Question: What exactly is mortgage insurance? Is it something that is mandatory for purchasing property or just the property I am buying?
Answer: This is a question that is coming up more frequently as first time buyers enter the housing market and the industry has been without “piggy-back” mortgage transactions for several years. Though making a comeback, piggy-back mortgages are being evaluated differently in the current market than in years past—especially with the specter of the prime rate increasing in the very near future.
Mortgage insurance defrays some, perhaps all, of the cost to a lender if a loan goes into default and foreclosure. Depending on the loan type and initial loan-to-value (LTV) of the mortgage, the lender will require certain amount of coverage from mortgage insurance.
For FHA mortgages the full amount of the mortgage is covered and all mortgages require two forms of insurance premium be paid, an upfront premium that is added to the loan amount and a monthly mortgage premium. Recently FHA changed it guidelines so all new FHA mortgages require the monthly premium be paid for the life of the loan. Keep in mind the minimum down payment for FHA is 3.5% for the maximum loan amount of $625,500. With that much leverage risk it is not surprising that FHA has mortgage insurance to off-set some of the costs should the loan go into foreclosure.
For Fannie Mae and Freddie Mac mortgages, also known as conventional or conforming mortgages, mortgage insurance is required on all mortgages that have a loan to value greater than 80% of the property value; i.e. if the value of the home is $400,000 and your mortgage is greater than $320,000 you will be required to have mortgage insurance. This is for all conforming mortgages, regardless of refinance or purchase, condo or single family detached home.
For conforming loans the vernacular is PMI, or Private Mortgage Insurance, as the insurance is made by a privately held company. For FHA the vernacular is MMI and/or UMIP for Mutual Mortgage Insurance or Upfront Mortgage Insurance Premium; FHA mortgage premiums are collected by the federal Department of Housing and Urban Development—it is a government insured mortgage.
For PMI the premium varies on the loan to value of the mortgage, type of mortgage and borrowers’ credit scores. The higher the LTV, i.e. the lower your equity or down payment on a purchase, the higher the coverage required by the lender and therefore your mortgage insurance premium. The coverage goes from 30% for loans with LTV between 90.01% to 95% to 25% for 85.01to 90% and 12% for 80.01% to 85%. The greater coverage required for your mortgage the higher your PMI premium will be.
Your premium will be higher than an owner occupied purchase if your loan is:
As well the higher your credit score the lower your premium will be.
What does 25% coverage mean? If a mortgage is covered by PMI with 25% coverage then if the mortgage goes into default the PMI company will pay the lender up to 25% of the mortgage amount to cover costs and losses due to the foreclosure. Note that after missed interest payments, legal fees, filing fees, plus the potential loss in loan principal because of a foreclosure is often much greater than 25%, depending on current market conditions.
Other loans also may have mortgage insurance depending on the product and lender. Some banks are offering our clients on “jumbo” mortgages, greater than $625,500 conforming loan limit, with no mortgage insurance for loans with LTV greater than 80% up to 90%. They “self-insure” the loan by charging a much higher interest rate than a mortgage with 80% loan to value, but there is no separate underwriting or payment.
Veterans obtaining a VA mortgage also have a version of mortgage insurance, called a “funding fee” that is added to the mortgage amount.
For PMI borrowers there are a few options as to what type of premium to use to pay for the mortgage insurance requirement.
Have a question? Ask me!
With apologies to the Jets fans in New York…F-E-D-S FEDS, FEDS, FEDS! Spell Jets instead of Feds and you have the cheer that roars through MetLife Stadium in the Meadowlands. This was a very, very light week for economic data so focus was on yesterday’s release of the Fed Open Market Committee’s minutes from its meeting in September. The minutes showed most of the FOMC voting members were looking to raise the Fed Disount Rate in December. The market reacted as expected to such news by a drop in bond prices (higher prices).
Investors are reacting like Jets fans, cheering every first down and booing every set-back. In the case of the market movers cheers are the Fed not raising rates and markets go up and the boos are sell offs in anticipation of the Fed hiking sooner than later. For those who follow football you know the boos are more frequent than the cheers for the Jets. To continue the analogy at some point the Fed will raise, investors will see it as a loss and and will want to head for the exits (sell their positions) before the actual event. Because of this the minutes released on Thursday had investors again heading to the exits.
Timing has been ignored. The Fed minutes were from a meeting in the middle of September. Before unfavorable data on the economy was released at the end of September and last week that pointed to the Fed holding off on any rate increase until December. But the reaction yesterday was as if the Fed had released minutes from a meeting that morning, instead of digesting the minutes reflected opinions based on data from August and early September.
It’s tough to be a Jets fan, and tough to try to figure out investors that have whip-sawed equity and bond markets for the past several months (year?) on guesses as to when the Fed will finally raise a rate it should have raised a few years ago in my opinion.
Rates for Friday October 9, 2015: Mortgage Backed Securities were rallying early in the week (lower rates) only to see a sell off yesterday that slowed but has continued this morning. The result is the conforming rate barely hanging onto last Friday’s number and the high-balance rate moving back up. A volatile market, lock through the close of your escrow when you can.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.625% Flat
30 year high-balance conforming 3.875% Up 0.125
30 year FHA 3.25%** Flat
30 year FHA high-balance 3.50%** Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs
Well that brief look at fall weather was nice….there is a rumor it will return in about two weeks. In the meantime summer continues in Southern California.
My favorite time of the year is fall, more so if the temperatures dip. But it also means the baseball playoffs, college and pro football are in full swing and hockey and basketball are getting started. In college, in the old days, we would gather three televisions in our dorm room every Saturday morning and have all the games on through Sunday and guys would wander in and out through the weekend to watch and kibitz. Old days meaning no ESPN or cable channels and games were on the three major networks.
Oh yeah, and we’d also study, yep have that Econ book open on the desk all weekend….
Have a great week,
Question of the week: What should I offer for the house we want to buy?
Answer: Here is another question that we have answered in the past year or so, but again as we see more first time buyers enter the market, and some repeat buyers re-enter after a decade or so since they last purchased a home, the question and answer are still relevant today.
Not unusual for me, to answer the question there are more questions that need to be asked and answered—but these need to be answered by you:
How bad do you want it?
Are you buying a house to make money or a home to raise your family in?
Is the asking price in line with recent sales and other properties currently on the market?
What kind of condition is the house in, will you need to spend a lot of money to make it livable, is the cost to do so reflected in the asking price?
Are you the only buyer interested in the property?
How long has it been on the market?
What is your real estate agent advising?
Are you asking the seller for any concessions such as paying for your closing costs, or any contingencies such as waiting for your home to sell or funds to be available to close?
Is the seller the family that has lived there for several years or an investor or bank?
All these are the questions you need to answer when making your offer. Keep in mind whatever you think the property is worth and no matter how much you try to justify your offer if it is below the seller’s asking price, the seller does not have to accept your offer because they have their justifications for the price they are asking.
My advice on this question has always been, and more so now with the current housing markets, don’t be afraid to give the seller what they want if you want the home. As you live in the home for many years and raise your family you can look back and say, “wow, we almost didn’t have this because I was getting stuck on a few thousand dollars.”
If you like it, your family likes it, you can afford it, the price is reasonable to closed and current sales so it will appraise, then buy it—make an offer that makes it difficult for the seller to say no.
If you want the house make the offer it takes for the seller to say, “deal.”
Have a question? Ask me!
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
A week with some significant economic data. Early in the week Personal Income and Consumer spending data for August was released. Incomes for the month rose a decent 0.3% and spending rose 0.4%, not surprising personal savings dropped to 4.6%, it has been slipping since its 4.9% reading in April. Released with the income and spending data was the PCE price index (Personal Consumption Expenditure), an inflation gauge that is closely watched by the Fed. In August the PCE price index was unchanged and is up only 0.3% from last August. The news is interesting, it shows increased income and spending by consumers, which is good for the economy; no inflation which is good for consumers; a decline in savings, which shows increased consumer confidence as they are willing to dip into savings to make purchases. Overall the news is positive for economic growth and therefore negative for mortgage rates.
International trade data for August shows the impact of the Chinese devaluing the yuan. Imports for the month increased 2.2% while exports declined 3.3%. This data is lowering estimates for 3rd GDP growth as it portends a slow-down in U.S. manufacturing, and that puts pressure on jobs. The news is mortgage rate friendly.
Since it is the First Friday of the month the most important economic data of the week was released this morning: the monthly jobs report from the Department of Labor. The news this morning probably pushed off any rate increase from the Fed until 2016. September hiring was well below expectations and contracted significantly from August, especially in the private sector. Across all data points the news was disappointing. Overall hiring showed only 142,000 new hires, of which only 118,000 new jobs were in the private sector. The unemployment rate held steady at 5.1%. Average hourly earnings were stagnant for the month and average hours worked decreased slightly. Finally, the labor participation rate continues to drop and was down to 62.4% for the month. The overall report is very friendly for lower mortgage rates.
Rates for Friday October 2, 2015: After a week of slowly climbing Mortgage Backed Securities (MBS) spiked this morning on the employment data. Even with a sell-off in MBS late in the morning rates are still lower than last Friday, matching their seven week low.
30 year conforming 3.625% Down 0.125%
30 year high-balance conforming 3.75% Down 0.125
A pretty low key weekend for the Smith’s, the first in a month in which we are all home and/or do not have a big event planned. Looking forward to some family relaxing!
Question of the week: What can we do to make it easier and faster for you to process our mortgage application?
Answer: Don’t staple items together and do not provide copies that are two sided.
A bit tongue in cheek on the answer, but those two items do slow down the process a bit.
With more new home buyers coming into the market it is time again to review how you can make the process a bit smoother and quicker to get from application to funding.
Everyone needs the same basic items for a loan application, having copies (electronic or paper) of these items available when you begin the process will save considerable time in processing your loan and chasing items that we know are needed up front:
**We have discussed asset statements and deposits several times in the past. If you have any unusual deposits, i.e. deposits that are not part of your employment, be prepared to show the source of the deposit. This is one of the primary hold ups to final loan approval: verifying funds and deposits.
Another hold up is adequate insurance coverage. Single family dwellings must have replacement coverage of 84% of the replacement value of the property as stated on the appraisal or the full loan amount, which ever if less. If you are refinancing be aware you may need to increase your current coverage to meet the requirements of the lender for adequate coverage.
Finally, the most important way you can improve the efficiency of the process is to ensure we have the best ways to contact you quickly if some additional information is needed from processing or underwriting. Do you respond fastest to work phone? Mobile? Email?
Preparation is always the primary factor in the success of any endeavor, the better prepared you are with your financial information for delivery to us the quicker your file can be processed, approved and funded.
A slow-down in August existing home sales, which dipped 4.8% from July sales. While up 6.2% from last August, the year over year trend is slowing and in August was the lowest since February. A slowing in housing market growth raises an eyebrow as to how the overall economy is perform—which is shown in the third revision of 2nd Quarter GDP data. The slowing sale of existing homes is positive for mortgage rates.
Further data supporting some slowing was the Durable Goods Orders report yesterday showing a slight contraction in August. Mostly due to exports which is probably showing the impact of China’s devaluation of its currency in August. Economic data that have a strong trade component should reflect the start of the yuan devaluation next month when we get results from September economic activity. A slowdown in durable goods orders is generally positive for mortgage rates.
After markets closed yesterday Federal Reserve Chair Janet Yellen gave some remarks on the economy and the Fed’s rate policy. Essentially she our economy will be able to prevail over a cooling on global markets—most notably China, but in Europe as well. She anticipates a hike in the Fed Funds rate before the end of the year since the U.S. economy can handle the rate increase.
We will see if that holds true in the final quarter of the year. Today’s GDP revision pushed economic growth for the 2nd quarter to 3.9% from the initial 3.7% growth estimate. A lot of the growth was in inventories which could impact the 3rd quarter numbers. However personal spending was strong in the 2nd quarter, which is beneficial for economic growth as consumer spending is 65-70% of economic activity in America. The upward revision from an already solid GDP number is negative for mortgage rates.
Rates for Friday September 25, 2015: Throughout the week Mortgage Backed Securities kept testing a break-out to higher pricing (lower rates) but could not muster momentum. A drop in prices at opening on the heels of Yellen’s remarks and the GDP revision pushed rates up after their dip last week.
30 year conforming 3.75% Up 0.125%
Happy Autumn! Hard to type that when it is already pushing 85 degrees at 10:00 in the morning…but with the cooler mornings when I walk the dog I can feel the cooler temperatures are right around the corner. Not this weekend around the corner but hopefully soon!
Many of you know I am a baseball fan, and love the history of the game. This past week the most accomplished player in baseball history passed away, Lawrence “Yogi” Berra. Others hit more home runs, had higher averages, might have been better defensive catchers, but none won like Yogi won. Here is a great obit from Sports Illustrated on Yogi and his accomplishments and place in the history or our American Pastime.
He famously said, “it ain’t over ‘til it’s over,” his life may be over but his legacy ain’t.
Question of the week: Do we have to have an impound account for our taxes and insurance?
Answer: This is a question that I answer about once a year in the Weekly Rate & Market Update and it has come up again recently so I thought it time to cover the topic.
The answer to the question: Yes, no, depends.
Paying the lender your taxes and insurance obligations as part of your monthly payment is known as having an impound or escrow account; for our purposes I will use the term impound account or impounds.
If you have a FHA or VA mortgage you have no choice regarding the impound account regardless of how much of a down payment you make; as well if you have a conventional mortgage with 10% or less down an impound account is required. At closing for a purchase or refinance mortgage you will need to have funds to establish your impound account for taxes and insurance.
Lenders want borrowers to have impound accounts, they want to ensure taxes are being paid and the property retains insurance. State law prohibits lenders from requiring impound accounts on all loans. For loans where it is permissible to have required impound accounts, lenders will do what is allowed--require taxes and insurance payments be part of your monthly mortgage. Because they want borrowers to have impound accounts, but cannot require them, some lenders charge a higher price for loans without impound accounts, from 0.125 to 0.25 points depending on the lender and the loan type (that is $125 or $250 per $100,000 in loan amount).
The benefit of having an impound account is knowing you have your taxes and insurance paid and will not have to come up with the funds to renew your insurance premium nor pay your tax bill. Keep in mind taxes must be paid when many people are having a bit of a cash crunch, in December when holiday shopping takes a bite out of many budgets and in April when checks for income taxes are written. ***
The most obvious benefit of not having impounds is you control your own funds and are not susceptible to the lender making your payments. Your monthly payment is lower, but your annual housing payment is the same. If you are a very good money manager and confident in your ability to save regularly so you can make your payments for insurance and taxes then you may wish to forego an impound account.
***Personally I do not like having an impound account and self-impound for taxes and insurance. This past month I have had two clients who have impound accounts where errors were made regarding payment for taxes for one client and insurance for the other. While relatively rare—I would say 10% or less—for such mistakes to occur with impound accounts, errors do occur and when they do they correcting them can be a pain in the basement.
Do you have to have your tax and insurance payments as part of your monthly mortgage payment? Not always. Should you? That depends on your comfort level and whether you would like to make twelve small payments for your taxes or two big ones.
Rates for Friday September 18, 2015: Another crazy week for Mortgage Backed Securities (MBS), which determine mortgage rates. Prices for MBS plummeted on Tuesday (higher rates) and then started climbing (lower rates), with a sharp spike yesterday after the Fed announcement. The result of the dip and climb is a small decline in rates for the first time in a month.
30 year conforming 3.625% Down 0.125%
30 year high-balance conforming 3.75% Down 0.125
30 year FHA 3.25%** Flat
30 year FHA high-balance 3.5%** Flat
Tulsa was fun but it is good to be home, especially this weekend as tomorrow we celebrate our oldest one’s 16th birthday, she is ten days older than Stratis Financial! Looking forward to hosting several of her friends tomorrow night and our family on Sunday to celebrate our wonderful daughter.
Question of the week: Will the new disclosure rules have an impact on my transaction?
Since November when the Consumer Financial Protection Bureau mandated the implementation of the TILA-RESPA Integrated Disclosure (TRID) rules those involved in real estate transactions have been in a tizzy. Given a reprieve with the CFPB pushed the start date of the TRID closing documents from August 1st to October 1st, industry professionals in real estate, mortgage and escrow are now experiencing rising anxiety over the new rules.
The new disclosures that borrowers will get as part of their mortgage transactions are considerably better than the forms we currently are required to provide. The CFPB has integrated the Good Faith Estimate and the Truth-In-Lending Disclosure into one multi-page form that provides clear disclosure of payments, cash to close, interest rate and costs of the transaction (being a government form there is one very confusing part of the form that is best explained in person once you receive the new TRID disclosure).
The anxiety being experienced in the industry is not over the form or explaining the forms. The anxiety is over the repercussions for forms that are not completed correctly.
In 2010 the industry almost shut down for a month when a new Good Faith Estimate was introduced. Lenders were extremely slow in processing, approving and funding mortgages because of the new form. Not because the form was extremely complicated but because of “restitution.”
If a Good Faith Estimate is filled out incorrectly or missing some information the originating company is required to send restitution, i.e. cash payment, to the borrower with the amount determined by the fee missed or quoted incorrectly. The early period of using the form led to some big restitutions for many companies as items such as not properly disclosing the transfer tax (paid for by the seller in almost all California transactions), HOA fees, etc. Fearful of large payments for mistakes lenders slowed down their process so that GFE forms could be reviewed, scrutinized and thoroughly audited before being sent out.
So as the deadline of October 1st nears for the implementation of TRID the industry is gearing up and educating mortgage originators and escrow professionals as to the proper completion of the form; as well real estate agents have been attending seminars since the new disclosure rules impact the closing of purchases and time frames that must be met at the end of a transaction.
But like with the GFE implementation in 2010 the biggest concern in the industry is not the form itself but the potential fines and penalties that the CFPB can impose on companies for improper disclosures or failure to follow the guidelines for providing disclosures or timing for steps in closing the transaction. Any fines levied by the CFPB will be months, even years, after
any transaction closes when a file is being audited by the CFPB as part of an audit of a lender.
So naturally there is anxiety and the strong desire to exercise caution when a new process is being implemented that has potential for severe penalties that can be imposed for not properly implementing the procedure—and not knowing of your process is correct for several months or years.
Due to the extreme regulatory and enforcement powers given to the CFPB the new TRID regulations will undoubtedly lead to some slow-down in the processing, approval, funding and closing of mortgage applications taken after October 1st. This applies to refinance and purchase transactions.
If I am a seller with a home on the market and have an offer to purchase my home that is a bit less than I want, but the borrower can complete their loan application prior to October 1st I would be inclined to take the lower offer to avoid any complications and delays that may result from taking a higher offer after October 1st.
As stated up-front, the new TRID disclosure form is a very good form for the borrowers—however the heavy handedness that we have already seen CFPB exert as a regulatory body has created an environment that will result in some delays as the new form is implemented.
First Friday means not only monthly event in Bixby Knolls in Long Beach (a lot of fun, all the stores, restaurants and bars have live music, promotions, plenty of folks out and about strolling the Avenue) but also means the Labor Department releases job statistics for the prior month. This morning’s release is one of the most important in a very long time as it is the last report on the labor markets before the Federal Reserve Open Market Committee meets in two weeks to decide whether to raise the Federal Funds Rate or not. After the last FOMC meeting the official statement was that a rate increase would depend on whether there was some strength in the labor market or not.
“Some” is ambiguous language and today’s report was ambiguous data. The headline number for your Friday evening news and Saturday morning paper will be that the unemployment rate fell to 5.1%, the lowest since April 2008, which supports a Fed rate hike. The statistical number is that only 173,000 jobs were added to the economy—well below expectations, and that of those only 140,000 were private sector jobs, which supports the Fed not raising short term rates. Within the report was 10.3% of workforce either looking for work or for better work and the labor participation rate remains at 62.6% for the third month in a row—both of which support no rate move.
Markets will be cautious for the next two weeks as no one will want to get caught guess which side of the coin will be showing when the Fed flips it later this month to determine if it will raise the Fed funds by 0.25% or not. With the economic news today that is the way pundits are handicapping the chances of a rate increase or not, 50-50. Contrast this with a few months ago when a September rate hike seemed like a sure thing. China, stock market drop, U.S. labor markets, all have put the sure thing to a coin flip. The over-all news can be positive for lower rates as investors pull back on stocks, or hesitate to get back into them, and target bonds and mortgages for investments until the Fed decision is made and released.
Rates for Friday September 4, 2015: Rates reflect the investor caution as we have seen tight trading this week and the result is no change in rates from last Friday. A volatile environment suggests not taking risks and locking in your interest rate as soon as you can through your escrow period.
30 year conforming 3.75% Flat
30 year high-balance conforming 3.875% Flat
A day of gratitude and appreciation as I look back on twenty-one years ago today when Leslie and I were married in the backyard of our first home in front of a small gathering of family and friends. Sometimes the time seems like a blink of the eye and others as if we have been together forever. My advice to young people is to marry your best friend, I did and it was the smartest thing I have ever done.
Enjoy the Labor Day weekend and have a great week,
Dennis C. Smith, California Bureau of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166