Question of the week: How much paper is used in a typical mortgage transaction and why so much?
Answer: I’ll answer the second question first. Last week I gave a partial list of the agencies and departments which have oversight and regulatory powers over our industry. These organizations are the primary reason there is so much paper used in our industry. Throughout a real estate transaction various companies and industries are regulated by different government agencies. Each company along the way has to retain the specific disclosures and legal documents for each of the different agencies so if audited, or sued, they can show they were compliant. Real estate brokers, escrow companies, title companies, home inspectors, termite companies, home warranty companies, mortgage brokers, lenders, appraisers, all must retain evidence of the work performed and signatures from the parties involved to bear witness that disclosures were delivered.
So how much paper are we actually talking about? My conservative estimate would be over 1,000 pieces of paper for the typical real estate purchase transaction. Here is a partial list
Total: 1000 pieces of paper
Not all parties print all pieces of paper, but more do than do not and I have not included any totals for the listing agreement, termite reports, transactions with multiple borrowers who are self-employed and need two years tax returns. Oh, and the complete mortgage package is held by the originator, the lender and Fannie, Freddie or FHA.
This is not a paper friendly industry.
Um, Chairman Bernanke could you rephrase that? Terms like “somewhat weaker” and “unusual uncertainty” from the head of the Federal Reserve Board to members of Congress do not inspire confidence and a rush to spending by investors nor CEOs. Bernanke has yet to fully master the art of Fed-Speak to the level of his predecessor Alan Greenspan. Greenspan’s vocabulary was such that he would use definition number five in the Oxford Dictionary to describe the texture of grilled cheese. Whereas Bernanke can parse the description of a staggering economy into six or seven degrees, Greenspan was capable of fifteen to twenty degrees. “Somewhat weaker” means the economy is flat, stalled, ready to slip. Bernanke says this and investors reacted accordingly on Wednesday dropping several hundred points off the Dow and pushing bond yields towards the floor.
Speaking truth to markets, Bernanke only said publicly what investors and economists have known since Winter turned to Spring. After declining last week initial unemployment claims climbed again this week with 464,000 new filings for insurance. Politicians are spending plenty of time arguing about paying for continuing unemployment insurance for 99 weeks, and while they argue another 464,000 people join the rolls. What Bernanke means when he says there is “unusual uncertainty” is that markets, CEOs, investors and citizens have no idea when jobs will begin to be added to the marketplace. Unusual in that usually there is a plan to boost private sector investment and jobs. But hey we have reform of the health care and financial industries. Expect next week’s initial unemployment filings to top 450,000 once again.
As expected existing home sales dropped for the second week in a row. Tracking the purchase applications index from the Mortgage Bankers Association on a weekly basis, we’ve seen the index drop for ten of the last twelve weeks. As a result existing home sales fell in May and again in June, by 5.1% from May. Early indications are July could come in flat or slightly negative unless we see applications grow appreciably in the next two surveys.
Government applications are surging for both refinances and purchases. The low equity requirements are seeing many home owners use FHA for refinancing despite the mortgage insurance due to the low rates and costs compared to conventional. Home buyers like the 3.5% minimum down payment and the low rates.
FHA 30 year fixed rates are at the bottom of their coupon rates. Our 30 year fixed rate sheets for FHA do not go below 4.25% because Ginnie Mae, who sells FHA mortgages in the secondary market, has not created a 4.125% or 4.00% coupon for their market. If we see rates stay in their current range expect to see FHA rates available below 4.25% for 30 year fixed before the kids go back to school.
Refinances own the market. For the past several weeks almost 80% of the applications taken have been for refinances. Pipelines throughout the industry are stuffed so expect some delays similar to what we experienced in late 2008 when rates dove from 6.25% on Halloween to below 5% for our annual holiday party. Have patience.
Rates for Friday July 23, 2010: A couple of interesting aspects of rates. Despite a huge move in Mortgage Backed Securities on Wednesday, Fannie and Freddie changed their loan level price adjustments for high-balance mortgages, those over $417,000 resulting in rate increases across the board for those products. As mentioned above FHA does not have a coupon for 30 year rates below 4.25%, so while the standard quote I have used since starting my updates in 2005 have been at a cost of 1 point, the FHA mortgages are at less than a point in the current market depending on the transaction.
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 4.125% Down 0.125%
30 year conforming-jumbo 4.25% Up 0.125%
30 year FHA 4.25% FLAT*
30 year FHA jumbo 4.25% FLAT*
* See comments above
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.
Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance 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.
If you live in the Long Beach region check out the food truck carnival tomorrow at Rainbow Lagoon down by the Hyatt and Shoreline Drive from 10:30 – 5:00. Some of LA’s top gourmet food trucks will be selling their delicious delights!
Have a great week,
Dennis
LICENSING:
Dennis C. Smith, California Dept. of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166
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