Angelo Mozilo the former CEO of Countrywide Financial, once the largest mortgage lender in the country and now owned by Bank of America, is standing trial in Los Angeles for allegedly providing sweetheart mortgage deals for members of Congress and other influential individuals. Immediately after this trial ends the SEC is scheduled to step in with their civil-fraud case and then the U.S. attorneys are waiting in the wings to see what happens and possible indict with their criminal allegations. Mozilo may be spending a good portion of his retirement visiting various courtrooms around southern California.
Mozilo, who looks more like a 1960s Las Vegas pit boss then a corporate CEO, has offered no comment about his fall from grace. It was but a few years earlier that Mozilo was a regular blabber mouth, often a guest on CNBC as a mortgage rate expert and heading one of the most successful mortgage factories.
In cahoots with Countrywide was the FHA which insured the mortgages that Mozilo and company originated. The pledge by government officials and politicians was to make home ownership attainable and realistic for all Americans. This philosophy was just one part of the 2008 financial meltdown.
Today the FHA is doing a 180 and making it more expensive to borrow. In the good old days if someone had a pulse, even if on life support, they qualified for a mortgage. Today it’s a different story. The quasi-government agency expects this year to ensure 30% of all originated mortgages. FHA down payments on home loans are the lowest at 3.5% as opposed to the normal 20% required by banks but require higher monthly fees which can be as much as 1.5% of the loan. The FHA is also demanding a credit score, something in its 76 year history it has never required. They also want to weed out sellers who artificially inflate the sales price of the property by limiting them to a seller contribution of 3% of the selling price from a current six percent. In the past this bit of tomfoolery allowed sellers to artificially prop up their selling price while paying for, or a portion of, closing costs or points or both.
Those potential buyers with a substantial down payment that are looking for competitive traditional mortgage rates and a faster turnaround time may well avoid the big banks and concentrate on smaller local banks and mortgage brokers. According to the WSJ, August 15th, small banks pay their people on commission, and sometimes on thinner margins simply to get a higher volume and the loan completed.
Profit margins at the smaller banks and originators has fallen from $1,088 in 2009 to $600 today. Rates are also lower and buyers may see mortgage interest rates drop even further before this year is over.
If you’re shopping for a mortgage and don’t know where to turn one resource is www.bankrate.com. Currently the best rate for a 30-year mortgage is 4.4%. This, of course, is for the best most pristine credit rating and with ample equity – something many homeowners do not have.
As an investor looking for ways to increase yield you may want to consider mortgage backed security mutual funds that have outperformed the equity indices but are seeing recent tougher sledding with rates falling. However, according to MarketWatch.com, while MBS have under-performed Treasuries for the past week many fund managers may be able to cherry pick attractive securities and ride out this temporary cycle.
Over the long-haul mortgage backed security funds have outperformed Treasuries with much of that income coming with government support. If you’re building a fixed income portfolio this may be an asset class you can add as long as you do your homework which includes researching a fund manager that has been through several economic cycles.
This is a specialty fund that may complement your domestic, global and high yield funds you currently own. Make sure you understand all risks before you buy.
If you have questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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