Hi Janet below is a copy of one of my comments to Jeff Belonger's posts.  Its my response to the problems in the market and the issue with DPA's going away.  I have to say that working for bank we have a lot of options to keep our borrowers out of foreclosure that we have the ability to do since we service the loans.  Many other lenders that made these loans sold the servicing and the loan therefore the servicer who currently has the loan cannot make modifications.  We do many things including  step down modifications, and depending on the borrower, we take the interest rate all the way down to 0% for up to 12 months then slowly increase the rate back to the original note rate.  We have forbearance for up to 6 months and will stop all credit reporting during that period, if they were current before the forbearance, if the were 30 days late, for example, we would continue to report 30 days late.  Those are just some of the options. 

Enjoy and I look for more of your blogs.

Hi Jeff, my name is Dustin Swigart I'm a mortgage loan officer for Fifth Third Bancorp.  I agree with you on a few aspects but to really put a finger on why this is all going on is people need to understand, and is probably safe to say, that we just came out of the hottest real estate market in history.  Housing appreciation in some areas was high double digits.  We were flooded with loan programs that should have never come about.  This was fueled by Wall Streets insatiable appetite for risk and higher returns.  Now you have the collapse of Bear Stearns and now talks of a buyout of Lehman Brothers.

I'm sure you know all of this being in the business for 17 years, I've been in it 4.5, but I love the financial aspect about how the mortgage market really works.  Lenders, including ourselves, do not have the reserve capital needed, while mainting daily reserve requirements by the Federal District Bank on our depostis, maintaining our tier 1 capitol ratio, maintaing a high capital reserve ratio, and keep making billions and billions of mortgage loans every year.  Fannie Mae was created in the 1930's to provide liquidity to the mortgage markets, Freddie Mac in 1970 and Ginne Mae in 1968 respectively.  The job of these GSE's, which Ginnie is still fully owned by the government, is to provide liquidity by purchasing loans from lenders like us, securitizing these loans, and selling them to investors worldwide.  These securities, MBS (mortgage backed) are guaranteed by these agencies to their investors should the underlying assets go bad their principal is guaranteed. 

Back to Wall Street, they got this bright idea to start extending warehouse lines of credit to all these new "sub-prrime" lenders like New Century, Option One, Ameriquest to name a few, giving them needed capital to fund billions upon billions of sub-prime loans.  Sub-prime has been around a very long time as you know but only represented a very small piece of the market.  In 2006 sub-prime was 20% of originations and Alt-A was 13%.  Many of these companies were highly leveraged and the only income they received were from selling the servicing and the initial SRP they received by selling the loan back to Wall Street firms.  They did just as Freddie, Fannie, and Ginnie, by packaging these loans, securitizing them, and selling to investors.  They did this by separating the pools of loans into traunches, AAA, BBB, and junk rated.  Then had bond insurers insure these securities letting them ride their credit rating coat tails and getting Fitch, Moody's and S&P to give good ratings on these bonds so that they could be sold to institutional investors and investors worldwide.  The crappy traunches they held on the books and paid themselves fat interest rates. Because home prices were rising the idea would be if these loans got into trouble they could just refinance.  Well we know the end of that story. 

There is a whole lot more this including SIV's (structured investement vehilces) and CDO's (collateralized debt obligations) but that's a another story.  Jumbo loans have always been funded by Wall Street but at the peek of the sub-prime crisis, jumbo spreads and credit default swap derivitives were trading at their highest levels.  Jumbo spreads reached 136 basis points but have now come back down.  In other words investors are scared, completely terrified of anything that has to do with the word mortgage, and the media is doing nothing to help that fear subside.

So what HUD is attempting to do by putting this new ban on DPA's in the new housing bill, which by the way is over 600 pages long, and establishing Federal Housing Finance Agency, is stabilize the market.  What had happended with the DPA's, or what is believed by HUD, is an over-inflation of home prices to pay for this down payment.  The sales price would be inflated almost 9%, 3% down payment and 6% closing costs, to cover everything.  With home prices dropping and credit deteriorating they are wanting to provide some guidance and stability in the market.  I believe a lot of these moves are political.  As an industry in a free marekt capitalistic society government regulation and control is not good.  The industry needs reform and should have never endorsed stated 500 credit score loans on a 2 or 3 year arm with a 1-5% pre-payment penalty, thats crazy and shame on the people who didn't read their papers before signing and shame on the non-professional LO's who lied to their customers. 

I understand where they are coming from but at the same time I believe we need reform of the program not elimination.  These DPA's are needed to help low to moderate income families buy homes especially when wage growth in this income bracket is not keeping up with inflation due to very high energy and food prices.  A CEO from an energy company was on Squawk Box about 3 weeks ago talking about the need for 1.4 Trillion dollars in new infratructure to expand energy capabilities which will inevitably lead to higher energy costs putting more pressure on low and moderate income families.  There is whole lot more to this housing correction then people care or want to realize.  In the old days the automobile industry was a signal of the U.S. economy now its housing and construction.

Plain and simple until loans begin to improve in performance, lenders, mortgage insurance companies, and GSE's will continue to tighten.  Investor confidence isn't fully back yet and until we have complete investor confidence in the market expect continual rate volitility and credit tightening. 

Thanks