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:
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
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.
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.
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
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.
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
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.721% Down 0.029%
30 year high-balance conforming 3.875% Down
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,
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
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.
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.
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
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.
Have a great week,
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.
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.
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.
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.
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.
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.
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
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
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
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
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
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.
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.
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.
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.
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.
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.
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
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!
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
“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.
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
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.
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.
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
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.
Dennis C. Smith, California Bureau of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166