Phil Tirone with #160

This week Bruce is joined by Philip Tirone. Philip is the president of the Mortgage Equity Group, and author of Seven Steps to a 720 Credit Score.

At the beginning of the second quarter of 2010, the Fed may not be the MBS-arm. This role may go back to the private sector. If this happens, Philip believes it would cause a disaster which would lock up the entire industry. The Federal Reserve has been helping the problem. The Fed will go from buying nothing to buying $800 billion in order to prop up the economy. Philip believes the Federal Reserve will reach a time in which they will no longer be able to continuously buy. However, both Bruce and Philip agree that the Fed’s limit will not be reached before April.

Right now, people have the mentality that they should not refinance unless they can get a value under 5 percent, but rates are at their lowest in over 60 years. Philip believes that if the rates increased to 6 percent, then the public would have a significant shift in their desire to buy. Philip thinks that if this increase occurs, some people will simply wait for rates to return to the previous low value. Unfortunately, if the government removes its influence from the market, Philip thinks there is a chance that the rate may return to a rate much higher than 6 percent. Bruce believes this sort of change would be very harmful.

We do not currently have enough buyers in the market, because the government is still paying people $8,000 to buy homes. This tax credit has helped realtors greatly in making deals.

For every 1 percent increase in the mortgage rate, the buying power is reduced by 15 percent. Fannie Mae and Freddie Mac are maxing out the back end ratio at 45 percent. The government is trying to stimulate the housing market by keeping rates low, and by buying billions of dollars of debt.

Philip thinks the back end ratio is preventing more loans than the front end, because the front end is simply like a point of interest, but the back end is like a deal breaker.

In Riverside, the home payment does not typically exceed rate. You would think this would make it easy for these citizens to qualify, but many of them have car payments and credit card debt which takes away their qualifying ability. This sort of problem is not something you can change over night, and it is causing a large number of losses in the number of home buyers.

The media has done a good job at scaring people into believing that they are underwater. In Philip’s area, with FHA, you can buy a $750,000 home with only 3.5 to 4 percent down. The problem is that people have now been conditioned to believe that they are incapable of qualifying for a loan. Some people believe that loan qualification currently requires a 30 percent down payment.

Philip has seen many people make strategic defaults on their payments. Philip recently talked to a man who had $150,000 in debt, and was underwater on his payments by $5,000. This man decided he was going to negotiate with all of his money lenders. He stopped paying his debts with the realization that his credit would go down. He then called his lenders and told them that he was will to negotiate for 15 cents on the dollar, payable over six months. He then began to receive threats from the lenders. His home lender threatened to get him put in jail. Nothing happened for 5 or 6 months, but later on he was able to settle for 22 cents on the dollar with his credit card debt. He later said that everyone he talked to about modifications was giving him a different story. Each industry had something different to say about modification. Philip doesn’t even think that the major banks like Bank of America currently understand everything about loan modifications.

Two years ago, strategic defaults would have been looked down on, but now many people consider it acceptable. Bruce has even heard that some college campuses are encouraging people to strategically default. Presently, about 11 percent of people are delinquent on their payments, but if we allow people to strategically default, then things could get worse. Philip thinks that the problem is that we are rewarding people that are behind on their mortgage payments. Those people gave their lenders their word that they would pay, but they have not kept their promise. Philip thinks that people who are current on their payments are getting angry, because they feel like all bad borrowers are being rewarded, but they are being damaged for doing the right thing. Philip thinks some of these good borrowers want to take revenge on the banks via strategic default. Bruce can understand that mentality, but this debt that is being incurred from these defaults is hurting us all in the future.

The fact that it is sometimes significantly cheaper to rent can be demotivational for some home owners. Another problem is that lenders are not being aggressive in foreclosing on properties. For example, Bruce knew someone who had not made a payment for 2 years, and their property went to sale. This person bought the home for $400,000, and then refinanced for $800,000. After the two years without payment passed, the lender opened the trustee sale at $400,000, but no one bid on the property. The lender then canceled the trustee sale and contacted the severely delinquent borrowers in attempt to make a deal. In the end, these two-year delinquent borrowers had all of their back debt forgiven, a $400,000 principal deduction, and a 2 percent interest deduction. When people hear those kinds of stories, it encourages people to strategically default as well.

Philip has asked people, through his blog, about whether or not they know someone who is not making payments on their home. Philip has received many comments from these people. When Philip hears people tell these stories he thinks, “Would you treat your kids this way?” Now that he is a father, he frequently thinks about the values he is teaching his children. Considering this, he would not want to encourage his children to damage other people through strategic default.

Bruce thinks there is big moral problem that develops when you reward people for making bad financial decisions. If a person loses a home, they will learn to not over borrow. When we reward people who are losing their homes, they will learn to expect someone else to take care of the problems they create. People view the real estate bubble busting in a different way that they view the stock bubble busting. Bruce knows people who lost 90 percent of their stock value within 6 months, but they couldn’t complain to someone about receiving bailout money. We have not treated our real estate problems in this way.

Some people did not put money down on their homes, so they did not truly have a financial commitment to their house. The lenders are the people who are really taking the hit on foreclosed homes. Bruce thinks many of those lenders deserved to take that hit, but rather than paying for the foreclosure problems out of their own pockets, they are making tax payers cover their mistakes.

Bruce asks if lenders are doing loan modifications for jumbo loans with the same program as Fannie Mae, or if they are making individual decisions. Philip says that the banks are making individual decisions for jumbo loan modifications, and he does not understand the reasoning behind their choices. Philip believes that banks are lying to borrowers, because they are giving different explanations for their decisions to different people.

Bruce was recently on a debate panel for REOMAC. He asked a lender about a specific trustee sale result. In this trustee sale, there was a $1.1 million loan go to sale for $400,000. After discussing this trustee sale, Bruce asked the lender, “When did you have to realize that loss?” Bruce asks Philip when lenders have to acknowledge a loss, because right now there are a huge number of delinquencies that are not in the default process. Bruce wonders if banks are allowed to keep loan amounts at the same value until a certain time. Banks get concerned when they have REOs on their books, because that causes their reserve requirements to expand dramatically. Banks can have a loan that is delinquent and not have to expand their reserves. So if these banks have an audit coming up, they have to get REOs off their books, but if they do not have an audit, then they are less concerned. This is why people are being allowed to stay in their homes without paying for over a year.

Credit scores dramatically affect your loan rates. Philip is doing a refinance for a man who makes over $500,000 per year, and he has a credit score of 685. The only reason why he has a credit score of 685 is because his credit card company will not report his proper credit limit to the bureaus. This credit card company is affecting his credit score by somewhere between 40 and 80 points. The money he owes is very insignificant.

Philip’s website is His phone number is 310-453-1901. He will handle any kind of mortgage throughout California.

Join us next week as we interview Christopher Thornberg!

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