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Source of Title Blog

Against All Conventional Wisdom
by Robert Franco | 2008/12/11 |

An article in Barron's is predicting that title insurance business could be up by as much as 50% in 2009, mainly due to falling interest rates.  That would certainly be very good news for all of us.  However, I am skeptical of the prognostication.  I do not think that falling mortgage rates will do much for our industry, and I do not expect things to get much better until the end of next year.  Maybe I'm a glass-half-empty kind of guy, but, I'd rather not get my hopes up and be pleasantly surprised if I am wrong.  Now let me explain why I think Barron's got this one wrong.

Source of Title Blog ::

The average 30-year fixed rate now stands at 5.5%, down a full percentage point from five weeks ago. In the last week of November, mortgage applications jumped 112% from the prior week, according to data from the Mortgage Bankers Association. Refinancing activity rose at an even greater clip.

Basically, the good news is predicated on mortgage applications - not approvals.  Applications certainly create more work for title professionals, but if the loan doesn't close it doesn't generate any revenue.  The problem seems to be that banks still haven't made the influx of cash from the bailout available to borrowers, and there doesn't seem to be any mechanism in place to ensure that it happens.

[House Financial Services Committee chairman Barney] Frank said Monday that he was concerned about how Treasury had no plans to monitor whether the banks receiving the capital infusions were using the capital to hike lending. The statute approving the $700 billion fund requires Treasury to provide details about how banks are using their government capital.
"What troubles me is Treasury was asked by GAO, 'how much lending is going on?' and Treasury seemed to be saying we're not going to find out."
One of the problems that led to the mortgage crisis was irresponsible lending.  On one hand, Congress is now telling the banks that they have to start lending money again.  On the other, they don't want the banks to lend money to those who can't pay it back.  So the question is, how do you lend more money when fewer people qualify for loans?
And, certainly, fewer people qualify for mortgage financing.  What do you need to qualify for a mortgage: savings for a downpayment, assets with equity for collateral, a job with a steady income to make the payments, and good credit.  Who has any of those... let alone all of them?
BusinessWeek cited a survey that indicated that people are saving less because of the economic downturn.  That means coming up with a downpayment is more difficult for most Americans.  To make matters worse, those who had savings invested in the market have probably lost a large portion of it. The Dow Jones Industrial Average has lost about 34% this year.
And, who has any equity left in their home?  Home prices have fallen for the last two years.
[P]rices continued to fall throughout 2008, with the bottom shimmering out of reach like a mirage in the desert. The National Association of Realtors, which tracks sales throughout the U.S., expects the national median home price for existing single-family homes to decline by 8% in 2008, on top of a 1.8% drop in 2007. That would be only the second time since the NAR began keeping records in 1968 that prices fell two years in a row. Our data supplier, Fiserv Lending Solutions, tracks 110 metro areas, where price changes have been even more volatile. Fiserv predicts a more dramatic decline of 15% in home prices for 2008 on top of 2007's 9% drop.
And, because downpayments were considered unnecessary, many people owe more than their home is now worth.  Federal Housing Finance Agency Director James Lockhart said that some homeowners who need to refinance owe more than their property is worth and wouldn’t qualify for the necessary mortgage insurance.
Gainful employment will be another problem for many who would otherwise be refinancing for a lower rate.  Jobless claims are at a 26-year high! 
The number of people continuing to collect unemployment rose to 4,429,000 in the week ended Nov. 29, the most recent week available, which was also a 26-year high. The measure was an increase of 338,000 from the preceding week's revised level of 4,091,000.

The economy is officially in a recession.  So far this year, we have lost 1.9 million jobs. 

Lastly, credit problems are mounting for many Americans.  Although interest rates plunge, the credit reporting system prevents many borrowers from seizing opportunities.

When the Federal Reserve announced its plan to invest up to $600 billion in mortgage backed securities owned by Fannie Mae, Freddie Mac and Ginnie Mae, mortgage interest rates dropped to their lowest point since February 2008. However, few borrowers may actually qualify for these savings. In addition to tighter lending standards and declining home values, borrowers are also being plagued by the nation's credit reporting system.

The mortgage crisis has also caused a large barrier to refinancing.  The Mortgage Banker's Association recently reported some alarming statistics.

  • 1 in 10 home loans is in delinquency, 1 in 20 is seriously delinquent, and 1 in 33 is in foreclosure.
  • At the end of September, the nation experienced foreclosures at an annual rate of 2.4 million. We estimate that those foreclosures alone will cause an additional 41 million American families who happen to live near these properties to see their own home values plummet by an additional $352 billion.

Sure... interest rates may be dropping.  But, that doesn't help if you don't have a job, you don't have any equity, or you are currently in foreclosure.  The real problem is the economy, not the cost of borrowing.  Even people who still qualify may be waiting due to the uncertainty of their jobs or investments.

For all of these reasons, I do not think that lower interest rates can bail us out of our current situation. Conventional wisdom may tell us that lowering interest rates will spur more borrowing.  But, there is nothing conventional about this crisis.

Robert A. Franco


Categories: Economic Indicators, Mortgage Industry

1463 words | 3147 views | 3 comments | log in or register to post a comment


Every mortgage lender I know has tons of money available to lend.  They just don't have borrowers calling to apply.  The media is scaring the crap out of people for no good reason.


Borrowers should know that lending rules are about where they were in 2003 or 2005.  It's tougher than last year but not insurmountable.


Add to that the absolutely fantastic rates and we should be experiencing a major boom.  The only thing preventing that is FEAR.  If media would go even neutral and not positive, the dike would probably crack and consumers would act normal in droves.


We can only hope.

by Diane Cipa | 2008/12/11 | log in or register to post a reply

The Glass Half Full

While many people will not be served by declining interest rates, I believe a greater number will.  In 2003, the 15- and 30-year fixed rates dropped to a 45-year low.  Many people have been paying interest on their mortgages at 5% or less since then - and buying back equity.  These are the people who did not cash out all of their equity every year or two.  These are the people who are not in the news.

With a few exceptions, interest rates have hovered between 5.5% and 7%, give or take some fractions. (You may have noticed that I am not citing hard facts.  That is because I am too lazy to look them up at this time.  You have been cautioned.)  Many people who have been paying faithfully on their mortgages are also in belt-tightening mode and could use a lower mortgage payment. 

These are the people who will benefit if the rates dip to 4.5% or lower.  It may help the overall economy some because these folks will have more disposable income at hand - not by cashing out, just by paying less to the bank.  Although we don't hear about these people in the news, I think they outnumber the upside-down people with ruined credit by far.

With exceptionally low interest rates, combined with deflated housing prices, I don't know when there will be a better time for first-time homebuyers to jump in.  That should at least start to clear some of the excess inventory.

As far as our business goes, I am looking forward to a return to normalcy in volume.  With reasonable interest rates and reasonable lending standards in place, maybe stability will replace the feast-or-famine insanity.

by Patrick Scott | 2008/12/11 | log in or register to post a reply

Interesting Take On The Situation

I prefer to remain optomistic, though.  Based on what I've heard from some of the "movers and shakers", the Barron's prediction may not be too far off the mark.  Remember, none of us (except me) thought we'd ever see $2.00 a gallon gasoline again, either.

by Scott Perry | 2008/12/11 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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