Dennis' Mortgage Blog

Question of the week:  Do I have to have my taxes and insurance as part of my monthly mortgage payment?

Answer:   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.  At closing for a purchase or refinance mortgage you will need to have funds to establish your impound account for taxes and insurance.

On conventional loans the discussion gets a little more complex.  In California on certain loan lenders can require borrowers establish an impound account, certain loans with loan to values over 80%, primarily Home Affordable Refinances, or mortgages at 90% or greater loan to values.

Lenders however want impounds, especially in the current market environment with significant and growing Real Estate Owned (REO) portfolios with delinquent taxes.  Many short sale and loan modification negotiations have been bogged down because the mortgage did not have impounds and a substantial amount of money is due the local tax authority.  To avoid this going forward lenders may not be able to require impound accounts on some loans, but they can encourage them by charging more for loans that do not fund with an impound account.  We have seen and heard of charges up to 0.25 points (one-quarter of one percent, or $250 per $100,000 in loan amount) added to loan fees for applications requesting a waiver of impound accounts.

Mortgages with impound accounts are also desirable to lenders as they are worth more on the secondary market than mortgages without, for the reasons stated above.  It reduces the chances of borrowers making mortgage payments but not making their tax payments.  It takes a long time of delinquent taxes before the County or State will foreclose for delinquent taxes and tax liens take precedence over mortgage liens when it comes to foreclosure. 

In my twenty plus years in the industry I have seen a tremendous change in how lenders handle impound accounts and they have become much more efficient and less mistake prone with the technology that has emerged in the time period.  Not to say they do not still make mistakes, they happen, but they are much fewer and farther between and tend to be more easily resolved. 

I have clients say, “I want to earn the interest on that money and not let the lender.”  Two points on this, depending on the amount of your taxes you are looking at perhaps 3% on $4000? $5000? $6000?  if you have a really good savings account today.   Second, how much is the late fee for your taxes if you miss the payment since they are due, in California, just before Christmas and just before IRS tax deadline of April 15^th?

Impound accounts work very well for many people, and many others do just fine without them.  However the option to not have them is becoming less likely in our current market, or if you are looking to avoid them it may cost you at closing depending on the lender and the loan type.

Have a question for me?  Ask me!

Early in the week we saw continued fallout in the Mortgage Backed Securities market from the absence of the Fed after fifteen months of buying (for those who missed it recap here from last week).  The MBS market dropped 125 basis points in the three days of trading after the Fed stopped buying, spiking rates.  Tuesday and Wednesday saw some rebounds, followed by more losses yesterday and so far this morning.

Mortgage Backed Securities will struggle to find their new trading levels in the coming days and few weeks.  With continued supply from the Treasury ($80+ billion sold again this week) and company earnings due starting next week, investors will be moving their funds around searching for the best returns vis-à-vis risk.  Anyone floating their mortgage rate better have a strong stomach and willingness to take risk.

In economic news this week February saw a large jump in pending sales of existing homes, up over 8% after a sharp decline in January.  Another change in direction is occurring with mortgage applications.  According to the Weekly Applications Survey from the Mortgage Bankers Association for the week ending April 2^nd refinance applications consisted of 58.7% of all applications taken for the week, the lowest percentage since August 2009.  Initial applications for unemployment insurance rose this past week to 460,000 claims, a change in direction that was unexpected and unwelcome.

Former Fed Chair Alan Greenspan was testifying to a Congressional committee this week.  In his comments he said the Federal Reserve was pressured by Congress to make lending to poorer Americans kept increasing through the 2000s.  Greenspan stated, “If.. we had said we're running into a bubble and we need to retrench, the Congress would say 'we haven't a clue what you're talking about'.” Note that Congressional committees flat out ignored or rebuffed warnings about Fannie Mae and Freddie Mac balance sheet problems and their increasingly lenient credit policies during the same period.  Today the United States Government, you and me, essentially own Fannie and Freddie which were placed in conservatorship in September 2008.

After sharp pop in rates last week that continued Monday of this week, rates improved through the week on not so great economic data and wariness over Greece’s economy and debt.  Big gains on Wednesday pulled the market back and by the end of business Friday last week’s losses were wiped out.  I would not take the dip this week in rates as a trend however but rather as a temporary profit taking and asset re-alignment by investors.

Rates for Friday April 9, 2010: (note due to travelling on Friday and inability to get out weekly update rates posted in this week’s update reflect closing rates on Friday afternoon)

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.875%                            Down 0.25%

30 year conforming-jumbo 5.125%                   Down 0.125%

30 year FHA    4.75%                                      Down 0.125%

30 year FHA jumbo 5.00%                              Down 0.25%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

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.

After spending last week in Scottsdale for the kids’ Spring Break it’s good to be home!

Have a great weekend everyone, let me know how I can be of service to you.

Dennis