Dennis' Mortgage Blog

November 21st, 2014 10:28 AM

Question of the week:  Why do I have to provide documentation on the $3000 birthday check my grandmother gave me?


Answer:  With all the new buyers entering the real estate market, and some old buyers purchasing for the first time in many years, it is time to revisit the issue of gift funds and unusual deposits on your bank statements.


As I have written in the past, and try to remind everyone a couple of times a year, for the past several years the number one issue that slows approvals, documents and fundings is verification of funds.  It used to be verifying funds to close, now it is verification of all funds in mortgage applicants’ bank accounts whether needed for closing or not.


More so than ever Fannie Mae, Freddie Mac and FHA have tightened down on asset verifications and have been sending loans back to lenders due to what they deem inappropriate verification of funds and assets, i.e. deposits.  Because of this lenders are tightening down even more so on what they require for asset verification.


Adding an extra layer of tightness for lenders are the anit-money laundering rules in place that require financial institutions, from stock brokers to credit unions to mortgage lenders, to report suspicious bank activity to FinCen, the Financial Crimes Enforcement Network of the Department of Treasury and to the Department of Homeland Security.


What is suspicious? It is a bit subjective but large and frequent cash deposits, routine deposits just under the IRS $10,000 reporting threshold or large deposits that seem out of character for the rest of the profile of the depositor. So mortgage lenders are not just worried about Fannie Mae or Freddie Mac kicking back a loan but also worried about an audit by the Federal government and possible penalties for violations of the anti-money laundering statutes.


As part of the approval process your loan application package will need to include verification of funds to close and/or reserves.  Verification requires two months bank statements (all pages please) or in some cases a Verification of Deposit (VOD) which has current balance and the two month average balance. 


Trouble arises when on the bank statements there are deposits that are “unusual” and exceed what are considered “significant” amounts by underwriters, in some cases as low as $500, in other cases deposits totaling one-third or more of your monthly employment income.  “Unusual” is a deposit that is not funds from your normal pay check or direct deposit from employer.  If using VODs if the average balance is below the current balance the underwriter may request a statement to see why, what deposits have been put into the bank to increase the current balance above the two month average.


So to prevent being delayed, or even in some cases unable to be approved, due to deposits into your bank account(s) that are above and beyond your normal income deposits:


  • For any checks deposited within two months of your transaction make a copy. 
    • Checks from friends to reimburse for a wedding shower gift
    • Birthday checks from Grammy
    • Reimbursement checks from supplies provided for the school musical
  • If you own rentals do not take cash out when you deposit tenants rent checks.  Copy checks and make the full deposit that matches the rental agreement.
  • Alimony and child support checks should be copied.  Often these payments are made twice per month, copy the checks to show the total for the month matches the divorce decree or judicial decree.
  • Self-employed.  Keep a separate business account to run your revenue and expenses from.  When you make a compensation payment to yourself be prepared to trace the check back to your business account.
    • If taking out a large sum from your business account that is more than what is seen as your “regular salary” be prepared to show that taking such a sum from your business will not harm the business with a letter from your CPA or CFO
  • Cash, best not to deposit cash if you can avoid it as it is untraceable and can cause issues.  We have seen deals almost come apart from large cash deposits from clients who got lucky in Vegas and deposited the cash into their account, which is wise to do but underwriters don’t like it.


Before depositing any check that is not from your employer copy it, source it and be prepared to explain it.  I repeat this again and again for clients and we get tripped up consistently on verification of funds and deposits into borrowers’ accounts.


One more time, if you are considering purchasing a home or refinancing at any time in the near future make sure you have copies and can source every deposit into your bank accounts.  If you cannot then you will run into headaches with your loan approval in the future. 


If you have any questions concerning depositing funds not derived from your regular employment please contact me to discuss how these funds may be properly documented and used for your mortgage transaction and not derail your transaction.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.


The week had plenty of significant economic data. Monday started off with Industrial production in October and it was down 0.1% from the prior month after a 1% increase in September. Industrial production is important economic indicator as it reflects into the job markets and overall economic growth, a low or negative growth number tends to create lower interest rates.


Prices are always important. Tuesday the Producer Price Index (PPI) for October was released showing a 0.2% increase in prices wholesalers pay for goods and services, year over year PPI is up 1.5%. Take out volatile energy and food prices and the growth was 0.4% for the month reflecting the drop in petroleum prices around the globe. Thursday the Consumer Price Index (CPI) was released reflecting what you and I pay for goods and services and it showed no change in prices from September, taking out energy and food costs and CPI rose 0.2%, again showing the impact that lower gasoline prices have in our basket of goods we buy each month. Low and flat numbers for CPI and PPI tend to push rates down as it delays increases in rates from the Federal Reserve and can indicate a sluggish economy.


Of importance to most readers are existing home sales. For October sales showed another month of increases in sales gaining 1.5% after a 2.6% boost in September. Sales in October 2014 of existing homes were up 2.5% from last October, the first time this year sales have topped 2013 sales. The median price shrank in the month indicating some slack in demand with the median price dropping 0.4% for the month following a 4.3% drop in the median price in September, year over year the median price is up 5.5% from October 2013. Regionally the West saw a decline of sales of 5% from September and 3.4% from last October. Improving home sales puts upward pressure on interest rates as they reflect stronger consumer confidence and stronger economic activity.


Rates for Friday November 21, 2014: Technical trading information kept rates from dropping a bit further than they maybe should have this week but drop slightly they did from last Friday after a bit of an increase on late Tuesday and into Wednesday. Next week is a short week which should make it a bit volatile as traders move positions ahead of spending the Thanksgiving holidays in the Hamptons.




30 year conforming                               3.721%             Down 0.029%

30 year high-balance conforming           3.875%             Down 0.125%

30 year FHA                                         3.25%***         Flat

30 year FHA high-balance                     3.625%***       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.


The question of the moment this time of year is, of course, “are you staying home or going somewhere?” We will continue our tradition of staying home for Thanksgiving and I will be spending the day in the kitchen with old movies on as I prepare our Thanksgiving meal, the menu for which has changed only slightly over the years—and that is on the dessert side. Barbecued turkey, homemade rolls, sausage cornbread dressing, green beans and mashed potatoes for dinner and typically pumpkin cheesecake and apple pie for dessert (note not “or” but “and,” it is Thanksgiving afterall). This year we have guests from abroad, Sweden and Scotland, and our Scottish visitor will be substituting trifle for our cheesecake.


Whether you are going somewhere or staying home my families—the Smith family and the Stratis family—wish you a wonderful Thanksgiving, knowing it will be spent with those you love and enjoy and are thankful are in your lives; as I am thankful you are in mine.


Have a great week and happy Thanksgiving,



Posted in:General
Posted by Dennis C. Smith on November 21st, 2014 10:28 AMLeave a Comment

November 14th, 2014 12:25 PM

Question of the week:  What do you think of the news that the government wants to loosen home mortgage standards to increase the number of people who can qualify to purchase a home?


Answer:  I think government officials pushing for the changes and their supporters either have very short memories or are more concerned with scoring political points than the economic impact on the mortgage and housing industries and the overall economy of their proposals.


The question arose from news that Melvin Watt, former Congressman who was appointed by President Obama earlier this year to head the Federal Housing Finance Agency  (FHFA)—the entity that regulates Fannie Mae, Freddie Mac and the Federal Housing Authority (FHA)—wants to expand homeownership opportunities by relaxing many policies put into place following the housing and mortgage markets crisis.  There are many facets to the overall objective of expanding opportunities of homeownership, some of which I do not object to and several that I do.


Whenever anyone addresses the tighter lending standards in our current market the fingers can be pointed directly at the entities controlled by FHFA. Fannie and Freddie, who determine our conventional mortgage guidelines and purchase mortgages qualified mortgages from lenders, have significantly increased their repurchase demands from lenders over the past several years, which in turn has resulted in lenders tightening their underwriting guidelines to be stricter than those required by Fannie and Freddie. A “repurchase” is when Fannie or Freddie purchases a mortgage from a lender and then after reviewing the mortgage finds some aspect they feel is not up to their guideline and requires the lender to buy the loan back. This is very expensive to the lender who cannot recirculate those funds for other mortgages. As repurchase requests increase lenders get tighter and tighter. (At end of this section I have an example of repurchase for those interested.) FHA has tightened lending but jacking up, a technical term used in the  industry, the mortgage insurance fees for borrowers to the extent that FHA loans are almost subprime in cost and used by many lenders as a last resort if we cannot find a way to qualify the borrowers with a conventional mortgage.


Watt’s proposals to expand lending are to restrict the use of “over-lays” by lenders, over-lays are lender guidelines on a particular policy that are stricter than the policy of Fannie, Freddie or FHA, loosen the repurchase requirements by Fannie and Freddie and to ease the underwriting guidelines of Fannie and Freddie, primarily by having a minimum down payment of 3% instead of either 5% for regular conventional loans or 10% for high-balance loans.


By restricting over-lays by lenders while at the same time loosening Fannie/Freddie repurchase requirements Watt is saying that he wants lenders to loosen their lending standards and if they do they will not run afoul of Fannie/Freddie and risk having to repurchase the loans made with the looser standards. The risk to the lenders of course is the implementation of such agreements, afterall lenders have been underwriting to Fannie and Freddie standards for decades and after the mortgage crisis saw loans that had been performing for many years go into foreclosure only to have Fannie and Freddie require the lenders to buy back mortgages funded years ago under then current Fannie/Freddie standards only to have them apply new standards and require a repurchases. The mistrust is somewhat palpable and understandable given the past actions of Fannie and Freddie.


I support the loosening of the repurchase standards of Fannie and Freddie but disagree with the ability of individual lenders to have their own standards. If a lender wants to have tighter lending standards and reduce their risk, and the risk to taxpayers who back Fannie and Freddie mortgages, then that should be their right. It will reduce their loan volume and revenue but that is a decision any business should be able to make in an open market.


One restriction Watt would like to eliminate is lenders being able to have higher minimum FICO requirements than those allowed by Fannie and Freddie. This to me is walking down the path to trouble. Over the past few years the minimum credit score for conventional loans has dropped down to 620 (FHA has dropped to 580 for minimum down and as low as 500 for 10% down). In my opinion this is too low, and realizing there are individual circumstances due to one-time circumstances, I feel a minimum score of 660 or even 680 is more reflective of an applicant who is able to maintain a mortgage with timely payments while not adversely impacting other credit payments or obligations. If a lender wants to impose their own scores for their applicants at 660, 680 or even 700 or 720 that should not be Watt’s decision to disallow.


As for lowering the down payment requirement for Fannie and Freddie to expand homeownership for those that can afford monthly payments for a mortgage but are challenged to save a down payment, especially in higher cost areas like Southern California, if feel Watt would be better served to instead of changing the guideline for conventional loans to instead change the mortgage insurance requirements and payments for FHA mortgages which already allow for a 3.5% down payment. For decades the FHA mortgage program worked for those whom Watt is trying to include in the homeownership experience. Following the mortgage crisis FHA raised its mortgage insurance requirements to where they are today, for a $300,000 FHA mortgage the upfront mortgage insurance premium is 1.75% ($5250 usually added to the loan) and then a monthly payment for the life of the loan of 1.35% ( $337.50 per month, which is $4050 per year). These higher premiums have priced many otherwise qualified buyers out of homeownership.


Obviously given my longevity in the mortgage industry I am a huge proponent of homeownership. However as I have told thousands of clients over the years, I do not want to help someone get a mortgage that results in the part of their home they know best is the ceiling above their bed that at the end of the month they stare at in the middle of the night wondering how they are going to make their next mortgage payment.


I sense our government regulators and many politicians are slipping back into the mindset that homeownership is a right and not a privilege and as such as many accommodations as possible need to be made that results in many people buying homes they really cannot afford and/or should not be buying. There are many underwriting guidelines and policies that I find ridiculous and restrictive that can be loosened that will expand homeownership in a way that is responsible without jeopardizing the financial strength that Fannie and Freddie have come to have since their bailout from and repayment of the funds to the U.S. Treasury.


Unfortunately it seems to be the nature of our government officials to swing pendulums too far one way and then too far the other, often times the with very slight pressure on the pendulum from regulators the markets most often can control the swings to a much more measured degree and pace that benefits the vast majority of consumers.


Example of repurchase: Lender funds $400,000 mortgage to couple in Scottsdale for the purchase of a $500,000 home. Borrower is self-employed and receives income from his retirement account on a monthly basis, has a very good credit score and was a prior homeowner. The funds for the purchase come from sale of his prior residence in Minneapolis. The lender packages the loan with several others and sells a portfolio of $25 million mortgages to Fannie Mae. Upon receiving the package Fannie Mae reviews the Scottsdale buyer’s mortgage package and sees that there were several large deposits made into the retirement account that were not account for and that the retirement account does not show a year to date history of the borrower accessing the monthly amount put on the application. Fannie says the lack of fund documentation and proof of continuity of income on the retirement account fails to meet its criteria and sends the loan back to the lender to repurchase. At which point the lender must send $400,000 to Fannie Mae and set up to maintain and service the loan until it pays off.  In reality the borrower accumulated various retirement accounts he had acquired over a lifetime of working with different employers that rolled into different IRA accounts. All the funds came from similar accounts but the history of those accounts was not fully documents. On the income the borrower’s tax returns showed the amount of income from distributions from his retirement accounts as he took a little from each account, upon consolidating the accounts his income was consolidated as well to the one account. Perhaps some sloppy underwriting by the lender but the assets and income were present for a qualified borrower.


As a result of this repurchase, or buy-back, the lender may tighten its criteria for using retirement account assets for proof of income in a mortgage application.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.


Some interesting foreclosure data making the news this week. October saw a surge in foreclosure auctions and an increase in filings. Foreclosures have been climbing for the past couple of months and this article in Mortgage New Daily they will continue to increase mostly due to the lack of performance of mortgages that were modified under the government backed Home Affordable Modification Program (HAMP), Home Equity Lines of Credit set to be reset to fully amortized payments and millions of homeowners still underwater and/or behind on payments. The article is a good complement to those pondering the desire of the Administration to loosen lending standards. If the numbers continue this could push prices down, restricting or constricting economic growth and lead to lower rates.


Not a lot of data this week that impacts mortgages. Yesterday initial unemployment filings came in higher than the week before and at the highest level in seven weeks at 290,000 applicants for unemployment insurance, there are currently 2.4 million Americans receiving federal unemployment benefits. The data is somewhat neutral, while typically higher unemployment filings lead to lower rates investors shrugged off the news as an outlier in the recent trend.


Consumers are spending their savings on gasoline. Overall retail sales in October increased 0.3%, strip out auto and gas purchases and sales increased 0.6% for the month. After declining in September the higher numbers are making retailers happy heading into the holiday shopping season.  Further buoying spirits of retailers was another increase in consumer sentiment. Right now the data shows for more consumer spending which would lead to faster economic growth which would result in higher mortgage rates.


Rates for Friday November 14, 2014: With the off day on Tuesday for the markets we have in effect two Mondays and two Fridays. Not surprisingly the mortgage markets sold off on Monday ahead of the holiday (higher rates) and then bounced around the rest of the week with the end of each day’s bounce being slightly higher than the day before (lower rates). The net result from last week are rates are flat—always a positive in my book when rates are steady.




30 year conforming                               3.75%               Flat

30 year high-balance conforming           4.00%               Flat

30 year FHA                                         3.25%***         Flat

30 year FHA high-balance                     3.625%***       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.


High school football playoffs start this week in  California and I’m excited to experience them for the first time this  year. Our daughter is in the marching band for Long Beach Poly High School which is a perennial football power in the region. Having attended most of the games this season I look forward to watching the team try to advance through some of the toughest competition in the country as they seek another state title.


Having gone to a small high school in Brussels, Belgium for sophomore through senior years that had a football team (school was about 75-80% American) this is my first experience of big time football with large crowds and expectations. And I have been enjoying it very much.


Go Jackrabbits!


Have a great week,



Posted in:General
Posted by Dennis C. Smith on November 14th, 2014 12:25 PMLeave a Comment

November 7th, 2014 9:45 AM

Question of the week:  Can my parents co-sign because of my credit?


Answer:  With the influx of new buyers into the market some questions that we haven’t answered in a while are coming back, this relating to credit is one that has been in the market in recent months.


A client has some spotty reports on their credit report, enough that they are unable to qualify for the purchase or refinance mortgage they want, looking for a solution they ask if someone, typically parents, can co-sign on the account so they can get approved.


No.  Credit is the one area where a co-signer cannot help a file.  We can co-sign to get more income for qualifying, we can co-sign to bring more assets to an application to qualify, but we cannot co-sign to eliminate bad or less than required credit.


It used to be that our credit component was based primarily on the primary borrower as defined by who makes the most money.  All the debts of the borrowers on the application would be counted for the debt to income ratios, however the middle score of the primary borrower was the score used for the application.  (For instance if Donna earned more than Phil and Donna’s middle score was 718 and Phil’s was 765 the score used for qualifying was 718; if Donna’s was 765 and Phil’s was 718 then we would use Donna’s score of 765.)


Today the lowest middle credit score of all borrowers is used as the score for the file, regardless of who makes what income.  If in the above scenarios Phil did not work and Donna did, it would make no difference as in both scenarios the 718 score is the lowest and would be used.


Hence, if you have a 580 credit score and do not qualify for a mortgage product because you do not meet the 620 threshold for conventional loans then adding your parents who have scores over 800 points would not matter, the lowest of the credit scores, yours, is what would be the score used for underwriting.


Taking this a step further, you can eliminate low credit scores if one spouse is able to qualify on their own for the mortgage, for conventional mortgages we can get loan approval and fund on the one spouse and take the other spouse off the loan and title. For FHA mortgages in an instance like this we will need a credit report for the non-signing spouse and any debt s/he has will be counted in the file, however low credit scores will not.  For Fannie Mae and Freddie Mac no credit report is required and no debt on the non-signing spouses credit report that is not on the borrower’s report will be counted.


Another option we have used is have your parents purchase your home as an income property, you move in and make payments and in the  future when your credit is rehabilitated refinance the loan, if appropriate, to your name.


Since you cannot co-sign poor credit it is best to be aware of what your credit scores and reports show, if there are derogatory accounts that impact your score determine what steps you need to take to raise your scores to the levels needed so you can purchase your new home or refinance your current mortgage.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.


It is the first week of the month so all economic news before Friday is somewhat ignored. Why? Because the first Friday of the month is when the Labor Department releases employment data for the prior month. There was not much other news this week, the headliner was Thursday when unemployment claims for the prior week were released and they were down 10,000 from the prior week and the four week average of initial claims continues to drop.


The bottom line with the labor data for investors is does the data justify the Federal Reserve continuing to hold its discount rate near zero percent? Yes it does. The Labor Department information this morning was mixed, as most economic data is lately. The number of new jobs created was below expectations of 240,000 with 214,000 new jobs across the economy, of which 209,000 were in the private sector. The unemployment rate declined from 5.9% to 5.8% which is the lowest since 2008—this is the number that will be the headlines. Hourly earnings posted a meager 0.1% gain after no gains in September.


Overall the net neutrality of the information has pushed Mortgage Backed Securities prices higher this morning (rates lower) as investors predict that cheap money will continue to be provided to enable leverage for their investments.


Rates for Friday November 7, 2014: Most of the week MBS prices have been drifting down so today’s boost was a welcome break in the trend to higher rates and a new trading range above where we have been the last couple of weeks. As a result of today’s push rates are clinging to last Friday’s levels having bounced back from higher rates earlier in the week.




30 year conforming                               3.75%               Flat

30 year high-balance conforming           4.00%               Flat

30 year FHA                                         3.25%***         Flat

30 year FHA high-balance                     3.625%***       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.


How many people showed up early for church on Sunday morning? While it is nice not to walk the dog in the pre-dawn dark every morning I’m not as enamored with driving home in the dark after work.


I am one of the many out there who advocate tossing the daylight savings time adjustment and just leave the clocks alone. First proposed in 1895 by a New Zealander, Daylight Savings Time was first adopted by Germany and Austria during the World War I in 1916 and then followed by Britain and other countries. In 1918 the United States started Springing Ahead and joined the DST movement.


Whether it saves energy or not is a bit of a dispute depending on who is presenting the data—like most such instances where data can be selected to prove your point of view. Either way were I in charge we in the Spring of 2015 we would leave the clocks be.


Have a great week,



Posted in:General
Posted by Dennis C. Smith on November 7th, 2014 9:45 AMLeave a Comment

October 31st, 2014 10:28 AM

Question of the week:  What does it mean that the Fed stopped buying mortgages?


Answer:  Maybe not much.


In 2008 in response to the sudden drop in the stock markets and start of the recession the Federal Reserve initiated a policy known as “Quantitative Easing,” or QE. This policy was for the Fed to purchase fixed rate securities, i.e. bonds, to pump money into the economy to stabilize the markets and reduce panic in the markets and to lower interest rates to spur on the economy. The bonds purchased were Mortgage Backed Securities (MBS) issued by Fannie Mae, Freddie Mac and Ginnie Mae and some Treasury bonds. From November 20008 until the end of QE1,as it became known, in early 2010 the Fed purchased $1.25 trillion in mortgages and $300 billion in Treasury debt plus another $175 billion in debt from other federal agencies for a total of $1.725 trillion in new money put into the economy. Before QE1 started the base 30 year fixed rate loan I quote every week was at 6.25% on Halloween 2008, when QE1 ended rates had dropped to 4.875% at the end of March 2010, a reduction in rates of 1.325%.


The economy was not faring too well in 2010, even though the recession had ended in June 2009 unemployment remained very high and growth was stagnant. In November 2010 the Fed initiated what is known as QE2 to increase the pace of the economy and keep interest rates very low to entice borrowing for companies to expand and hire more workers. Until June 2011 the Fed purchased $600 billion of long term Treasury bonds. At the start of QE2 the benchmark 30 year fixed rate loan was 3.875% in the beginning of November 2010, at the end of June 2011 the rate was 4.5%, an increase of 0.625% during the QE2 time period primarily because when the Fed started QE2 it announced how much and for how long it would be purchasing the U.S. Treasury assets.


With the economy and job growth still lagging the Fed embarked on QE3 in September 2012, which was to purchase $40 billion in mortgages and $45 billion of U.S. Treasuries until the economy improved—so for an indefinite period of time. Again the expectation was to keep mortgage rates and other borrowing rates low for consumers and companies. 


As soon as QE3 started speculation started as to when the Fed would end its purchasing program and the word “taper” entered the vernacular of financial markets. Tapering was the expected move of the Fed to end QE3, instead of immediately stopping the purchase of $85 billion in securities every month the Fed would slowly taper off its purchases until out of the market. Tapering finally began in December 2013 and will end this month--which is the news this week, the Fed announced that October 2014 would be its final purchases of mortgages and U.S. Treasury debt with new money in the economy.


The net impact of QE3 was approximately $2.2 trillion in mortgage and Treasury securities purchased by the Fed, for a total of approximately $4.5 trillion in new money put into the economy from the start of QE1 in November 2008 through this month. As stated by the Fed in each iteration of Quantitative Easing, a primary purpose was low interest rates for businesses and consumers to spur the housing markets, the economy and employment. 


What was the impact on mortgage rates from November 2008 to October 2014? As stated above the benchmark rate that I have consistently used for the Fannie Mae conforming mortgage rate every Friday in the Weekly Rate and Market Update was 6.25% on Friday October 31, 2008, today exactly six years later that rate is 3.75%, a drop of 2.5%.


So what happens now that the Fed has left the building so to speak? Not much in my opinion. The Fed’s QE program saturated the markets and did have an impact of lowering mortgage rates. However as we have seen this past year even as the Fed has exited the QE3 program tapering its purchasing of mortgages and Treasury debt rates have been very stable through most of 2014 and are lower than January when the tapering began.


This is very good news for the mortgage markets in the short, and possibly longer term, as it shows that institutional and private investors have filled in the slack in the demand for Mortgage Backed Securities as the Fed has slowly left the market. It also means that investors do not have a significantly positive view of economic growth in the near term.


The Fed purchase of mortgage debt has not ceased entirely, just the use of new money for those purchases. Moving forward the Fed is recycling proceeds from mortgages that pay off and interest received to continue purchasing MBS, the sheer volume of purchases has declined precipitously though. The difference between the Fed reinvestment and the MBS hitting the market is what is being bought by the private sector.


Moving forward without the false support of the Fed for mortgages our rates will once more become more tied to economic data and investors’ outlook on future economic conditions. As things stand currently, the continuing conflicting data (see recap below) continues to show a murky economy not ready to exhibit strong growth and not ready to dip back into recession. After more than five years of the post-recession business cycle history shows that one or the other should be occurring in the not too distant future.


One other note on the Fed’s QE program. With a purpose of stimulating investment by companies for economic and payroll expansion the most expansion that has seemed to occurred are the cash balance sheet of U.S. companies is estimated to be up to $5 trillion, that is $5 trillion not spent on new equipment, on new buildings, on payrolls. This non-invested cash is very near the amount of all the Fed’s QE programs combined.


One other expansion exhibited by the Fed QE programs has been the value of U.S. stocks as the Dow Jones has expanded from 9,325 on Halloween 2008 following its low point of 8,450 two weeks prior (having reached a record high of just over 13,000 in May 2008) to almost 17,400 as I type this on Halloween 2014. This increase has benefited those with retirement accounts, such as 401(k), IRAs, pension funds, invested in equities and of course institutional and private investors.


I hope this rather lengthy explanation and opinion has not put anyone to sleep and provided insight into the Fed and its impact on the economy and your mortgage rates.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.


Quite a busy week for data that impacts mortgage rates. Pending home sales nationwide was reported on Monday by the National Association of Realtors and showed a slight 0.3% increase in September and up year over year for the first time in 2014 by 1.0% from September 2013. The Western region showed decline of 0.8% for the month. Higher pending sales usually translates to higher closed sales and continuous gains in home sales will usually precede higher interest rates as it reflects a strengthening economy. Of course if rates climb too fast too soon home sales will dampen.


A strong indicator for the economy are orders for durable goods, these are orders manufacturers place for what are known as factory hard goods. September showed a surprising drop in durable goods orders for the second month in a row dropping 1.3% for the month and the year over year performance is an increase of 3.3% from last September. Though a volatile index that is used to predict future economic performance drops two months in a row create some unease about economic growth. Lower durable goods orders tend to be good for lower interest rates as they can portend lower economic growth.


Yesterday was the release of the initial third quarter Gross Domestic Product (GDP) data. For the quarter the initial estimate was an economy growing at 3.5%, which is moderately healthy. The growth in the quarter was lower than the second quarter’s 4.6% growth much of which was a rebound from the poor first quarter due to the harsh weather in January and February in much of the country. This data could push rates higher as the Fed debates when to raise its discount rate it charges banks borrowing funds to cover reserves, if the Fed pushes its discount rate higher then rates across the economy will rise as well.


Employment is stabilizing as seen by initial unemployment claims filed each week continuing to remain at recovery lows. This week 287,000 new filings were made, up a bit from the prior week. The stabilizing number indicates companies are not laying off more workers across the economy and usually this is followed by an increase in hiring. As we have seen however despite the slow-down in layoffs there has not been a corresponding rise in private sector hiring to increase the labor participation rate in the economy.


Seemingly conflicting data this week on consumers. Consumer confidence and sentiment data was released that showed strong gains as consumers look forward to a more positive personal economic situation. This in spite of decreases in personal spending in September of 0.2% following gains of 0.5% in August. Personal incomes in September gained 0.2% for the month, lower than gains seen in August. With personal incomes up slightly and personal spending down slightly combined with lower durable goods orders and expenditures one would anticipate consumer confidence to be lower rather than higher. Overall the mixed data has a cancelling out impact on mortgage rates as the lower spending would trend rates lower and higher confidence trend rates higher.


Rates for Friday October 31, 2014: With all of the news what is the net impact on mortgage rates? Overall Mortgage Backed Securities prices slipped a bit lower each day with some volatile interday swings. The net result has been a slight increase in our rates from last Friday.




30 year conforming                               3.75%               Up 0.047%

30 year high-balance conforming           4.00%               Up 0.125%

30 year FHA                                         3.25%***         Flat

30 year FHA high-balance                     3.625%***       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.


Boo! What can be better than being a kid with Halloween on a Friday or Saturday night? No homework, no having to get up early the next morning for school and more leeway from parents to sample treats from the night’s haul.


This year is a milestone for the house as the oldest, being in high school, is too old to trick or treat so will be going to a party instead. To make up for it we are having of few of the younger one’s friends stay over after trick or treating and no doubt staying up to near dawn on sugar highs from their haul.


Have a great Halloween, remember when you pass out your candy it is not supposed to be one for them and one for you!


Have a great week,



Posted in:General
Posted by Dennis C. Smith on October 31st, 2014 10:28 AMLeave a Comment

October 24th, 2014 9:53 AM

Question of the week:  We are looking at a home that the prior owner lived there for over thirty years and now her children are selling it. It is in pretty rough shape, how will this impact our appraisal?


Answer:  Once again we have a question that presents many possible answers. With real estate prices having climbed the past few years there are fewer investors purchasing “distressed” homes so they can remodel and flip for a profit. As a result more of these properties are being purchased by traditional buyers who need mortgages to finance their purchases.


In answering this question the first question I have is what is your definition of “rough shape?” For some people a property needing fresh paint and carpet is considered “rough” or “distressed;” for others holes in the wall, obviously leaks in the roof and missing fixtures means a property is distressed. If the condition of the property is the former we will get different impact on appraisal than if the condition is the latter.


Appraisers are required to grade a property’s condition on a six point scale that range from “improvements have been very recently constructed and have not been previously occupied” to “the improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect safety, soundness or structural integrity.”  Most properties fall between these top and bottom grades and depending on where in the opinion of the appraiser will determine the impact on the appraisal report.


If the condition of the property is such that it needs cosmetic renewal, i.e paint, carpet, and has an out of date kitchen then the appraiser will down grade the value in relation to comparable sales in the area that are in clean condition and have had recent upgrades to kitchen equipment, bathrooms, etc.


If the condition of the property is such that it has several functional, safety or integrity issues-such as missing fixtures, holes in structure, missing floor coverings, etc. then the appraiser will severely downgrade the value of the property with list of conditions that have impacted the value. In this instance underwriters will reject the loan unless the conditions have been addressed and corrected, at which point appraiser must re-inspect the property to verify the conditions have been corrected and often will then re-adjust the value of the property.


Poor landscaping, dirty wallpaper from 1981, carpets that have been in place since the wallpaper was put up and had several pets potty train on them over the years and an original 1956 kitchen will not kill a mortgage approval as long as the structure is sound but will receive a lower value than the property that sold across the street that had been refreshed the year before it sold.


If this same property has noticeable water stains on the ceilings from a leaky roof, a water heater that is installed out of code and some broken windows then the underwriter will most likely require a certification from licensed roofer that the roof is free of leaks, the water heater properly installed and vented and broken windows replaced before the loan can fund.


One of the challenges we have with property conditions on appraisals is not necessarily the subject property since the appraiser has inspected the home, but rather the condition of the properties that are used as comparables by the appraiser that he did not inspect. For gauging the condition of comparable sales the appraiser can only use the comments made by the agent that listed the comparable and put in the multiple listing service.


“Recently remodeled inside and out!” “Turn key with new cupboards, counters and flooring” “Cleanest property on the market” and other phrases tell the appraiser that the condition of the property is very good. We have had instances when showing the comparables and adjustments to real estate agents on an appraisal that is low where the agents have seen the properties valued much higher do to superior condition and commented that the conditions were the same but the listing agent on the comparable engaged in “puffery” on the MLS. While this may entice some agents to show a property it also negatively impacts other sales in the area if the property is not in the condition stated. I had one instance where the listing agent of our property with the lower appraisal was the agent that puffed up the condition of the comparable property, that was an interesting conversation. The lesson being that the more honest MLS descriptions are for the condition of listed and sold properties the better values other homes will receive when appraised.


Condition of a property definitely impacts an appraisal, how much is determined by what is needed to improve the property to good condition and also what condition other properties were in that have sold recently in the area.


If you can find the home that needs cosmetic improvements and updating and is selling towards the bottom end of the market in a neighborhood then that can be a great home to buy. Weekends at Home Depot or Lowes to get paint and materials to slowly rehabilitate your new home can add a lot of value with not a lot of cost and some hard work.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.


Good news for housing markets as existing home sales for September rose 2.4% from August, though down 1.7% from September 2013. Median home prices for the month were down 4% nationwide, spurring the growth in sales, and are up 5.6% from September 2013. One result of the uptick in sales was a decline in inventory with supply on the market shrinking to 5.3 months (if no new homes are put on the market at the current sales pace it would take this long for all listings to be cleared off the market). The West was the region with greatest growth in sales at 7.0% for the month. Strong home sales is generally an indicator for higher mortgage rates as it reflects a stronger economy, consumer confidence and demand for mortgages.


Despite the drop in gasoline prices that we have all enjoyed the Consumer Price Index for September was slightly positive at 0.1% growth for the month after dropping 0.2% in August. Stripping out food and energy costs CPI was still up 0.1% indicating an increase in food prices for the month to balance out the decline in energy costs. Year over year consumer prices are up 1.7%, the same as August. The CPI data supports interest rates remaining low and in the same range where we have been, absence of inflation decreases chances of the Federal Reserve raising short term interest rates in the near future.


Not since 2000 have initial unemployment claims been as low as they have been over the last four weeks, averaging 281,000 claims per week. This shows some strength in employment and should result in higher monthly employment figures, however as our monthly employment data have shown rather than an increase of hiring that is usually reflective of very low unemployment filings the economy has seen restrained expansion of employment and a slow decline in the percentage of those eligible for employment actively working. Ordinarily low unemployment filings would lead to higher interest rates as it signifies strength in the economy and in job markets. 


Rates for Friday October 24, 2014: Following last week’s large swings up and down in both stock and bond markets there was some anticipation for another choppy week as international and domestic news continued to put uncertainty in markets. Mortgage markets returned to some stability with narrow price changes all week and prices moving sideways day-to-day and equities regaining upward momentum. As a result mortgage rates after their big dip last Wednesday and subsequent slow move upwards at the end of the week saw very slight movement up in the conforming rates from last Friday and no movement in other products.




30 year conforming                               3.703%             Up 0.015%

30 year high-balance conforming           3.875%             Flat

30 year FHA                                         3.25%***         Flat

30 year FHA high-balance                     3.625%***       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.


This is coming to you live from the Bay Area this morning. We are gathered for an 8 Bells Ceremony for my Dad and will spread his ashes in San Francisco Bay this afternoon. It is a beautiful day and we look forward to this age old ceremony as the ringing of the bell 8 times signifies the end of a watch and all is well, time for those sailors on duty to rest. Today we honor the end of Dad’s watch knowing all is well.


Have a great week,



Posted in:General
Posted by Dennis C. Smith on October 24th, 2014 9:53 AMLeave a Comment



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