans rose to 2.1 percent in August, a 4.7 percent increase from the prior month, Standard and Poor’s said in a report.

Debt tied to auto lending accounts for a majority of asset- backed securities issued this year, or 53 percent of the $85.2 billion in sales, according to Bank of America Merrill Lynch data.

Bonds from DuPont Co. were the most actively traded U.S. corporate securities by dealers, with 167 trades of $1 million or more, Trace data show. The Wilmington, Delaware-based company’s $1 billion of 3.625 percent notes due in January 2021 rose 1.2 cent from its issue price on Sept. 20 to $101.04 cents on the dollar.

Bondholder Protection

Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 2 basis points to a mid-price of 108.7 basis points as of 5:23 p.m. in New York. Yesterday was the first full day of trading after index administrator Markit Group Ltd.’s semi- annual adjustment of companies included in the measure.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan increased 1.5 basis points to 122.5 basis points as of 8:22 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show.

In emerging markets, the extra yield investors demand to hold corporate bonds rather than government debentures rose 22 basis points to 292 basis points, the highest since Aug. 31, according to JPMorgan Chase & Co. index data.

Leveraged loan prices rose for a 10th straight trading day, climbing 0.15 cent to 90.21 cents on the dollar, the highest since May 19, according to the S&P/LSTA U.S. Leveraged Loan 100 index.

Mortgage Refinancing

Mortgage refinancing can hurt bondholders by returning their money more quickly than anticipated. That’s particularly punitive if investors paid more than face value for their securities because of their relatively high coupons and instead receive their principal back at par.

The average rate on a 30-year mortgage fell to 4.37 percent last week, from this year’s high of 5.21 percent in April, according to McLean, Virginia-based Freddie Mac. The rate touched 4.32 percent earlier this month. Rates on loans in Fannie Mae’s 5.5 percent bonds average about 6 percent.

The Fed has held its target rate for overnight loans between banks at zero to 0.25 percent since December 2008. The 2-year Treasury note yield dropped 4 basis points to 0.43 percent after touching a record low 0.4155 percent.

Fannie Mae

Washington-based Fannie Mae’s 5.5 percent, 30-year securities fetch 106.44 cents on the dollar in the so-called To Be Announced market, where orders to buy debt can be filled with bonds with a range of characteristics through a type of futures contract, Bloomberg data show. That’s down from the record of almost 108 cents on July 27, though up from 104.72 cents on Dec. 31.

Mortgage-refinancing applications rose to the highest levels since May 2009 last month, according to data from the Washington-based Mortgage Bankers Association. While applications have declined, last week’s pace was more than double the level at the end of 2009.

“Right now, we have some pretty dramatic concerns about prepayments, so we’re looking at the specified pool market as an area where you can generate excess returns,” said Paul Colonna, who oversees $58 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut.

‘Seasoned’ Debt

General Electric Co.’s investment arm likes mortgage bonds backed by lower-balance loans, and “seasoned” debt, which also offers protection against homeowners falling out of the pools after turning delinquent, Colonna said.

Aviva’s Bemis said he’s willing to pay for bonds backed by loans made in recent months, whose borrowers “are much less likely to want to go in anytime soon and refinance again.”

He also favors debt tied to property investors and homeowners owing the most relative to their properties’ values who will find it more difficult or expensive to qualify for new loans. While the latter debt may not prepay as slowly as smaller loans, it may cost only 0.5 cent on the dollar more than generic securities, he said.

Some types of mortgage bonds are in “bubble territory” in relation to the TBA market, according to Tae Park, a money manager in New York who oversees mortgage-bond investments at Societe Generale SA, France’s second largest bank.

“This bubble will last as long as the refi uncertainty continues,” he said. “It’s like when people are willing to pay-up for bottled water, when the tap water is from an unknown source.”

Hubbard, Mayer

In a New York Times op-ed this month, Columbia University’s Glenn Hubbard and Chris Mayerproposed a new program through which the government would direct Fannie Mae, Freddie Mac and federal agencies such as Ginnie Mae to streamline refinancing. Hubbard, who served as chairman of the Council of Economic Advisers under President George W. Bush, is dean of the Columbia Business School, where Mayer is a senior vice dean.

Higher payups “certainly illustrate the anxiety mortgage investors are feeling about government policy,” said Julian Mann, who helps oversee $5.8 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles.

Changes in the mortgage market amid the worst U.S. housing slump since the Great Depression are eroding the value of some typical characteristics investors seek for “prepayment protection,” Mann said. Bonds of older 15-year mortgages with low balances, for example, are refinancing faster than First Pacific Advisors expected, he said.

Mortgage bankers and brokers pursuing “slam dunk approvals,” rather than spending as much time on potentially more lucrative larger loans, are responsible, Mann said. The 15- year debt tends to be taken out by borrowers with better means to pay it off than 30-year loans, and pays down more quickly, giving homeowners lower loan-to-value ratios when they seek to qualify for a refinancing, he said.

To contact the reporter on this story: Jody Shenn in New York at

To contact the editor responsible for this story: Alan Goldstein at