Dennis' Mortgage Blog

For 11-14-08:  estate planning, taxes, etc.

IMPORTANT NOTICE:  The new loan limits for LA and Orange County will be $625,500; San Bernadino and Riverside will be $417,000.  The temporary loan limits of $729,750 for “conforming-jumbo” loans will no longer be available and all loans above $417,000 and below the new area limits must be funded by early to middle December depending on the lender. 

Question of the week:  If we don’t have kids do we need an estate plan?  Answer:  YES!  Well unless you want the State to determine how your assets are distributed should you have and accident and pass away or become completely incapacitated without an estate plan.  Family trusts and estate plans are musts for anyone who owns real property, or has any significant amount of assets.  If you do not have one and would like information or who to contact please call or email me. 

If you have a question you would like me to answer send it to me!

With the election over the front pages and nightly news leads have been taken over by the economy once again.  This week new big news is that U.S. automakers, having seen the $700 billion bail out package for banks and credit market participants, have their hands out for some of that government money.  While an important piece of the economy, the automakers are not the foundation of our economy like the credit markets are so their pressure for more money from Washington (they have received over $20 billion already this year) rings hollow with me; but I do not have a vote in Congress or a veto stamp on Pennsylvania Avenue.   Of more importance to our industry this week is news from Sacramento and more news from Washington.

First, the California legislature is working on a bill that would put a 120 day pause in the foreclosure process in California; when a buyer goes into default, the new legislation would add 120 days to the process for the lender before they can issue a notice of sale.  What this bill assumes is that lenders file their notices of defaults, notices of intent to sell and notices of sale within the proscribed timelines now on the books.  In the current environment almost every foreclosure situation already extends beyond the new time frames being set by the new legislation, but it allows them time in front of the cameras and the appearance they are engaged in doing something. 

If the California legislature really wants to make a difference they will pressure Washington to keep the loan limits where they are ($729,750) instead of a reduction to $417,000 in much of California and to $625,500 for the high cost areas such as LA and Orange Counties.  This will do more to stabilize our housing markets than delaying someone’s foreclosure by four months.

In Washington Treasury Secretary Paulson announced that the Treasure will not be using some of the $700 billion bailout package money to purchase defaulting assets from banks.  Instead funds will be used to purchase equity in banks and others in the credit industries.  This will keep the U.S. taxpayer from owning billions of dollars in bad mortgage debt and instead will give the U.S. taxpayer stock in companies that own billions of dollars of bad debt.  One effect of this is that the U.S. government will not become the owner of thousands of foreclosed properties, other than those they would otherwise own through HUD foreclosures.  Banks and lenders will continue to have control of their own foreclosed properties through their REO (Real Estate Owned) divisions.  Key to this transaction from the taxpayers standpoint is the ownership of stock and equity in the companies.  Many are screaming “socialism” at the transactions, but there is a huge difference between government stock ownership and socialism, primarily is that the stock ownership can mean influence but not total control.  As the companies become healthy and begin to regain profits and growth, the government can start to sell off the equity they own to the private markets and divest itself, and the taxpayer, of ownership---hopefully at a profit.

Looking forward we had horrible retail sales for October reported today.  While WalMart issued a statement this week that they are somewhat optimistic about the holiday retail season; while not saying they will break records they are saying they do not expect their sales to be as bad as many are predicting---a somewhat positive voice howling in the wind!  Because of the bleak retail sales there is some positive momentum for bonds and mortgage rates, but week over week we have not seen a drop in our rates.  There is more downward pressure on rates than upward pressure however.

A slight loss on FHA rates but otherwise despite another week of jerks and jumps in the markets we are flat for the week.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.875%            ó 0.00%

30 year conforming-jumbo at 1 point 6.00%              ó 0.00%

30 year FHA at 1 point6.00%                                     é 0.125%

30 year jumbo at         NO PRICE CALL FOR INFORMATION  

Remember in the coming few weeks we have some turmoil built into the markets with the expiration of the conforming-jumbo loan limits and the introduction of the new limits in some markets.  If you have any questions on how you or your clients may be affected please contact me.

I will have limited ability to communicate on Saturday as I will be assisting in setting up for the Condit Spirit Awards Gala benefiting the Community Hospital of Long Beach Foundation and attending the event later in the evening.  It should be a fun evening and raise some funds for the “Community Dreams Fund” used to purchase equipment for Community Hospital.  If you would like to make a donation please contact me!

Have a great weekend,

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com , feel free to forward the link to family and friends who may be interested in past commentaries. 

Important information next week on loan limits and funding time lines 

Question of the week:  How come private mortgage insurance is not covering all the defaulting loans we are reading about?   Answer:  Mortgage insurance is, and has been, required on most loans over 80% loan to value (LTV)—I say most because some lenders will “self-insure” and not use mortgage insurance companies for high LTV mortgages.  Around 1998-1999 Chase developed a home equity product and division that would go to LTVs up to 90%, this product became more and more popular into 2000 and by 2007 almost every lender had their own Equity lines and 2^nd Trust Deeds they were offering, many allowing financing up to 100% LTV—or the full value of the property.  Our industry started using “piggy-back” financing slowly at the end of the 1990s and the use exploded in the early 2000s; by 2007.  A piggy-back would be a primary or 1^st trust deed up to 80% of the purchase price, with no mortgage insurance because of the LTV, and then a 2^nd trust deed to cover the remaining difference between the purchase price, or value, and the down payment.  A $500,000 price with 10% down would be structured:  $50,000 down, $400,000 1^st mortgage and $50,000 2^nd mortgage; no mortgage insurance.  The borrower benefited using the piggy-back financing from a lower monthly payment and a higher tax deduction.  After about 2001 our company did not have a loan that I am aware of with mortgage insurance until this year when the equity-line and 2^nd trust deed markets had collapsed.  The sub-prime mortgages were not eligible for mortgage insurance as the premiums were too high, or the mortgage insurance companies would not insure high loan to values for borrowers with poor credit histories and no verification of income or assets.  Because of the piggy-back transaction structures a huge percentage of the transactions up to and through 2007 had no mortgage insurance despite high loan to values on their transactions; therefore no coverage when the borrowers default.

If you have a question you would like me to answer send it to me!

This week the Fed announced it would guarantee $500 billion in MBSes (mortgage backed securities), essentially guaranteeing the investments in Fannie and Freddie.  This caused a steep drop in rates early in the week, with some give back on Wednesday.  Today, Friday, the market is all over the place because of the holiday weekend and very light trading.  Also boosting the drop in conforming and FHA rates is the pulling back on the “agency/FHA-jumbo” investments ahead of their expiration at the end of December; as I have been announcing and communicating these loans will need to be funded within the next two weeks so lenders can meet their delivery dates to Fannie, Freddie and FHA.

As of today we still do not know what the pricing and structure will be for mortgages over the current loan limits for conforming and FHA and the new limits that will come into effect on January 1, 2009 for high price areas such as Los Angeles and Orange Counties.  While we know we will have loan limits up to $625,000, we do not know if we will have two tiered pricing for loans above $417,000 for conforming and $325,000 but at or below the new limit of $625,000; every lender is waiting for the official announcement of how these loan amounts will be handled.  Rest assured when I know you will as well.

Looking forward we are having industry reports of many problems in the “Hope” and other programs that the agencies have developed to assist homeowners facing foreclosure.  Not surprisingly for huge bureaucratic organizations the idea and desire was way out in front of the policy, then the implementation and then the reality.  As we get further away from the $700 billion bailout package passed in early October we see very little of those funds committed and the markets working themselves out somewhat with very little tapping of the funds; essentially a lot more has been committed than actually spent at this point—which is a great position if we can continue it.

Looking forward you can see from the chart today that rates have been falling since Halloween, the week the Fed funds and discount rates dropped by 0.500% prior to markets opening.  As I indicated that week rates went up on the news and then proceeded to decline.  The downward trend will likely continue into Christmas barring some exceptional economic news, such as inflation roaring into the economy.

You will notice that I have altered the chart, dropping Jumbo all together as it has now been several months since we had “normal” jumbo financing, next week we may see the disappearance of the conforming-jumbo—included today merely for reference as only one of our lenders is quoting that market today.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.375%            ê 0.25%

30 year conforming-jumbo at 1 point 5.625%            ê 0.25%

30 year FHA at 1 point 5.25%                                    ê 0.5%

We had a nice quiet Thanksgiving, just Leslie, the girls and I with plenty of leftovers.  I hope your Thanksgiving was as nice as ours and you had the opportunity to enjoy family and friends.

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com , feel free to forward the link to family and friends who may be interested in past commentaries. 

Time is running out on current “conforming-jumbo” loan limits, plan wisely!

Question of the week:  What is an “AVM” and how does it affect me?  Answer:  AVM stands for “Automated Valuation Model” and AVMs are used by lenders to determine if properties’ appraised values are consistent with a market area.  If I submit a mortgage package for 123 Main Street with an appraised value of $400,000, the underwriter will run and AVM—inputting the property information into a software program that then gives a value for the property/area.  If the AVM value is 15% lower than the appraised value then the underwriter will call for a review appraisal that must be completed by an appraiser selected by the lender or assigned from a national appraisal service.  Note the underwriter can also call for a review if the AVM and appraised value match but the underwriter does not like or feels uncomfortable with the appraisal write up.  AVM’s are run on all loans by all lenders—real estate brokers may wish to invest in their own AVM services to assist their selling and listing agents determine list and offer prices that will be easier to finance. 

If you have a question you would like me to answer send it to me!

The big news this week is the announcement that Fannie and Freddie are suspending foreclosures through the end of 2008 while they figure out how to better utilize loan modifications to keep delinquent borrowers in their homes.  While this is good news for those who were scheduled to lose their home it does not necessarily eliminate that proposition, the suspension may just delay the action.  One concern I have is one the suspension is lifted will Fannie and Freddie flood the markets with two or three months of foreclosures, possibly depressing home prices in some areas?  We will see how this works out and hope for something positive to result for the market as a whole.

Speaking of loan modifications, we are being bombarded by emails, phone calls and direct mail pieces soliciting us to get into the loan modification business.  My opinion of this new industry that has sprung up is not very positive.  Most companies offer to pay me a generous fee for referring potential clients who may benefit from a loan modification, they pay be the fee by charging a pretty substantial upfront fee from the client (one line I heard more than once is, “hey they aren’t making their payments so they have the money to pay…”).  They then say they will negotiate a loan modification with the borrower’s lender with no guarantee as to any outcome.  From what I have learned what the loan modification companies are doing is what the borrower can do, and often the lender will not speak to a third party.  My advice to anyone considering loan modifications is to first contact your lender yourself.  If you have any questions call me, perhaps I can provide you with questions to ask and answers to consider.  While this is not very nice it is what I feel to be true: it is my opinion that many of those engaging in the loan modification business were previously pushing the types of mortgages that created the need for such modifications in the first place.

Okay let’s have some positive news!  One of the Fed governors spoke today and I agree with much of what he has to say.  Despite the Dow falling over 16% and the S&P 500 25% since Election Day, despite the auto makers trying to wrest tens of billions of dollars from Washington, despite the forecasts for a very slow Christmas retail season, despite all the negative news, recovery is not a far off as some would lead us to believe (i.e. write and put on the front page of the, let’s say LA Times, or broadcast on MSNBC).  The combination of low energy prices, low interest rates, low retail prices and recovering housing markets from the bottom up, portend an economic recovery beginning as early as the end of the first quarter in 2009.  A significant portion of the stocks in the Dow and S&P are very fundamentally sound, and while not recording record earnings or profits are recording profits.  When you see news such as “Dennis Manufacturing reported profits in the 3^rd quarter 50% lower than last year/quarter” ignore the 50% lower part and see the “profit” part.  Yes, there are plenty of companies losing money and some are closing, that is what happens when markets contract and correct.  There are also plenty that are weathering the storm pretty well.  Investors know this and eventually the value decisions will enter the market bringing money back to the market.  Patience Grasshopper.

While bombarded with economic news hourly on a daily basis investors make decisions based on what they think will happen in the future and on trends.  Their objective is to make money, you cannot make money yesterday or earlier this morning.  You make money later today or tomorrow, or next week, month, year.  In analyzing markets there are trend lines and moving averages that create ceilings or resistance keeping prices from going higher, and floors of resistance keeping prices from dropping lower.  All stocks, commodities, and in our case bonds, trade within trend lines and moving averages, bouncing off the bottom and floating to the top before bouncing back again.  When a moving average, or trend line, is broken the price establishes a new trading range above or below the resistance level broken.  For example, let’s say Dennis Manufacturing has been trading for the past 100 days between $4 and $5, then one day closes at $5.25, breaking above the upper end of the range.  If the stock continues to trade ahead of the $5 through the next day the chances are very good that it will go up, possible to $6.  After several days of trading it will become apparent that a new range is established, let’s say between $5 and $5.75. 

Okay, so what, you say.  This week the FNMA 30 year fixed mortgage backed security broke above the 200 day moving average (refresher: in mortgage and bond prices up is good—up prices mean down rates), this should mean a new range and higher prices for the bonds; if this happens we will most likely see rates drop into Christmas, or drop and hold.  On the other hand there is a technical “squeeze” occurring that could also cause the prices to drop bringing rates back into the range we have seen the past several weeks.  We will know more during the short trading week next week—the key is the break through the 200 day moving average, or trend line. 

Despite a Friday reversal due to investors picking off cheap stocks the week for mortgages was quite favorable, improving by 0.25% for conventional and FHA.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.625%            ê 0.25%

30 year conforming-jumbo at 1 point 5.75%              ê 0.25%

30 year FHA at 1 point 5.875%                                  ê 0.125%

30 year jumbo at         NO PRICE CALL FOR INFORMATION  

I am thankful for this wonderful industry I have chosen for my career.  Thankful for all the families who have entrusted me with the purchase of their homes.  Thankful for all the real estate professionals, finance professionals, friends, family and clients who have recommended my services.  Thankful for the opportunity to work in my community professionally and personally.  Thankful for my wife and daughters who support me in my career and work and no matter what has happened that day will hug and kiss me when I get home, thankful we are together.

Realizing the economic conditions of our industry and others, there are always those less fortunate that ourselves.  Here is a link to the American Red Cross of Los Angeles if you are able to donate to assist those who have lost their homes in last week’s fires in Southern California.

Have a wonderful Thanksgiving, be thankful for the many blessings with which we are all bestowed.

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com , feel free to forward the link to family and friends who may be interested in past commentaries. 

IMPORTANT NOTICE:  The new loan limits for LA and Orange County will be $625,500; San Bernadino and Riverside will be $417,000.  The temporary loan limits of $729,750 for “conforming-jumbo” loans will no longer be available and all loans above $417,000 and below the new area limits must be funded by early to middle December depending on the lender. 

Question of the week:  What happens if the appraisal comes in low on the house we are buying?  Answer:  When an appraisal comes in below sales price there are four options open to the buyer and seller---and remember buyer and seller must agree as to which option otherwise option 4 is the result.  For mortgage purposes our loan to values are based upon the lesser of the sales price or appraised value.  For our scenario the sales price on a home is $415,000 and the appraisal comes back at $400,000, a difference of $15,000 and the buyer is putting 10% down for a $373,500 mortgage. 

Option 1: The seller can drop the price to $400,000 and buyer gets mortgage for $360,000

Option 2: The price stays the same and either the borrower still gets a mortgage for $373,500; which in this case would be 93% loan to value on appraised price necessitating an FHA mortgage in California; or the price stays the same and the buyer makes up the difference in down payment to lower the mortgage to 90% loan to value on sales price, i.e. puts an additional $13,500 down.

Option 3: Buyer and seller meet somewhere near the middle and buyer modifies loan to value/down payment

Option 4: Transaction is cancelled and buyer typically gets deposit back if within agreed upon time frames.

If you have a question you would like me to answer send it to me!

A bit of history this week with the election of Senator Barak Obama to the Presidency on Tuesday.  With his pending inauguration as either the foreground or background to continued economic news pouring out of Wall Street and Washington D.C. there is no shortage of news for our front pages.  As we head to the end of the year we see increasing unemployment, usually good for mortgage rates, a strengthening dollar, usually good for mortgage rates, dropping oil prices, usually good for mortgage rates, and the Federal Government borrowing about $1 Trillion (with a Tee) in the next twenty weeks or so, not so hot for mortgage rates. 

With Congress reconvening in two weeks and talking about another stimulus package, plus the auto makers back in Washington with the hands out it appears the government is about the spend another $300-500 billion dollars---evidently the close to $1 Trillion spent on “stimulus” since the beginning of the year is not enough.  While this is supposed to ease the credit markets, what it also does is create false economies that make economic recovery even more difficult to attain.  I think those in charge need to answer this question regarding the economy:  Do you think it is more important for credit to loosen or for home prices to stabilize?  The answers to those questions present different solutions, unfortunately the only solution they know is to print more money and give it to those who have already made bad decisions.

I leave you with this regarding markets and investments:  Arthur Laffer, renowned economist and creator of the famous Laffer Curve which shows tax revenues increase when tax rates decrease, wrote an article last week for the Wall Street Journal (here, may require subscription) titled “The Age of Prosperity is Over.”  In the article Laffer makes two very important statements.  First he notes that “Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production.”  Meaning if there is a financial panic the governments best option is to let it runs its course within the industry where the panic is occurring.  Second, Laffer states regarding investments, including home purchases, “Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.”  Unfortunately too many investors, and Americans, and elected officials see profits and gains on Wall Street less as a result of risk than as an expected right for putting money into the market.  Because of this view government, which was previously intricately involved in regulation of financial institutions and transactions, is now intimately involved to the extent of government ownership of companies that make bad decisions and were punished by the market. 

The reactions by Washington the last few months to the bad decisions on Wall Street and Main Street are as if my daughter stuck her tongue out at me and used a bad word and I sent her to the corner; then her mother (dear, sweet, wonderful woman that she is) brings her some cookies and lets her go watch television.  What is to stop her from behaving in such a manner in the future?

Big improvements in rates this week as the Dow had its biggest back-to-back losses on Wednesday and Thursday in over twenty years---some how the papers did not print that this week….

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR JUMBO LOANS AND 10% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.875%            ê 0.375%

30 year conforming-jumbo at 1 point 6.00%              ê 0.375%

30 year FHA at 1 point 5.75%                                    ê 0.500%

30 year jumbo at         NO PRICE CALL FOR INFORMATION  

Note that with the new loan limits taking over $100,000 off the table for conforming loans we may (key word: may) see some emergence of jumbo financing in early 2009.

How great to see so many Americans exercising their right to vote this week.  What is also great is the number of Americans, specifically Southern Californians, who are pursuing the American Dream and buying homes as we see the end of 2008 creeping towards us!

Have a great weekend, if you need me please call!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com , feel free to forward the link to family and friends who may be interested in past commentaries.