Watching the government do practically anything is often akin to watching molasses run down the hill in January. But like that slow running ooze it eventually manages to accomplish its feat. Nowhere has this been more apparent than in its attempts to rein in the mortgage industry.

That's because while the Federal Reserve, the FDIC, and other banking regulators issued their final guidance on "non- traditional" mortgage products (Option Arms and Interest-Only Loans) over three months ago, the banking industry and its state regulators have by and large chosen to ignore them.

But all of this willful non-compliance is about to change because the Feds have suddenly decided to get tough.

Earlier this month the Office of Federal Housing Enterprise Oversight (OFHEO) ordered both Fannie Mae and Freddie Mac to essentially get with the program on the guidelines that were issued in October.

Furthermore, OFHEO director James B. Lockhard also directed Fannie and Freddie to report back to him on their progress in implementing these guideline changes by no later than February 28, 2007.

"OFHEO supports what the banking regulators have issued, and we have taken steps to ensure that Fannie Mae and Freddie Mac incorporate the principles of that guidance into their risk management and business practices," Lockhart said. "This will enhance the overall level of underwriting standards, risk management, and consumer protection in the mortgage market."

For the mortgage markets this means two things.

First, it means that as these guidelines are finally imposed on Fannie and Freddie that substantially fewer borrowers will qualify for loans.  And when they do qualify it will be for significantly smaller loan amounts.

Second, it also means that sub-prime mortgage bonds will likely weaken causing interest rates on these mortgages to rise. That's because as the giants of the secondary market, Fannie and Freddie will have to cut their purchase of them to meet the new restrictions.

The net result is there will be fewer qualified borrowers in the long run, which means that the demand for housing will continue to decelerate. It also means that these long awaited consumer protections may finally be put into place.

These regulators maybe slow, but at least they are determined.

Mortgage Matters

Dear Steve,

I am a man who is 74 years old and married to a woman who is 40 years old. We do not have any children or dependants to whom we wish to leave our home to in our wills. 

In the event of my death, my wife does not intend to live in this residence, but rather move to a condominium or rent and invest the cash from the sale of the house.

My concern is living with the value of our home as an asset and to extend the mortgage payments in order to fit my officer military pension. 

I am considering a 50 year mortgage as a means of reducing my monthly mortgage payments to a more manageable level.  At present my mortgage is $240,000 and our home is valued at $395,000.  I have an offer for a fixed rate mortgage at a rate of 5.75% fixed for 50 years, which would make my payments around $1200. 

What is your take on this strategy?

Sincerely,

N.B.

Dear N.B.,

Since it seems as though you are simply looking to lower your monthly outlay a 50 yr. mortgage would do the trick. Although it will barely whittle down your principal, it will lower your payments

These loans have come about as a way for lenders to make the monthly payments more affordable to new buyers.

Simply put, with the increase in home prices, 30yr mortgages no longer allow as many buyers the chance to purchase. The 50 yr makes it affordable by lowering the monthly payment.

A 300K loan @6% yields a $1798.00 principal and interest payment for 30 yrs while the same loan at 50 years is $1579.00

Most of these 50 yr loans, however, are  5/1 Hybrid Arms. That means that your rate is only fixed for the first 5 years and begins to adjust. Usually these adjustments are capped at 2%.

This adjustment could make your payments considerably higher 5 yrs. from now.

So while the reasoning behind the loan is sound, at least make sure the loan is a true fixed.

Also if you do choose to go this route, make sure that you read the note in its entirety at settlement. The note is by far the important document that you need to sign to close the deal. Unfortunately, like all of the rest of the documents at closing, the note is often not even read by many borrowers.

This is unfortunate because the note clearly spells out the terms of the loan. It is where to discover the devils in the details that your loan officer either didn't tell you about or glossed over. It's a straight forward document and it needs to be read completely if you want to avoid any surprises in the future.

I hope that helps.

Good luck and thank you for your military service!

Steve Christ

By the way....The bottom in housing that the mainstream press so gleefully reported on yesterday is nothing but a fantasy. Sure, housing improved in November by the reported 3.4% but that was only a month to month comparison.

The real story in housing is year-over year and that data told a far different story.

In the Northeast housing fell 42.4% compared to November 2005. In the West it was down 9% and in the South it was down 19.2%. The bright spot was the Midwest where it rose a paltry 1.2% year over year.

And overall, November 2006 sales turned out to be worse than November 2005, 2004, and 2003.

But the media didn't manage to tell you that part of the story did they?

Also.....Hovnanian Enterprises, New Jersey's largest builder, reported a fourth-quarter loss on cancellations of new-home orders last week. Hovnanian customers canceled 36 percent of their contracts in the period, an increase of 25 percent, the company said.

"We didn't have this in other slowdowns, customers walking away," CEO Ara Hovnanian said.

Wishing you happiness, health, and wealth,

Steve Christ, Editor