Question of the week: We are interested in buying a foreclosure from a bank, but it has no cabinets in the kitchen and other problems; can we buy the house? Answer: Sure you can…but you better have cash or being private money for your mortgage to cover the purchase price. When lenders approve a loan application package they are not only approving the credit ability of the borrower—credit report, income, assets—they are also approving the collateral—the home you are buying for value and condition. Drive around your neighborhood and community and see if you can spot the homes that are in foreclosure or have already been through the process. Many of them look like they need work, which means they look like a good value; and they can be, but not always depending on condition and the financing available to purchase them. Most buyers are purchasing using 3.5% (FHA), 5%, 10% or even 20% down payments and require financing for the balance of the price; usually the down payment amount is dependent on how much money the borrower has available. If the borrower is stretching their savings to buy the home, and the home has no kitchen cabinets, or toilets, or flooring is missing, how are they going to make the home inhabitable? Credit cards? That adds to the debt consideration and the lender does not want to put someone into a home just to see them turn around and run up more debt. As well, if the borrower is unable to repair the damage or bring the property up to a safe inhabitable standard and the bank gets the property back it will impact their ability to sell it. Because of this many banks are now expending funds to bring some of their foreclosed properties to “normal” market conditions—i.e. sinks, cupboards, etc. So, while you may think you can get a great deal on the property on the east side of town that has been stripped by the previous owner and it just needs some pre-fab cabinets and paint, you may get a deal on the price, but good luck on the financing.
If you have a question you would like me to answer send it to me!
After several steady weeks in mortgage and bond prices, we saw some erosion this week culminating in a big sell off today (Friday) in bonds as money flowed into stocks. Early in the week the small slide in bond prices (which means corresponding increase in interest rates) was mostly caused by a move into cash for investors. Selling in bonds and stocks was precipitated by political wrangling over the $350 Billion left from the $700 Billion bailout approved in October by Congress and President Bush.
When it became apparent that Congress was releasing $350 Billion investors pulled out of the markets and accumulated cash, waiting to see where the money would be spent. Once they know they can chase it with their investments and hope to profit from the taxpayer funded expenditures. Several weeks ago we saw huge gains in mortgage rates after the Fed started buying mortgage backed securities, if more of the hundreds of billions floating around go into the mortgage sector we should see rates decline further, or at least stabilize below 5% for conforming rates where they have been for the past several weeks.
With no positive economic news apparent in the near future, with the exception of inflation having pretty much disappeared, the expectation is that there should be little to no upward pressure on interest rates. With this prospect we should see rates settling into a range with today’s rates on the high side and the historic low rates of early December on the down side.
With the sell off in bonds and mortgage backed securities today, rates see their biggest week-to-week increase since the half-percent increase from the first to second week of October, which as you recall was the first full week after the $700 Billion was originally passed (click here for my update that week). When several hundred billion dollars is about to be dumped into the economy at one time the markets definitely take notice and react; usually by moving to cash. Which is what happened this week.
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional at 1 point 5.25% up 0.375%
30 year conforming-jumbo at 1 point 5.375% up 0.375%
30 year FHA at 1 point 5.25% up 0.375%
Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected. Numbers provided are for comparative purposes only.
Next week when you read this update we will have our 44th President, and our democracy will continue to exhibit to the world and history the will and power of the people in governance and self-determination.
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.
Question of the week: Why does it matter where my down payment and closing cost funds are coming from? Answer: The quick answer is that a lender wants to make sure you are not borrowing funds for closing, and if you are that they know about it so the repayment of that obligation can be accounted for on a monthly basis. To ensure the funds are not borrowed lenders require a paper trail showing: a) where the funds for closing originated, borrower(s) bank account(s), or if gift funds the account(s) of the donor(s); b) transfer of the funds, copy of check, cashier’s check or wire and c) deposit of the funds into borrower’s account—either bank or escrow. If you are purchasing a home and part of your funds for closing are coming from somewhere other than your current bank accounts make sure you are clear on the documentation needed to verify the funds for the lender. These rules apply for all mortgages, whether FHA or conventional.
After last week’s nice drop in conforming rates the market retreated big time this week wiping out last week’s gain and then some. There appears to be no major cause in the jump in rates but a combination of factors. First, when the Fed met this week they did not change rates but their commentary led many investors to believe that with rates where they are the only way to go is up—and they reacted accordingly. Second, the Fed then purchased several hundred million dollars of mortgage backed securities from Fannie Mae and Freddie Mac; ordinarily this demand would increase bond prices, thereby lowering rates, however it appears the Fed only bought mortgages with yields over 6%--causing demand for yields below that figure to drop, thereby raising the rates. Third, with the House of Representatives passing the $825 billion “stimulus” package (for my thoughts on this bill go here) which is incredibly inflationary in the medium and long run. Bond markets do not react well to inflation, as a result pressure on rates to rise.
Unfortunately for some and fortunately for others there is plenty of negative economic news still on the horizon, most notably continuing deterioration of employment and wages. Despite being countered by a stabilizing of commodity prices, even a slight rebound in some sectors, which indicates a nearing of the end of the recession, continued increases in unemployment and lower household income will drag on the economy, putting downward pressure on interest rates.
For now we see a very ragged and jumpy market. Rates are whipsawing daily and weekly as investors try to gauge what is the best investment; one day it is equities and the stock markets, the next it is a flight to the safety of the bond markets, many days it is parking funds in cash and waiting. Looking at the rates for the past year, even with the big jump this week we are still below where rates were for all of 2008—in other words relative to a few weeks ago rates are high, relative to history they are very low!
For the week in rates we have seen a big jump across the board with most of the action coming yesterday (Thursday).
30 year conventional at 1 point 4.875% up 0.375%
30 year conforming-jumbo at 1 point 5.25% up 0.5%
30 year FHA at 1 point 5.25% up 0.25%
Our unofficial national holiday this weekend with the Super Bowl, don’t tell my buddies from college and my bachelor days but I’m not that excited about it this year---I will probably watch while baking something tasty in the kitchen!
Question of the week: What are the acronyms and abbreviations I read and hear about in the mortgage industry? Answer: Every industry and group develops their own “language” that includes acronyms, abbreviations and lingo—for proof ask a teenager 2nite about TXT ABBS get the 411 from if you 404 some will make you OMG and other will have you ROTFLYAO. Our industry is no different, the basics:
PITI= Principal, Interest, Taxes, Insurance; refers to the complete housing payment and can include mortgage insurance, homeowners dues or other payments made monthly
LTV= Loan To Value is the percentage of the value of the home that is encumbered with a mortgage (or CLTV-combined loan to value includes all mortgages on property); for instance 80% LTV on $500,000 property equals $400,000
DTI= Debt to Income, this is also called “ratios” and is the percentage of borrower(s) gross income that is for the housing payment (top ratio) and/or housing payment and monthly debts (bottom or back end ratio). Someone with a 35% back end ratio is applying for a mortgage where 35% of their gross pay is being used for their PITI plus monthly debts like credit cards and car payments. We like this number to be 40% or under, most lenders will not allow this number to exceed 45% of the borrowers gross income.
FICO= The acronym is derived from Fair Isaac Company which is the group that developed credit scoring; some of us remember when there were no credit scores and each individual report was graded against the borrowers overall credit package. Today credit scores, or FICOs, are a primary determinant of loan rates and decisions. FICO scores are like bowling—the higher your score the better.
Fannie/Freddie=Fannnie Mae (FNMA or Federal National Mortgage Association) and Freddie Mac (FHLMC or Federal Home Loan Mortgage Corporation), these are our conventional or conforming rules makers and conduits through which almost every non-government loan these days is bought and sold (as MBSes, mortgage backed securities).
So if you have a FICO >760 with 80% LTV and DTI below 35% you are an excellent prospect for a Fannie/Freddie mortgage!
Welcome to the White House President Obama, then back to business as usual. The credit and mortgage markets reaction to the start of the Obama Presidency has been one of mixed reaction as investors have sold off their positions, but the Federal Reserve has continued to buy Fannie and Freddie which has propped up the conventional mortgage market.
Today one of the many Federal Reserve Board Members gave a talk and used the “I” word, inflation. Markets did not like hearing the word and we are seeing a not unusual Friday sell of creating more downward pressure on rates. The mention of inflation was a commentary on the amount of money the Federal Government has already dumped into the economy and the amount that appears to be dumped in again in the form of the proposed $825 Billion “stimulus” package. The more money in an economy the more fuel for inflation to take hold, this is the concern many investors have as they decide whether to purchase MBS and other bond investments.
Remember Inflation is BAD for mortgage rates. As we move further into 2009 we keep an eye on when the bad economic news begins to dwindle, and when that happens we prepare for market reaction to the decrease in bad economic news—higher rates.
The big news for mortgages this week is a Fannie/Freddie imposed rate hike. Lenders were informed this week that if over 10% of their mortgage portfolios were in “high-balance” or “conforming-jumbo” mortgages (greater than $417,000) then Fannie/Freddie were adding a premium of up to 2 points—which in the current market translates to 1% or more in rate. This has taken several lenders out of the market on mortgages over the national conventional loan limit of $417,000 as their rates are non-competitive until their portfolios shift and 90% or more of their mortgages are below $417,000. Thankfully as a broker with multiple sources we have sources available not affected by the price movement.
This move by Fannie/Freddie shows the disconnect once again between what we hear politicians say in front of the cameras for CNBC or CNN and the actions that are occurring that affect our economy and housing markets.
For the week in rates conforming rates have dropped gaining back last week’s increase, conforming-jumbo sees a slight dip and FHA was stagnant.
30 year conventional at 1 point 4.875% down 0.375%
30 year conforming-jumbo at 1 point 5.25% down 0.125%
30 year FHA at 1 point 5.25% FLAT
Congratulations to America for once again demonstrating the peaceful transfer of power and the continuation of our democratic principles and values.
Question of the week: What is the difference between a “short-pay”, a “foreclosure”, a “bank owned property” and an “REO”? Answer: Let’s shorten the question by saying that the last three (foreclosure, bank owned and REO) are the same thing—REO stands for Real Estate Owned; for brevity I will use the term REO. We get this question often because in today’s real estate market a significant number of properties for sale are either marketed as “short-sale” or REO properties. REO’s are properties that are legally owned by a bank, lender or other entity that has obtained title from the individual(s) who previously owned the property and lost it through the foreclosure process. A short-sale is a property where the individual(s) still own the property, however they owe more on their mortgage(s) than the property is worth. The distinction is important because it determines who is making the decision to accept an offer to purchase the property and at what price. For REOs the bank has hired a local real estate agent to represent them in the marketing and sale of the property and some one at the bank has the authority to make the decisions as to what price to list the property for sale and then to accept the offer. In a short-sale the current owner must agree to the sales price being offered, then must negotiate with his/her lender(s) to accept a partial pay-off of the mortgage(s). This can get tricky depending on if the seller has one mortgage or two, what the balances remaining are, if there are back taxes, homeowners’ association dues or other liens against the property that must also be taken into consideration. If there are two mortgages then both the first and second mortgage holders must agree to the amount of proceeds they will, or will not, receive. When purchasing any property where short-sale procedures are required it is crucial for the buyers, the agents, the new mortgage broker, the escrow officer and the seller are in continuous communication and providing current information to the lender(s) to ensure they will approve the final sale of the property.
Home Valuation Code of Conduct (HVCC). The HVCC has been on its way for many months and recently Fannie Mae and Freddie Mac announced that it will become effective May 1, 2009. What is HVCC? It is new process for ordering appraisals whereby brokers can no longer order appraisals directly but must use national appraisal services, or order through lenders clearinghouse units. This removes control of the process from the local broker and puts the valuation process in the hands of someone with no relationship to anyone in the transaction. At face value this may seem like a good idea, in practice in our market it is not.
The majority of my business is in the Greater Long Beach area. Clients and agents in the area know that for many, many years I have ordered appraisals for my clients’ transactions from Tom Mores. Tom lives in Long Beach, his children go to school in Long Beach, and he knows Long Beach very well. As such Tom does an outstanding job appraising properties in the area. Because Tom is a professional he is licensed by the State of California and every time he provides an appraisal to a lender he is staking his license and career on that appraisal being a professional opinion of value supported by comparable sales and listings in the immediate market; if a lender discovers that Tom has “cooked” the value in order to ensure a transaction will close he can, and should, lose his license, and be subject to fines and penalties for loan fraud. As a result of Tom’s experience, professional abilities and ethics, he and I have an excellent relationship that has benefited our clients with solid evaluations of the value of the properties on which they are placing mortgages.
With the new HVCC guidelines being imposed by Fannie and Freddie I will no longer be able to order appraisals from Tom and must use a national appraisal service located out of the area and they will then contact an appraiser to provide our appraisal. This causes tremendous difficulty, especially in many cities like Long Beach where there are many diverse neighborhood juxtaposed within zip codes and census tracts. We recently had a transaction in the 90808 zip code near Clark and Conant in Long Beach where we were required to have a second appraisal performed by a national appraisal service. The appraiser they sent was from some where deep in North Orange County and it was evident he knew nothing about our market and sub-markets. As a result his value came in significantly lower than our sales price, appraised value and subsequent appraisal done by another lender’s appraisal. As our company, and many other brokers and lenders locally, has seen this is not uncommon—everyone is having tremendous problems with poor appraisals ordered using the new Fannie Mae and Freddie Mac guidelines.
We need to have the new HVCC policy scrapped or loosened. This is a significant problem for local real estate markets as it artificially deflates values even further, creating more foreclosures and short-sale transactions, which push the values down even farther. At a time when the entry level to the market is solidifying and generating positive results in the real estate markets we do not need to have the momentum killed by new rules that mandate the use of non-local appraisers.
Call, write, email your Congressional Representatives and Senators and ask that they push for this regulation to be rescinded. It is an example of government trying to “protect” the consumer but instead hurting them. Most of them have no idea how this process works and the harm it can and will do to their constituents and districts.
Once again and up and down week in rates that ended up fairly flat Friday to Friday. Early in the week we saw some positive momentum with the Feds purchasing Fannie and Freddie mortgage backed securities. This led to a big spread between conventional and FHA mortgage rates as no one was buying the FHA securities. Late in the week, the trend reverse and we saw the gap thin to only about 0.125%.
30 year conventional at 1 point 4.875% no change
30 year conforming-jumbo at 1 point 5.00% no change
30 year FHA at 1 point 5.00% down 0.125%
Here is some interesting news. In some areas of Long Beach prices from November 2007 to November 2008 are up over 2% for condominium sales! It has to start somewhere and it is starting!
Question of the week: What are some financial matters I should check annually? Answer: This question was asked at a holiday party and it is a good one we should all ask and answer. For homeowners my annual checklist is pretty short. First, make sure your Family Trust and Estate Plan are in order and have a review scheduled. If you own property and do not have a Family Trust and Estate Plan then number one on your list should be to get one, if you need help contact me. Second, review your homeowners’ insurance policy to make sure it is up to date, accurately reflects the insurance you need (remember for most people you only want to insure replacement cost, not value or mortgage balance). If you feel your mortgage needs a check up give me a call and we can run through your information and see if you will benefit from restructuring your mortgage debt.
Historically the last week of the year is pretty crazy, as investors buy or sell in large numbers to either protect gains for their portfolios for the year, or sell to take losses. This week has been no different as the mortgage markets see-sawed every day as investors moved from stocks to bonds and back again all week.
Ending the crazy year of 2008 we saw investors react favorably to Fannie Mae and Freddie Mac mortgages as investments and conforming loans start 2009 0.375% below last January. In the middle of the year investors lost all confidence in the jumbo mortgages and that market collapsed and is waiting for investors to recognize the benefit of making loans to well qualified homeowners above the conforming limits. As for government mortgages, the new loan limits imposed early in the year by Congress, plus the mortgage insurance built into the mortgages has resulted in tremendous volume for FHA mortgages in the last quarter of 2008.
Looking forward we anticipate continued low rates as the government, investors and consumers continue to work through a struggling economy. With continued buying in the first time buyers’ markets we will slowly see stability in home prices and any housing market rebounds will be led from the bottom. For anyone considering buying a home in 2009 I would counsel getting your financial information together early in the year and find out where you stand in regards to ability to qualify. Once you have that information work out a plan as to when you want to purchase your new home and what you need to do in order to successful close escrow on your new home.
With all the year end trading we ended the week flat from the last Friday in 2008. More stable trading should resume on Monday and not to long thereafter we will see if any new trends, or momentum, develops in the mortgage markets as to rates. We skipped off the bottom we have seen in the past fifty or so years in mid-December, will we hit that again? The markets will let us know in early January.
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 4.875% ó 0.000%
30 year conforming-jumbo at 1 point 5.00% ó 0.000%
30 year FHA at 1 point 5.125% ê 0.125%
I hope everyone had an enjoyable and safe new year’s celebration; thankfully we celebrate ringing in the New Year on East Coast time so I am able to make “midnight” before my bedtime.
2009 will be as successful as we each choose to make it, choose success!
Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
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