What Will the Federal Bailout Mean to Home Mortgages?

Burt Hoffman   

Stamford, CT-based attorney-at-law, Burt Hoffman, gives his take on what the federal bailout means to consumers. Topics discussed range from the continuing importance of your credit score to an overall analysis of foreclosure problems.

Transcript

John: Welcome back to the CreditFYI Café. Today we're talking with Burt Hoffman, a Stamford, Connecticut-based attorney-at-law specializing in real estate. We'll be talking about what effect the bailout might have for the mortgage business in both the short and long term. Welcome, Burt.

Burt: Hi, John.

John: It's good to have you here.

Burt: Pleasure to be here.

John: Thank you. Let's get right into a few questions on what's in store for homebuyers, Burt, now that the federal bailout is more than a month old, and Washington has basically mandated that banks start lending money again. Have you in your personal experience, have you seen any change in general lending practices in your immediate geographical area since the bailout was passed?

Burt: Well, John, actually, I have not in the sense in that the bailout itself hasn't been particularly effectuated. I believe as of last week, they started extending some allocations to certain banks. But the banks themselves haven't ratcheted up their lending program. What I'm finding, though, is banks are much more conservative in scrutinizing the application process of Form 1003. They're also looking much closer at federal income tax returns and verification of income. And I think they're poising themselves to get ready to lend money. But the national banks are still standing back; local banks are now in the mortgage game.

John: Burt, you mentioned Form 1003, I believe it was. Could you elaborate a bit on that?

Burt: Form 1003 is the application under Fannie Mae/Freddie Mac. It's a uniform application for residential lending for one-to-four-family residential dwellings.

John: I'd imagine where you are in Stamford, Connecticut — Fairfield County, Connecticut — which I imagine is primarily, at least in pockets, an affluent area. Can you speak to what long-term effects the bailout might bring to homebuyers on a national basis?

Burt: Well, to a certain degree I'm familiar outside of the Fairfield County area, and there are pockets in the country that are driven by many other criteria. For example, you take the Florida, Las Vegas, and Southern California areas, they are in dire, dire straits. And I'm seeing some investors actually going in there and looking at auction properties that are going for a fraction of what their asking price was even a year ago; forget about two or three years ago. Those properties in these areas are going to be significantly hurt by this entire bailout process. Because they still don't know what the rules will be. And that's a problem.

John: It's interesting that you mentioned Florida, Burt. I know that 's — at least by some — been labeled a "debtor's paradise" in the past. As far as that goes these days, are all bets off?

Burt: Well, to a certain degree, that's the case because people don't know what rule of thumb applies. You know when you don't know or see value and see what the bottom of the value is, you stand on the sidelines before you want to go in and invest. In fact, one of the programs now that they're trying to implement occurs when the government will go in, or the municipality or county will go in and start to buy houses in areas, and they become government-owned, and they'll try to rent them out or keep them in decent condition. It's a major problem.

John: I understand. What about interest rates? I've noticed, at least in the last few months, that interest rates haven't really fluctuated all that much. First of all, do you agree with that, and secondly, if that is in fact the case, do you think that's going to change any time soon?

Burt: Well, actually, there's a misconception out there too with the cost of funds and the prime rate as it deals with long-term lending. There isn't particularly an association for that. For example, last week the Fed reduced the prime rate by 50 basis points, or half of a point. That is not necessarily going to drive the long-term rates down, because that I think was done for different economic principles, in order to try and avoid a deeper recession. The long- term rates, ironically, last week didn't ratchet up. The thirty-year fixed went up, I think, about 20 or 25 basis points. The rates are relatively affordable. They're low, but they did go up. They're in the low sixes now.

John: And the fact that they're in the low sixes now, is it fair to say that that's a good sign?

Burt: Well, it's a good sign in the sense that if they ever raise the rates significantly, then they'll have a total disaster with the housing market, which this economy can ill afford.

John: Speaking of the Fed lowering rates, and I know they've done it quite often. If my research is correct, these are probably the lowest rates, at least in the last four years. Do you see those rates going even lower, within, let's say, the next six months?

Burt: I think so, based upon other general economical principles. Because the government is trying to, you know, deal with this problem that has become global, as opposed to just dealing with our own economy. One might see, and don't be surprised that by third quarter next year, you could see a zero cost of funds, similar to what happened in Japan a number of years ago. Look, the government is now talking about buying up additional businesses, and once that starts occurring, that will cause those costs of funds to go down, in order to keep business viable. Because businesses can't operate without having certain lines of credit to buy future raw material. Otherwise, they just can't produce things.

John: Speaking of the government, Burt, now that the FDIC, in cooperation with the Treasury Department, says it has plans to help those facing foreclosure, what do you think that means to the industry as a whole? Are we going to see this happen anytime soon? Now that you mentioned that legislation is pending, but for the "John Q. Publics" out there, what's the real deal in your mind?

Burt: Well, look … back in March, House Rule 3648 — a mortgage forgiveness debt relief act — that was passed. Then, we've had some other things, including recently in Connecticut, an act was promulgated in July having to do with mediation — for one-to-four family residences that are owner-occupied. Now that mediation process goes into the court system. Statistically, what's happened is the mediation two months ago was at one percent. This past month, it has increased by 50 percent. That means that they only have so many mediators to be able to address all the foreclosure actions. And I think it still has to have the cooperation of the lenders to participate in a forthright way, in order to modify these loans. If that doesn't occur, it'll be useless. Any of the legislation is useless then.

John: Understand. We'll go for a wrap-up question here, Burt. One more question, we'll call it a true-or-false question: It'll be more difficult over the next six months for first-time homebuyers to get a mortgage?

Burt: True.

John: Okay, I think that makes sense, at least from our end. And just along those lines, just to keep listeners mindful, keep an eye on that credit score? Try to keep that the one thing that you can control? Keep the credit score high if possible? Is that a fair statement?

Burt: And make sure you accumulate 20 percent of a down payment. That's going to be a strong criteria.

John: Very good to know. All right, we'll you heard it out there, folks. We thank you, Burt Hoffman, and we look forward to hearing from you again.

Burt: Anytime, John. And it was a pleasure. Thank you.

John: Thank you, Burt Hoffman.

Burt: Take care.

John: So be sure to check in with us again soon for another informative podcast. And remember, the biggest factor in controlling your credit destiny is you.