12-28-18: Happy New Year! Rates Drop Continues

Question of the week:  Are you having a nice holiday?


Answer:  We are, and I hope your family is as well. It is nice having our oldest home and the family all together for a while.


A break this week from the Weekly Rate & Market Update, should have a regular missive next week.


Have a wonderful New Year!


Have a question? Ask me!


Rates for Friday December 28, 2018: You may have noticed the markets have been a bit schizophrenic this week, continuing the ups and downs from last week but with much bigger swings. The volatility in the equity markets (stock markets) has created a flight to safety for investors, which means they are leaving the uncertainty of equities and purchasing fixed rate investments to lock in returns—i.e. bonds and mortgages. As a result rates continue to drop, the fourth Friday to Friday drop out of the past five weeks for conforming and the fifth Friday in a row for high-balance rates. The 30 year conforming rate is the same as it was on April 13th and down five-eighths of a percent (0.625%) from its high of the year in October. If you have an equity line with a large balance now may be a good time to start doing the math and looking to lock in that variable rate.



30 year conforming                                            4.25%      Down 0.125%

30 year high-balance conforming                   4.375%     Down 0.125%


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 with 740 FICO score for purchase mortgages.





A year and a half in age and one grade apart, we spent a lot of time together as we moved five times growing up through three states and a foreign country. A handful for our mom, and many neighbors as we were prone to create a bit of havoc, we stood by and behind each other and took what we deserved in terms of discipline. Happy birthday to my big brother Michael as he spends it on another road trip through the state—though this time in a car with his lovely (and tolerant) wife instead of on his beloved motorcycle. Safe travels on your trip and through 2019. Cheers!


Have a wonderful New Year’s celebration, and if you have a lot of fun please use Lyft or Uber (a tip I received a few years ago from my friend and millennial Jerry, rates jump very high for ride-shares on New Years. Before ordering a car go to a nearby hotel and see if you can work out a cash deal with a driver dropping someone off to take you to your destination; you save money and the driver makes more than if they were getting the ride through their car service. And you can probably get a car faster.)


Happy New Year and thank you for your support in 2018!




Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

12-21-18: Why Me? A case for Dennis Smith as your preferred mortgage professional

Question of the week:  Why me?


Answer:  As most of you head out for a long holiday weekend to be spent with family and friends, you will be having some conversations over eggnog or platters of hors d’oeuvres (picturing Clark Griswold and Cousin Eddie with the moose glasses). During those conversations, the topic of real estate and mortgages may come up. Cousin Eddie thinking of buying a new home, adding on to the current home, or worried about his equity line going up. Or perhaps sister Susie and brother in-law Lance finally see what others saw and are formally ending their marriage, she wonders what their options are regarding their home. Maybe the conversation is with you and your siblings over Mom and Dad’s home—your first Christmas without one of them and now the reality of dividing the assets which includes where you grew up, what options do you have? If/when such conversations occur it would be appreciated if you were to say, “I know a guy who can help, call Dennis…”


For thirty years I have helped families with many scenarios where a mortgage is able to solve problems. A family purchasing their first home, or their third. Siblings purchasing some investment property. Mom and Dad refinancing an equity line they used to put their kids through college. Sister buying out her brothers’ share in the family home from mom and dad’s estate.


Why me for these scenarios? Primarily because my staff, partners and I combined have more than two centuries experience in the mortgage industry—that is a lot of mortgages used to solve a lot of scenarios. We are adept at taking a problem and creating scenarios for our clients to consider for solutions. We are adept at communicating those solutions in plain English. We are adept at showing only the scenarios that we know will work and be able to close.


So, do we only do complicated or non-standard transactions? No, we thrive on “simple” or “normal” mortgage scenarios such as purchasing a new home or refinancing an existing mortgage. But, because of our experience we know that the “normal” transactions can quickly become complicated or possibly a bad situation for our client.


Properties that have unpermitted square footage, or not in condition that would be approved by underwriting. Condo projects with shaky budgets and financials. Job losses, maternity leave, unknown issues on credit reports, cloudy title, tax returns filed by someone else using your social security number, appraisals that come in under the needed value.


These are just a few of the countless surprises that can, and do, pop up during transactions. Numerous times per year we are called by agents as an issue has come up on their transaction where their client, or the buyer of their client’s home, is using a different lender and they do not know how to solve an issue; they call us because they know we can provide different possible scenarios so they can move forward.


I have always told my clients, you might be able to find another lender that will quote a lower rate; note “quote” because we only quote what we can close—this, we have discovered through the years, is not always the case with some of our competitors in the mortgage industry. Our rates are excellent, and our value is among the best in the industry. I use “value” because of what we provide in the way of service and experience to make our clients’ transactions as smooth as possible, with them knowing every step of the way what is happening, why it is happening and what will happen next. All at or below the same rate and price of almost all other lenders in our markets.


Our business is referral only. How have we been in business for so long counting on word of mouth for our business? Tremendous service, products and rates. Plus the ability to work out solutions for practically every scenario where a mortgage is needed.


“I didn’t know getting a mortgage could be so easy.” This is perhaps the most common comment we get from our clients, regardless of the difficulty of the transaction, it is easier than they think it will be due to our clear communication and honest answers from first contact through closing.


I thought long and hard before using this space to toot the horns of Stratis Financial and Dennis Smith; it is hard to speak well of oneself without feeling like a braggart or boastful. Every now and then however we do need to boast a bit about what we do and how we do it. I hope you read this as intended, to remind people about what we do and how we do it with the desire that our name is passed along to others who are in the market for some assistance with their mortgage needs.


In closing I want to thank the thousands of individuals and families that have told clients, families, friends, co-workers and neighbors, “hey, I know a guy who can help you, call Dennis…”



Have a question? Ask me!


Pre-holiday week is not short on economic news. A data dump of economic news today before everyone heads out for the above-mentioned eggnog as reports were issued for Gross Domestic Product, personal income and spending and inflation. The third and final revision to 3rd quarter GDP was revised down to 3.4% growth from the earlier rate of 3.5%, mostly due to a revision in consumer spending in the quarter. The spending thus far in the 4th quarter has been very strong with November spending up 0.4% from October, and the October consumer spending was revised up from a 0.4% increase to 0.8%. In November consumers hit the credit cards as personal income was up 0.2% for the month after increasing 0.5% in October—that is back to back months where spending has outpaced incomes. With the increase spending and demand inflation bumped up a bit to 1.9%, below the Fed’s target rate of 2.0%. Overall the news is a bit mortgage rate unfriendly and in a vacuum would lead to rates increasing a bit.


But there is no vacuum in nature or economies. To paraphrase Jan Brady, “Fed, Fed, Fed.” The only questions investors had prior to the Fed announcement was whether the rate increase would be the expected 0.25%, or would there be a surprise increase of 0.5%; the other question was what, if anything, would the Fed say about 2019 rate increases? The Federal Reserve did what was expected and raised their discount rate 0.25%, which resulted in an increase in the prime rate to 5.5%. On the second question, the Fed announced that it anticipated raising rates twice in 2019. This was news as for the past year plus the Fed had been telling the public its intention was to increase rates three times in 2019. The news whipsawed rates as investors reacted first to the rate increases in the future, then reacted to the stock markets’ reactions to the news. As a result, both the bond markets (which determine mortgage rates) and stock markets had chart lines that mirrored Colossus or some other roller-coaster with lots of ups and downs.



Rates for Friday December 21, 2018: Rates drop for the third Friday in the past four for conforming and the fourth Friday in a row for high-balance; almost solely attributed to the corresponding decline in stocks as investors have sold stocks and purchased long-term fixed rate assets, such as mortgages. The risk is getting in the mindset that rates will continue to drop for some period. I say this due to what I have mentioned in prior WR&MU’s, the Fed is selling about one trillion dollars in assets accumulated post-recession to push rates lowers. If rates drop when the Fed is a buyer of fixed rate assets what is the reasonable expectation when the Fed becomes a seller of those same assets? Correct, rates will go higher. One reason the Fed has decided not to raise rates three times in 2019 is quite possibly because the knowledge that selling its assets will result in rate increases. In the meantime the 30 year conforming rate is at its lowest in four months.



30 year conforming                                            4.375%      Down 0.125%

30 year high-balance conforming                       4.50%      Down 0.125%


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 with 740 FICO score for purchase mortgages.





Very special wishes for a happy birthday to my wonderful wife Leslie! With our at home daughter we are going to dinner and then a movie (the new Spiderman) this evening and then on Sunday a celebratory brunch as our oldest daughter returns from her first semester at school in Boston. It is the first year that Leslie gets the present for her birthday, and we get the same present for Christmas, of a child returning from being away for several months—I can think of no present better!


From our family to yours a very happy Christmas holiday with your family and friends.




Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

12-14-18: Should we use auto-pay for our mortgage payment?

Question of the week:  Should we use auto-pay for our mortgage payment?


 Answer:  Yes, but…


One of the biggest benefits I derived from the advent of everyday web availability for the common citizen was on-line banking. My desire to not have to write a bunch of checks every month and put in the mail was so strong that I left the bank I had been with for almost twenty years, and my first job out of college, that I closed my account and went to a big bank just because I could pay bills on-line. Subsequently, my preferred local bank that is strong, friendly and conservative (and Long Beach’s oldest family owned bank) established on-line banking and I immediately switched back.


Very few people write and mail checks for their monthly bills anymore. Most people pay their bills using their banks’ on-line service. That said, many people still log on one, two, three times a month and fill out their payments and then hit send. This is understandable as credit card balances and utility payments change every month. However, many still log on every month to fill out payments for accounts that have the same payment every month for house payment, mortgage or rent, auto loans, student loans, etc.


I strongly advise that if you have a payment that is the same amount every month that you establish an automatic payment every month. There are a few reasons for this. First, you do not need to remember while you are on vacation in Yellowstone, “oh shoot it’s the 14th and I need to log-on and pay the mortgage.” Second, well, there is no second. The reason to do this is to ensure your biggest payments—house, auto, other loans—are made on time all the time.


The next question I get from a lot of clients, or if they do not bring it up I try to when we close their loan, is “should I set up auto-pay with our new mortgage lender?”


My response is always, “No.”


Almost every creditor has the option to set up on their site for making payments. You input your banking information and then can set up for them to automatically pull the payment from your bank account, or you can log in and tell them how much money you want to transfer from your bank to your credit account.


I am not a big fan of having your creditors pull funds from your bank account and strongly recommend you push your payments from your bank account to your creditors.


There are several reasons I prefer the “push” over the “pull.” First, you are in total control. Once you set up the automatic payment from your bank every month you can quickly and easily make changes if necessary. If your bank account is compromised most banks will quickly assist you in setting up a new account and many will also enable the transfer of your existing autopayments to your new account. You immediately know if your payment has been made and applied to your account.


Recently one of our clients was setting up his first payment, and subsequent auto-pays, after we funded his mortgage. He input his banking information, input the payment amount and clicked, “confirm” on making the payment and having subsequent payments pulled on the same day every month in the future. After a few days he noticed his payment was showing “paid” on the lender website, but the funds had not left his bank. After several days, we conferenced called the lender and discovered he had entered his account number incorrectly. Because the lender’s computer software did not know the account number was incorrect it assumed the payment had been made. It took about ten days before the software discovered no payment was coming and marked the account as still due. Simple mistake, but had he not checked his bank account to see if the payment had been taken out by the lender he would not know for quite some time—long enough that he may have been subject to a late penalty.


Had he set up for the payment to be sent from his bank every month he would have been notified immediately by his bank had he incorrectly input his mortgage account number and been able to make the correction. He has cancelled his auto-pay with the mortgage company and set up auto-pay from his bank.


It is not uncommon for us to receive notifications that our personal data may have been compromised, hotel chains, retailers, even the IRS have been hacked and data taken on account holders. Should this happen to your mortgage company they will obtain some very critical information, name, address, social security number, date of birth. However, if you do not have your auto-pay set up for the lender to pull your payment every month the hackers will not have your bank accounts routing and account numbers.


Yes, your account information can be compromised from your bank. However, if this happens and your accounts are accessed and funds transferred your bank will very, very likely reimburse the funds taken and set up a new account. Will this be the case if someone obtains your account information from a mortgage, credit card or student loan lender? Perhaps, perhaps not.


I strongly encourage you use auto-pay, and strongly recommend as well that you set up the auto-payments to initiate from your bank and not from your creditors.


Have a question? Ask me!


Tame. That is the one word to describe prices for wholesalers and consumers in November. The Producer Price Index rose only 0.1% in November, after climbing 0.6% in October, and increased 2.5% from last November after year-over-year increase of 2.9% in October. Consumer prices rose at the same pace in November as October, up 0.2% and the annual increase from last year is up 2.2%. Both the PPI and CPI were strongly influenced by gas prices dropping 4.2% for the month, however stripping out food and energy the “core” CPI increase was still only 0.2% from the prior month. Overall the news is interest rate friendly as the price increases are close to the Fed’s target and provide some foundation to speculation the Fed may not go through with three rate increases in 2019.


Not as tame. Retail sales as a whole increased 0.2% from October, however taking out spending on gasoline and sales were up 0.5% for the month a strong increase, evidently consumers took their savings at the pump and logged on to buy stuff. On-line sales in November were up 2.3%, department sales increases at a much smaller rate but were still up 0.4% from the prior month. Further showing the strength of the retailers was the revision to a 1.1% increase in October sales from the prior release stating sales increased 0.8%. The strong November sales and very strong October sales indicates the Gross Domestic Product for the 4th quarter of 2018 should come in at a pretty high number. The retail sales data is not real friendly to lower rates. Since consumer spending is 65-70% of our economy strong sales puts upward pressure on prices as well as on the labor pool


Where are we going? That is the question investors are asking and there is no consensus—which typically indicates an economy in transition. On the one hand, some are predicting inflation will rise through 2019 due to higher prices for wholesalers and consumers due to higher tariffs as well as higher costs for wages and salaries due to tight labor markets. If this is the case rates will continue to increase in 2019. On the other hand, some are predicting that inflation will remain flat near current levels or decline due to the economy slowing due to rising rates.


Rates for Friday December 14, 2018: Rates are retaining their levels after the recent dip, mainly due to investors pulling money out of stocks and putting into long-term fixed rate investments, such as bonds and mortgages. It appears that with inflation somewhat benign that the mortgage rates in the near future will be strongly influenced by the U.S. government. How? Because the Treasury has announced its borrowing needs and they are significantly higher than last year. Because the government can print money to pay its bills it is not very rate conscious, therefore if it needs to pay higher rates to borrow in order to finance operations it will borrow at higher rates. Between the government coming to market to borrow and the Federal Reserve putting its assets on the market to unwind its balance sheet from it Quantitative Easing programs starting in 2008, there is a lot of supply in the fixed rate markets. Over supply leads to higher interest rates. The economic data indicates somewhat stable rates, the financial markets indicate upward pressure. In the meantime rates have dropped in recent weeks—time to take advantage.



30 year conforming                                                4.50%       Flat

30 year high-balance conforming                       4.625%     Down 0.125%


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 with 740 FICO score for purchase mortgages.

















On my Facebook page I have been running a “Best Christmas Movie” poll for several weeks. I started by asking people to nominate their favorite films. The following week I posted the top sixteen nominees and every week since people have voted for their favorites to whittle the contestants down to the final two, posted today. It has been interesting as throughout there has been a balance between “old” (made prior to 1960’s) to “new” (made 1980’s or later). Our final two mirror the balance with “It’s a Wonderful Life” (1946) in a run-off against “A Christmas Story” (1983). Interesting, though both are widely considered two of the best Christmas movies of all time, neither did well at the box office and gained their popularity several years after their releases.


Like types of cookies, pie, whiskeys or kids, it is very hard to pick a favorite Christmas movie; but it is always fun to experience them all while trying to decide!


Have a great week,



Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

12-7-18: I have tax liens; will that prevent me from purchasing a new home?

Question of the week:  I have tax liens; will that prevent me from purchasing a new home?


Answer:  Liz is an attorney and specializes in negotiating settlements with federal and state tax authorities, and a friend of mine. We were having a few weeks ago and this question came up as we often have clients that have state and/or federal tax liens and it was great to get some input on some options for tax liens.


Before we answer the question of whether tax liens will prevent you from obtaining a mortgage to purchase a new home, let’s answer the question: What is a tax lien?


A lien is the right to keep possession of someone’s property until a debt or obligation is paid. In the case of the government it is the right to take possession of someone’s property until a tax debt is paid—i.e. a tax lien.


If you have unpaid taxes and a lien has been filed against you the guidelines for all loans are that until the obligation is paid a loan will not be funded and closed.


Example: You are purchasing a new home for $575,000 and applying for a mortgage of $517,500 and are qualified to obtain loan approval. You have a lien for unpaid state taxes of $5000 from 2014 that is recorded in the county where you lived when the lien was filed. We submit your loan and the underwriter approves the application with a condition that we must show proof that the state tax lien from 2014 is satisfied and show evidence of where the funds for satisfying lien came from before the loan will be able to close. In many instances we coordinate satisfying the lien with the title company so you can pay the amount owed, initial amount plus penalties and interest, as part of the total funds needed for closing. Title will then guarantee to the lender, and you, the lien is paid and record the deeds needed for closing.


There are some instances with FHA mortgages where if you have established a payment plan to satisfy a lien recorded against you and are making payments on a constant and consistent basis. These situations are approved on a case-by-case basis, so if you are in such a situation do not assume you are automatically able to be approved. Before you write an offer and open escrow we would want to run your situation and any evidence through an underwriter for an opinion as to whether the lender would approve the loan with your payment agreement.


For unpaid taxes, or other debts, to become liens or judgments the obligation has to be outstanding for a fairly significant period of time. If you are aware of an unpaid obligation, especially taxes, it is strongly recommended you contact the public agency to which the obligation is owed and establish the amount owed and if necessary a payment plan. Many tax debtors are fearful of contacting the public tax authority thinking they may attach bank accounts or employment income to repay the back taxes due. This is not the case, these measures happen if a lien is filed and there has been no communication from you for a long period of time. Generally, for most private citizens for what the tax authorities would consider small amounts owed, the agency is willing to wait until you are forced to pay the tax obligation because you are purchasing a home or some other event.


Should you have an outstanding tax obligation it is strongly recommended you contact the agency to which the taxes are owed and negotiate a settlement amount and if you are unable to pay the full amount do at that time to set up a payment plan to pay off the taxes and retire the debt. In almost all cases, if you set up a payment plan and make the payments on time for the amount owed the agency will not file a lien against you. Depending on the loan type for which you are applying some lenders will approve and fund a loan if you show you are making consistent and timely payments on your obligation—counting the monthly payment amount as part of qualifying.


If you are having your pay garnished to collect a judgment or other obligation the garnishment is not considered a payment plan since it was not voluntary. Before a mortgage can be approved and funded the total obligation must be paid and the garnishment removed.


Prior to this year when running credit reports public records would show on the report that would impact whether we would be able to obtain loan approval, or what steps we would need to take to obtain loan approval: Federal and state income tax liens, county property tax liens, judgments from lawsuits or court cases, unpaid child or spousal support and bankruptcy being the most common. Beginning earlier this year these types of public records were no longer reported on credit reports, with some exceptions if a case somehow fell through the cracks.


Because a lien or judgment is not on your credit report does not mean we will not find out about it. As part of the mortgage process we obtain title insurance, part of the title insurance process is your completing a Statement of Information that includes name, addresses and employment for the past ten years, spouse(s), etc. The title companies runs this information through their data bases to determine if there are any public records filed in your name and notify us if that are any.


When there is a public record filed it needs to be addressed before we can obtain final loan approval and fund your mortgage. Because this is now the only way any public records will be discovered it is highly recommend you inform us at the beginning of the transaction if you have any public records for taxes, support payments, bankruptcy etc so we can begin working on the issue at the beginning of the transaction instead of waiting to find out from title closer to our scheduled closing date.


We have had transactions that have fell apart because borrowers delayed in completing their Statement of Information until close to closing, a lien popped up with title and we were unable to solve the issue in a timely fashion to satisfy the seller.


If you know, or suspect, there may be a lien let us know up front, complete a Statement of Information right away for title to run it through databases and if there is something filed we will have to ability to determine our best options and proceed accordingly.


Ignoring tax or other public record obligations thinking they will go away is not a long term success strategy. We have helped many families over the years with serious debt delinquency get their debt paid and in a position to purchase a home. The longer you wait to begin the process of satisfying the debt and clearing your public record the longer before you are free and clear. Start the process today, you will have a tremendous mental weight lifted just by beginning the process.


As always, if you or someone you know has public records and feel they will prevent obtaining a mortgage please contact me to discuss your situation and potential solutions we can begin to work on so you can become a homeowner.


Have a question? Ask me!


Higher loan limits for 2019 were announced by the Federal Housing Finance Agency. Starting for loans funded after January 1st, 2019 the conforming loan limit for single family residences (including condos) will increase from $453,100 to $484,250; for “high-balance” areas (LA and Orange Counties for example) the limits for Fannie and Freddie mortgages increase from $679,650 to $726,525. Will the loan limit increases have a dramatic impact on the housing markets? Not so much, at any given time the rate difference between the conforming loan amount and the high-balance amount is from one-eighth to one-quarter of one percent (0.125% or 0.25%). There will be some advantage to those borrowing more than the prior limit and at or below the new limit for high-balance as qualifying for the high-balance mortgage is generally easier than for “jumbo” or non-conforming mortgages.


November employment report contains no news that impacts rates. First Fridays are a big event for economic data geeks such as myself and investors as the Department of Labor releases job reports for the prior month. Today’s reports are nothing too exciting. The economy created 155,000 new jobs last month, significantly less than the 237,000 in October and below the expectations of most investors; however the total jobs added is not insignificant and still reflect a healthy employment market. Enough jobs were added to keep the unemployment rate at a near 50 year low at 3.7%. Wages continue to grow, up 3.1% over the past year—a factor in whether the Fed will increase rates later this month.


Rates for Friday December 7, 2018: Last week’s WR&MU mentioned that Presidents Trump and Xi were meeting at the G20 summit to discuss the tariff disputes. Following the meeting they announced a 90 day moratorium on new tariffs and agreed to negotiate the recent tariffs enacted by both countries. The news was well met by investors and stocks and bonds improved. As the week has progressed many have noticed the decline in stock markets, due in large part to continued uncertainty as to the trade war truce. Rates have benefited from this  uncertainty as the funds pulled out of stocks have flowed into long-term fixed assets, i.e. mortgages. As a result rates drop for the second Friday in a row and are at their lowest in three months.



30 year conforming                                            4.50%      Down 0.125%

30 year high-balance conforming                   4.75%     Down 0.125%


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 with 740 FICO score for purchase mortgages.




















For the past year I have been listening to an incredibly detailed podcast about World War II. To give you an idea how detailed, the podcaster began the podcast in December 2011, this past week he finally got to Pearl Harbor—seven years to cover three to four years. As a history buff I love the detail, he spends about ten episodes just on Churchill, but now that I am caught up I will have to wait a week or more (he is great at putting together information and his commentary, not so great at sticking to a schedule) before his next podcast. I anticipate his completing the war in around 2026.


I bring this up because today is the anniversary of Pearl Harbor and I feel its importance in our nation has declined over the years—not surprisingly. When the Japanese planes approached Oahu and began their bombing and strafing many on the island, civilian and military, thought the planes were part of a drill—even as bombs exploded many thought there must have been some mistake made. Once reality hit the general attitude went from disbelief to anger very quickly. Sentiments quickly echoed across the country as the news was broadcast that Sunday.


In Gilmore, Iowa seventy-seven years ago a boy named Don had turned twelve that morning, and the radio told his parents and the community what had occurred in far off Hawaii earlier that day. I asked Don several years ago what was his memory of that birthday and Pearl Harbor. His response was, “I didn’t get a chance to ride the pony.” They lived on the farm and he had eleven brothers and sisters and before it was his turn to ride the family pony they were all called into the house.


Happy 89th birthday to Don McCormick, my father in-law.


On a final note, thank you to everyone who bore with my very long WR&MU last week and those who replied with positive comments!


Have a great week,




Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/My-Blog

11-30-18: What will be the cost of waiting, or is there one, to purchase your new home in mid to late 2019, or 2020, instead of now or the near future?

Question of the week:  What will be the cost of waiting, or is there one, to purchase your new home in mid to late 2019, or 2020, instead of now or the near future?


 Answer:  This installment of the Weekly Rate & Market update is a follow up to the WR&MU of November 16th when the question of the week was “What was the cost of waiting?”


I got very carried away writing the update this week and to follow is a lot of detailed economic information. My conclusion shown at the end is that there is little cost to waiting, but likely not a lot of benefit, if you can afford to purchase where you want to purchase today. If you are waiting for prices to drop significantly so you can afford to purchase in area you could afford a few years ago but cannot today, then your cost of waiting is the cost of homes in areas you can afford likely going up as will the home you currently cannot afford—essentially to see a decline in values of 15-20% is not very likely so you should change your expectations and neighborhoods to where you can buy. For those interested in my more detailed observations, bless you and read on!


The answer to this week’s question is speculation on my part based on several economic factors, trends and some educated guessing. Regarding the educated guessing part, I have degree in economics and political studies and have been a student of both for over 35 years. (Two famous jokes about economics at the end of the update for those interested. They were funny when I was in college, not sure they still are…)


To answer the question of the week, I am going to flip the standard format of the WR&MU by presenting economic news this week and how it relates to interest rates, then extrapolate out to what I see for 2019.


As you read the following keep in mind that there is upward pressure on rates when economies are doing well and there is inflation, there is downward pressure when economies are sluggish, slow growth or recession, and if there are extremely negative events such as threats of war, war, or economic collapse in other nations.


While economic data is usually the primary driver for interest rates, politics also has an influence. This weekend a political event will occur that could/should impact not only rates but our economy for the near and possibly long-term future. President Trump will be in Buenos Aires for the G20 summit and has a meeting scheduled with Chinese President Xi Jinping for the purpose of discussing the tariff war between the two largest economies in the world—by three to four-fold over the next nearest.


If the meeting goes poorly and there no movement to lower tariffs, or either or both sides are so upset they raise more tariffs, we will see higher rates due to higher inflation. With tariffs increasing prices of Chinese goods imported into the United States those goods will need to either be manufactured in the United States or imported from other nations. Either scenario will increase the prices of the goods, for those manufactured in the U.S. companies will need to hire workers in an economy that is at or near full employment, which will require higher wages, as well as purchase materials required to manufacture the increased supply of goods they will need to sell. Higher prices lead to higher rates.


The meeting will be considered “good” if there are mutual statements of starting talks to find common ground on the issues that led to the tariffs, mainly market dumping, counterfeiting of American brands and piracy of intellectual property. Any indication that both sides are looking to de-escalate will likely lead to lower rates as the expectation will be a relief on inflationary pressures and avoidance of further conflict.


This critical meeting between Trump and Xi can have a significant impact on our housing markets due to their potential impact on mortgage rates.


Another non-data event this week has had an impact on mortgage rates. Federal Reserve Chair Jerome Powell gave a speech to the Economic Club of New York. In the speech, he said that he believes rates are “near neutral,” and that prior business cycles have ended not due to inflation but rather because of asset prices. Regarding “near neutral,” this comment had investors buying bonds, and mortgages, putting downward pressure on rates as they read the comment to mean that the Fed may not increase rates four times between now and the end of 2019. Instead of the Fed rate increasing one percent over the next thirteen months, perhaps only three-quarters of a percent, or one-half of a percent. The comment about asset prices ending cycles instead of inflation brings forth another interpretation is that the Fed may shift from using inflation as their primary basis for rate increases and somehow may be looking at over all prices in different markets such as stocks and housing. If these interpretations are correct, and the Fed does strongly signal fewer rate increases in the near future the impact can be a sparking sales in the housing markets as rates remain near current levels or perhaps dip in the coming months/year.


Real and potential statements are not the only news impacting rates, and therefore housing markets, this week. We also had some real data, starting with consumer confidence for November. Consumer confidence impacts rates as consumer spending is 65-70% of our economy, happy and confident consumers are expected to spend more, leading to economic growth, leading to inflationary pressures, which lead to higher rates. The consumer confidence index dropped in November for the first time in five months, however the decline is not overly surprising since the October index was the highest in 18 years. The primary factor in the November decline was primarily due to feelings by respondents that they would see little to no income growth in 2019.


Speaking of consumers, this week we receive data on their spending and income in October. Consumer spending in October saw a big increase, 0.6%, from September, a good sign for retailers heading into the Christmas shopping season and a good sign for the Gross Domestic Product growth number for the 4th quarter, and for the year. Strong GDP growth is a strong indicator of inflation, which, as we have said repeatedly, leads to higher rates. Consumers increased spending in October, and earned more as incomes rose 0.5% from September, the highest monthly increase since January. Stronger earnings are also inflationary as they a) provide more money in households for spending and b) increase costs for employers who must raise their prices to accommodate the higher costs.


Released the same day as the reports on income and spending was the rate of inflation as calculated using the “PCE gauge,” which is the Federal Reserve’s preferred inflation index (it excludes food and energy and thus is labelled the “core inflation rate”). Despite higher spending and incomes, the annualized rate of inflation for October was 2%, right around the Fed’s target rate of inflation. The news is interest rate friendly and supports the Fed Chair’s statement about rates being “near neutral.”


Before we answer the question about if there will be a continued cost to waiting to purchase a new home we must look at the most recent housing data for our Southern California markets. The quick synopsis is that local markets are in a period of transition according to data from the California Association of Realtors.  State wide the median price in October for single family homes was down 1.2% from September, but up 4.7% from last October at $572,000. More locally, in LA and Orange Counties the median movement month to month and year to year somewhat mirror the activity statewide. The median price in LA County in October was $614,500, 3.2% lower than September and 5.9% higher than 2017; Orange County saw the median price from September drop 1.8% to $810,000 but was still 3.1% higher than in 2017.


Total sales volume, i.e. units sold, were up statewide month over month, 3.8%, and down 7.9% year over year. Like with prices, units sold locally were also up monthly and down annually. In LA County, there was surge in sales in October, climbing 29% from September, however the total sales volume for the month was down 5.9% from last year. In Orange County, sales also increased from September but a much more modest 3.9%, and also decreased from 2017 with a drop of 11.3%.


Month to month the trend is more sales at lower prices, plus increasing inventory on the market and longer periods of homes on the market before being sold. One other pattern is a growth in the number of cancelled or expired listings that are not renewed.


Back to our question, what does all this mean about housing markets and if there will be a cost to waiting to purchase a new home.


The data is somewhat murky for both the economy and the housing markets—murky usually means transition. Is the transition in the benefit of those looking to purchase homes? If there is a buyer’s market, how much of benefit will there be and for long?


The economic transition seems to point to a recession late in 2019, which means the slow down starts in early to mid-2019. This is not an uncommon thesis, as others reading the economic data are also indicating a stronger probability for a recession in the next twelve months. If this occurs the biggest question will be the depth and length. In my opinion, the depth will be fairly shallow and the length fairly short. Keep in mind a recession is defined as two consecutive quarters of negative economic growth, that would cover six months or more.


If there is a recession the impact on housing markets would depend on the cause of the recession, is it a decline in asset values as Fed Chair Powell stated? Is it inflation? The cause will be a primary factor in impact on housing markets.


If the cause is primarily driven by asset prices being too high, then as prices decline, or remain somewhat stable with incomes and other prices increasing, then rates will be dropping into and during any price corrections or stabilization making homes more affordable than they are today.


If the cause is primarily driven by inflation then even if housing prices drop the affordability will not necessarily increase as rates will be increasing to slow inflation. We can see an economy with rising energy, food, clothing, houseware costs but dropping, or stable, costs for large ticket items such as housing and automobiles. If this is the case rates will be climbing resulting in the month costs of housing, i.e. mortgage rates, climbing. If this is the case then the length and depth of a housing correction will likely be longer and perhaps a bit deeper than if there is an asset based cause for a correction.


When looking at housing markets we must acknowledge the uniqueness of California as a whole and Southern California in particular. Besides the weather, which will always be a draw, the lack of available land to build more homes in the any county that touches the ocean is a huge factor. Yes, there are some areas still in the region for new homes to be built, however overall the vast majority is fully developed. In many areas, new housing is going vertical with high rises and not horizontal with single family residences with yards. This inability to add significant supply will sustain a certain level for housing markets locally.


What about the housing crash ten years ago, space availability was not much different, so why did home prices drop so much? Great question to look at. The foundation for the market was built largely on panic buying and people more concerned with making money on a property purchase instead of a buying a family home. Homes were purchased with no verification of income, funds to purchase and in many cases no hard appraisals. Mortgage products were available that enable buyers to purchase way beyond their capabilities, and as prices rose many were looking to sell their homes quickly for a profit and buy their next home. When prices started to drop many found themselves in homes with loan balances higher than property values due to no down payment purchases, rather than pay it many walked away and foreclosures rose putting more downward pressure on the market. Eventually prices did stabilize as buyers who had been priced out of the market were able to purchase due to lower prices and rates.


Finally, the market collapse a decade ago was not a result of a recession caused by inflation, or high interest rates, but rather because of poor lending standards and mortgage products that created an unnatural inflation in housing prices. When investors started looking into the mortgages being sold on the market that were based on little to no verification of ability to repay on homes that had climbed in value at unheard of rates, they stopped buying those mortgages. The result was a domino effect that pulled the nation, and the globe, into recession.


One very large impact that compounded the decline in values was the lack of qualified buyers to purchase homes as they hit the market—lower demand with higher supply continued the price declines. Many families that might have qualified to purchase a new home were prevented from doing so for several years because of the foreclosure or short-sale on their credit records. This group was a significant number that otherwise would have absorbed inventory on the market.


Since 2010 buyers of homes have overwhelmingly been purchasing homes in which to raise families and not to make money. They have been qualified for their mortgages by proving income and funds for purchasing. Most buyers have been putting more than the minimum required down payment, so they have “skin in the game” and will be less likely to walk away or panic sell if/when market prices dip.


The run up in real estate values over the past several years was created by qualified buyers competing with other qualified buyers to purchase homes. The mixed market we now see, with housing values starting to decline, sales down one month and up the next, is based on affordability due to the price increases exacerbated by the increase in rates since the start of the year. The pool of buyers has not shrunk, and will not shrink because of any market transition, what has changed is the price for which they can qualify and/or their desire to purchase in a market they see as transitioning so they are waiting for prices and rates to drop.


All of this said, and I apologize for my long-winded path to this point but I wanted to be somewhat thorough, I do not feel there is a large cost to waiting, but I also do not feel there is a large benefit to be gained by waiting to purchase a new home.


Many sellers, or would be sellers, are holding properties off the market as they desire a higher price for their home than the market will support. For the past few years new listings have come on the market at the highest price in the neighborhood, or just beyond, and buyers have been over-bidding the list price to obtain the home. More recently homes are selling at or just below list prices, causing potential seller to hold off until prices increase again.


Note, “again.” Because of the lack of ability to build more housing near the coasts (let’s define “near” 25 to 30 miles from the ocean from San Diego to Santa Monica) there is limited ability to expand supply, any increase in demand will push up housing prices. Natural attrition is due to death, divorce, and relocation will dictate supply, population growth and aging as more people enter the age of homeownership will dictate demand. Demand will not be able to be sated with new housing, hence existing housing will be what is available for buyers to bid on. Over time Southern California coastal residential housing goes up. How soon and how much changes depending on what time frame, over longer periods of time  however prices climb.


Looking into 2019 housing prices will dip in some areas, drop in others and stay somewhat constant in other areas. Rates should remain near current levels, possibly declining towards the middle to end of year if/when economy slows down, but since they are already so low (historically discounting the false rates created by the government and Fed starting in 2008) there will not be a significant drop as we saw following the last recession. What I do see happening is families slowly moving their geographical areas of desirability to neighborhoods they can afford. The home they can purchase to purchase for $500,000 is no longer available in the neighborhood they were hoping to purchase in one, two or three years ago; that $500,000 home is now selling for $550,000 to $600,000. Where homes were selling for perhaps $425,000 – $450,000 two or three years ago are likely the $500,000 homes today. The decision will be, do we buy a home in an area we did not want to purchase in before or do we wait and hope real estate prices drop 15-20% to $500,000 to buy where we initially wanted to, or do we continue to rent with rents still increasing?


I believe the cost of waiting will be that if you stick to your desired area to purchase and hope for prices to decline significantly you will continue to rent until some major change in your financial situation to purchase a home in that area. The cost of waiting into the future will be lost opportunity in neighborhoods of lesser value that you can afford as families start to purchase in those areas, slowly increase their values and changing the neighborhoods with higher ownership density.


If you are able to purchase a home in your desired area, I do not see any significant cost in waiting, but not a lot of benefit to waiting either. Yes, prices may dip some more into the new year, yes rates may dip some more into the new year; however when will you know that the dips have stopped? When will you know that the time is perfect to purchase with rates and prices, and what will be on the market at that time?


My advice has always been, when buying a home, if you like and can afford it buy it. You will be there for a long time, any changes in price over the early years of ownership will be more than made up for in the long run due to where you are buying—California. Your ultimate cost of waiting may be hoping the house you really like still being on the market when you feel the price is right.


Sellers on the market now want to sell, make an offer!


Disclaimer on this very long-winded update:


The WR&MU on October 21, 2016 had a total miss on my part for predicting economic recession, in fact the exact opposite happened as I did not put a lot of thought into Trump winning the election and the resulting economic growth. That will provide a filter for any predictions I make, as well as others—it is all an educated guess and different guesses result on how each guesser is trained to read the tea leaves.


Have a question? Ask me!


Rates for Friday November 30, 2018: The comments by Fed Chairman Powell resulted in a nice rally for bonds and as a result the 30 year conforming rate is lower than the previous Friday for the first time in five weeks. Will it hold? Per comments above a lot depends on the meeting between Presidents Trump and Xi this weekend.



30 year conforming                                               4.625%       Down 0.125%

30 year high-balance conforming                       4.875%      Down 0.125%


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 with 740 FICO score for purchase mortgages.





We have three seasons in Southern California that cycle annually: Dry, Fire, Mud. When it is dry we have more fires, when it rains we get mud in many areas but especially the fire zones and the rain creates more undergrowth that gets very dry leading into the next fire season causing more and bigger fires that are then turned to mud slides….yet our state and local governments continue to allow more and more housing to be rebuilt where there are histories of fires, floods and mudslides. See Einstein’s definition of insanity.


Since it has been quite a while since we have had a drenching like yesterday, I hope your roofs, windows and other parts of your homes held tight. While we have had no water penetration the same cannot be said of the other scourge for most of the region: ants finding ways into our homes as their colonies get flooded out. The battle is on! We seem to have won the first one but know there are more to come. All that said, I don’t mind the ants a few times a year as opposed to snakes or very large arachnoids!


Enjoy the official start of the holiday season as parades and other activities begin!


Have a great week,




Economic Jokes:


Every question asked of any economist has the same answer, resulting in no definitive answer: “On the one hand blah blah blah; one the other hand blaw, blaw, blaw.”


A company is looking to hire an analyst. There are three finalists, a physicist, a mathematician and an economist.


The physicist walks into the interview and on the white board is a question; What is the answer and why: (12-4)3 + (4(13/4)+7) – 21 = ?


After explaining his process as he is writing down several equations using vectors, calculus, etc he writes down 23, circles it and puts down the marker and stares at the interviewer. The interviewer says, “Thank you, please erase your work and send in the mathematician.”


The mathematician enters, sees the equations and mumbles to herself as she solves the problem using basic math, circles the answer of 23. She caps the marker, looks at the interviewer and says, “It is basic math and the answer is 23.”


The interviewer says, “Thank you, please erase your work and send in the economist.”


The economist walks into the room and sees the question and reads aloud, “What is the answer and why.  This is a job for an analyst position correct?”




“Are you the one I will be reporting to?”




“Are you the one giving me the information to analyze and I presume it will then be passed along to your superiors?”




The economist looks around the room. Walks to the door and locks it. Pulls a chair up very close to the interviewer, leans in and whispers, “What is the answer and why….what do you want the answer to be?”


The economist got the job.


Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

11-23-18: What are the options for those who lost homes, or had them severally damaged, in the California wildfires?

Last week I ended the question of the week section (what was the cost of waiting) stating I would answer the natural follow-up question, what will be the cost of waiting, or is there one, for families waiting to purchase until later in 2019 or even 2020. Because of the wildfires in California that have destroyed thousands of homes I have chosen to address a very critical issue for those homeowners, knowing that we have clients, families, friends who are either directly impacted, or have family and /or friends who are impacted with lost or severely damaged homes. Next week I will look at what I feel may be the cost of waiting to purchase a new home.


Question of the week:  What are the options for those who lost homes, or had them severally damaged, in the California wildfires?


 Answer:  Earlies this week I was speaking with a friend whose son and daughter in-law lost their home in Paradise, California in the Camp fire. In our conversation, I went through several different options his son and daughter in-law should consider regarding their family’s future.


The very first thing that should happen is the affected family needs to contact the lender and home insurer and let them know that your home was lost in the fire. You need to ask the lender for payment abatement or suspension while you work your options and ability to make payment. Chances are high many people in the affected areas that lost their homes have also lost the ability to generate income depending on whether their place of employment was lost to the fire, their ability to get to work or other factors. Stay in communication with the lender regarding the monthly payments. Ask if the call is being recorded and if so how you can refer to it later if needed. Keep records of every phone conversation, who you spoke to, what time, what was the conversation about, did the lender make any statements to you regarding the issue. Always request an email from the lender summarizing the conversation and confirming what may have been agreed to, if no email received call back quickly and repeatedly until you do receive the written communication.


With property tax payments due by December 10th a similar conversation should be had with the local county assessor. If the lender has been collecting tax payments confirm with the lender if they will be paying the taxes—at this point they probably already have.


Once the mortgage payment has been figured out time to move onto your insurance company.


Since you have a mortgage your home was insured. The first question you need answered is, how much will our insurance cover? The required coverage for lenders is either the entire loan amount owed, or the replacement cost of the dwelling.


The location of your home, the cost of construction in the area, and the cost of the home will determine whether your insurance policy will cover the cost to rebuild your home or your loan amount; for most developed properties in California the policy will cover replacement costs and not the loan amount. Because dirt is expensive in California the price is impacted, but because dirt does not burn it is not required to be insured.


The lender requirement of replacement cost will be determined by the appraisal which contains on a section where the appraiser calculates “replacement cost new.” This is the amount that must be covered by an insurance policy. For instance, I have a client who is refinancing a mortgage for $550,000 for a property appraised at $800,000; the replacement cost for the structure is $245,000, this is the amount of coverage we must show on the policy to close the transaction.


In Paradise the numbers are smaller, but the policy is generally the same. If the market value of the property is $250,000 the cost to replace may be $145,000 and the outstanding mortgage balance around $200,000.


This difference between mortgage amount and policy coverage is very important to those whose homes have been destroyed or severely damaged when considering, what do we do now?


It is important to note that the lender is a “loss payee” on the homeowner’s policy, meaning that any insurance check is made payable to the homeowner and the lender, both must agree what to do with the money before both parties endorse the payment.


Let’s take the case above, property value before the fire was about $250,000 with an outstanding balance of $200,000 and the insurance policy covers rebuilding the home for $145,000.


The first option is to work with the lender and insurance company to determine the mechanics of what happens if you choose to rebuild your home. Does your policy cover either mortgage payments until you can move back into your rebuilt home? Does it cover housing costs if you need to rent? What is the process regarding contractors, is than approved list you must use, or if you choose a contractor is approval required? How much time do you have to rebuild your home?


Before deciding to rebuild there are several factors to consider. Because there are thousands of homes in the region that have to be rebuilt, what will the actual cost to rebuild be given a limited supply of contractors versus the large demand for their services. What about the cost of building materials? How long will it take before a contractor will be able to take on your rebuilding job? What about designs, engineering, permits? Will there be a building moratorium for political purposes as state, county and local authorities determine if building requirements will be changed that impact costs of construction?


If all those questions are answered to your satisfaction next consider the future of the town and region. What if only one in two, one in five, one in ten, homeowners decide to rebuild? What will be the value of your home? Will it be significantly less than the loan amount? What will the neighborhood and town be like? What about schools and stores? The town will be significantly different, but how and will it be a  place where you and your family will want to live?


Once you have this information then you ask the question, what if we decide not to rebuild our home? The answer is that you will likely need to assign the amount covered by the policy over to the lender who will apply it to your mortgage balance. Since the amount of the insurance pay-out is less than the mortgage balance you will still have, in this case, about $55,000. What next? You can ask the mortgage to be recast, meaning if you still have about 25 years left on the loan the lender will amortize the $55,000 for 25 years at your current rate to determine your new payment. If your rate is 4.00% the payment would be $290 per month. You can have the county re-assess your property to lower your tax liability and determine the minimum insurance cost required by the lender.


Once you have the cost to retain what will be a vacant parcel of land you can decide if you want to retain the property for any future development. Or if you want to contact the lender and inform them you have no intention of keeping the property and would like to deed the property to the lender. This will result in a foreclosure on your credit record, which will impact your ability to obtain a traditional mortgage for several years, but you will not be making payments on a property that may or may not be of significant value in the future.


For many families, walking away will be the best answer for their family, selecting what they see not as the best option, but the least worst option. The more people who make this decision the more negative the impact on families who decide they want to try to rebuild as property values, already negative impacted by the devastation to the town, will drop further. As well, property taxes will drop significantly negatively impacting city and county services.


Other factors impacting any decision are will there be assistance that may come from government agencies? Will it be sufficient for you to rebuild or to re-locate? Can you continue at your job and therefore need to stay in the area? What will be your cost of housing with all the other families in the area needing housing as well?


There may be other options I have not yet considered; my primary advice is to not rush into any decisions. Speak to different people you trust and have no stake in the outcome of whatever decision you make. A very big challenge will be to make your decision with as little emotion as possible.  Consider the possible long-term consequences of any decisions you make. Decisions should be made on what likely can happen, not necessarily what you would like to happen. Consider the impact of the decisions your neighbors and others in your town may be making and how those decisions will impact you.


Finally, be selfish. Your decisions need to be what is best for you and your family. No one else is going to make your housing payment, you will be the ones residing in wherever you choose to make your home, either where it was before or in a new location. Your financial future is going to be impacted, which will in turn impact the quality of life for your family for year to come so be as clinical as you can through the process.


CAUTIONARY NOTE Unfortunately disasters bring out scam artists and thieves. People posing as contractors with real or fake credentials will be contacting families to collect deposits to build homes and never be seen again. Real, or fake, attorneys or others will be offering consulting services and collect fees without providing any services. Be very careful before signing any contracts, or entering into agreements. Double, triple check backgrounds and services provided. Affected families will be looking for any good news and charlatans tend to be excellent actors able to prey on those in a weakened state. Be careful.


If I can be of any help with questions or what-ifs please do not hesitate to contact me.


To help the Red Cross help those in need click here: Red Cross Donations


Have a question? Ask me!


Rates for Friday November 23, 2018:  A slow week this week with the Thanksgiving holiday with little news impacting rates. A bit of softening in rates from last Friday but not enough for any change week over week. Rates are a bit steady and this should continue next week as well depending on how well the U.S. Treasury auctions go next week as the government sells over $110 billion in bonds. If the auctions go well rates should remain steady, if they do not go well rates will bump up a bit.



30 year conforming                                               4.75%       Flat

30 year high-balance conforming                       5.00%      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 with 740 FICO score for purchase mortgages.

We were without our oldest for the first time ever on Thanksgiving, she made the bus ride from Boston to Portland, Maine to spend a few days with family friends. Yesterday morning the temperature difference with wind chill was about 65 degrees, glad she has winter clothes. Absence makes the heart grow fonder and we missed her presence and my apple pie did not turn out well as hers do.


With friends and family at our table we had a wonderful day and evening and I hope you did as well.


Have a great week,




Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

11-16-18 What was the cost of waiting?

Question of the week:  What was the cost of waiting?


 Answer:  Over the past few years we had a lot of clients who were waiting to buy a new home because they felt the market would correct at some point and they could purchase the home they wanted for less money. About once a year for the past few years our question of the week has been, “what is the cost of waiting.”


On March 2, 2018, this was the question of the week and in my answer the worst case scenario I presented, with highest cost increase and highest interest rate, has come to pass.


Instead of creating my own sales prices for the answer to this week’s question, I will use the median home price for Los Angeles County as published by the California Association of Realtors.


What was the cost of waiting to purchase a home from September 2017 to September 2018?


In September 2017, the median priced home in the county was $606,110, in September 2018 the median price rose to $634,680, and increase of 4.7%. During this same time the interest rate for a 30 year fixed rate loan for borrower with a 740 FICO score rose from 3.75% to 4.75% for the loan amounts needed to purchase the median priced home with 20% down.


With the prices and rates climbing it follows that the mortgage payment also increases. With the 20% down payment on the median price the loan amount in September 2017 was $484,890, in 2018 the loan amount rose to $507,940. As a result, the monthly payment for the median home in 2017 was $2245, this year that payment is $2650 per month, an increase of $405 per month, or about 18%.


Long-time readers of the WR&MU know the mortgage industry used debt-to-income (DTI) ratios to qualify income for mortgage applicants. The DTI is calculated by adding up the applied for housing payment (mortgage principal and interest, property taxes, homeowner’s insurance, homeowners’ association if applicable, aka PITI) plus credit obligations (credit cards, auto and student loans, alimony and parental support payments, etc). Once the obligations are added together that number is divided by your gross income and the result is your debt-to-income ratio. Example: your new house payment is $3000 per month, you have $1000 per month in revolving debt and car loans for a total of $4000 per month. Your salary is $10,000 per month. Divide the $4000 in obligations and house payment by your $10,000 per month salary and your DTI is 40%.


The catchall rule of thumb for most homebuyers is that the house payment, PITI, should be around 35% of your gross income. Why 35%? Because when we add in your other credit obligations we do not want to exceed 45% of your gross income for most loan programs and many households have about 10% of their income going to other debt obligations.


Using the 35% rule of thumb, how much more income did you need to qualify for the median home in September 2018 from September 2017?


Including estimates for taxes and insurance the PITI for the median home in 2017 with 20%, a 30-year fixed rate of 3.75% was $2998 per month. Divide the PITI by 35% and we see that you needed income of about $8550 per month ($102,600 per year) to qualify for the median September 2017 home.


The September 2018 median priced home in LA County, also with 20% down but with a rate of 4.75% for a 30-year fixed rate, had PITI of $3438 per month. Still using 35% as the factor for calculating qualifying income you needed income of about $9825 per month ($117,900) in September 2018 to purchase the median price home.


Summing up, the cost of waiting that past year resulting in needing about 5% more funds for down payment, a 18% increase in your mortgage payment and you would need to earn 15% more to qualify.


The last number is the most critical, in general you need to earn 15% more in 2018 than you did in 2017 to purchase the same home.


Most people are not getting 15% raises from year to year. So how do the numbers look based not on a hypothetical but a reality?


Bill is single and approaching retirement—he plans on retiring between 2023 and 2025. He pays almost $2000 per month in rent and recently came into a financial windfall of about $200,000. We first met in March of 2017 and proceeded to have several conversations regarding his ability to qualify, and more importantly what he felt comfortable paying, for a new home. Involved in the decision process were his tax preparer, financial advisor and real estate agent. The parameters were to keep Bill’s total housing payment, PITI, at $3000 per month or lower and including closing costs not to spend more than about $120,000 to purchase his new home. This put us in a price range of about $550,000 for a new home, with a 4% interest rate our limitation was on the amount of cash to close the transaction not the monthly payment.


Bill actively entered the market looking at homes and condos that fell within his cash to spend and monthly payment parameters. You may recall that rates fell from the Spring of 2017 into the Summer and Fall, which was good news for Bill as he by using his cash to close as his limiting factor the same price homes became cheaper as the monthly payments went lower with interest rates.


Unfortunately, Bill could not find the right home for him, or by the time he made the decision to write an offer on a home another buyer had already entered escrow.


Because of the market as time went on the neighborhoods in which he was looking had rising prices, so to purchase the same house he needed more and more down payment to meet the 20% down we had budgeted.


Today, even with higher rates his ceiling of $120,000 to spend still is a sales price of around $550,000, however because of the rising prices in the market the 3-bedroom homes in that price range are now 2-bedroom homes in the same neighborhood, or perhaps even a neighborhood that is the next level lower in terms of price, location, etc.


Because of his hesitation throughout 2017 and into 2018, Bill has to either change his parameters to purchase the home he wants, or change locations where the average prices are lower, which creates a challenge for his commute to work, visiting family and where he would like to live in retirement.


We are now looking at condominiums for Bill as the prices are usually lower in the same market and we can purchase something within his cash spending restrictions as well as stay within his monthly payment restriction even with the HOA dues. In the meantime his rent has increased 5% and the landlord is considering selling the property to take advantage of current real estate prices.


Waiting has cost Bill not in cash to close or monthly payment but in size of home, location of home and/or type of home he can purchase today as opposed to one year ago.


All of which leads to a follow up question: What will be the cost of waiting, or is there one, to purchase your new home in 2019, or 2020, instead of now or the near future? A question I will explore in next week’s WR&MU.



Have a question? Ask me!



Consumer prices jumped last month. The prices consumers pay for goods and services rose 0.3% in October and year over year the general inflation index climbed 2.5%, the highest it has been in the past year, according to Consume Price Index data released this week. Leading the charge upwards in prices were gas, rent and used vehicles. This data would put upward pressure on rates, however the data used to calculate inflation by the Federal Reserve is the “core” rate of inflation—which strips out volatile gas and food prices. The core rate for October came in with a 0.2% monthly increase and the annual rate dipped to 2.1% from the prior month’s rate of 2.2%. This is a bit confusing with the two different calculations, consumers are seeing a cost of living increase of 2.5% from last year, but if they didn’t buy and gas or clothes they only saw an increase of 2.1%. Because the core rate was within expectations and the Fed’s target inflation rate mortgage rates were not impacted by the news.


Consumers are the most important part of our economy. Personal spending and consumption accounts for 65-70% or our economy, because of this retail sales data is an important indicator of the economy’s strength. The retail sales data for October were released this week and included revisions to the prior two month’s data. In the revisions retail sales in August and September went from slightly positive to slightly negative, the first back-to-back negative months since 2015. For October, the data showed the biggest increase since last fall with an increase of 0.8% for the month. As with the CPI data, the spending increase was led by gasoline prices, and helped with a surge in new auto purchases. Taking out gas and car sales and the increase in retail sales drops to a much more modest 0.3%, so good news for auto dealers who saw an increase in sales, not as good news for retailers who saw their customers spend on gas and cars instead of sweaters and meals out. Overall the news is neutral for mortgage rates, the revisions downward for August and September will likely result in a revision downward for 3rd quarter GDP growth from the initial estimate of 3.5%, which is good for rates, and the increase in total sales being led by volatile gas prices and one-off new car purchases is discounted by investors.


Rates for Friday November 16, 2018:  Rates should be a bit lower today than they are, but it appears lenders are hanging on a bit to increases in the markets (higher prices equal lower rates) due to the weekend before Thanksgiving and potential volatility in the short week. Overall rates see some upward pressure easing this week due to stocks selling off and a comment from a member of the Fed board that decides rates indicating that moving forward the Fed will be very cautious—putting some question into whether there will be three rate increases as scheduled in 2019.




30 year conforming                                            4.75%       Flat

30 year high-balance conforming                    5.00%      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 with 740 FICO score for purchase mortgages.





Unfortunately, it often takes the misfortunes of others to appreciate the fortunes we have. Such is the case for most of us this week as we gather with family and friends for Thanksgiving. Coming together in gratitude for what we have in our lives as we observe the incredible upheaval thousands, tens of thousands, of families have had in our Southern California region via the media, both traditional and social.


Those impacted by the wildfires in Southern and Northern California are extremely grateful for one of America’s most important organizations, the Red Cross, who show up at every disaster with all sorts of assistance from arranging shelter, food, water, clothing, even dolls and toys for children. This comes at a cost, which is almost all from charitable donations.


Here is where the readers of the Weekly Rate & Market Update can help those who no longer have a home this Thanksgiving, or are displaced, due to the fires, by clicking this link and making a donation of any size: Red Cross Donations


We will have guests at our table from near, my father in-law, and far as two families from Chicago, Leslie’s cousins as well as a family spending their vacation week in Southern California whose daughter has gone to camp for several years with our daughters. I am anticipating some talk about the Cubs and Bears.


My family and I are very thankful for the support we have had over the decades from our clients, business and referral partners. As well the incredible family at Stratis Financial who work diligently to ensure our clients’ files processed, approved and funded with the utmost on professionalism and efficiency.


Have a wonderful Thanksgiving with family and friends wherever the holiday may take you.


With gratitude,




Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

11-9-18 What kinds of loans do you and your company handle?

Question of the week:  What kinds of loans do you and your company handle?


 Answer:  This is a common question I am asked when meeting people, be it in a casual social setting or with professionals in other industries.


The broad answer is: almost any mortgage on residential property for one to four units in the State of California.


More specifically Stratis Financial excels at working with our clients to fund the following types of mortgages:


Conventional:  By far the most mortgages funded every year for residential mortgages in the United States. Broadly referred to as “conventional,” these are mortgages that are underwritten and approved to the guidelines as set forth by Fannie Mae and/or Freddie Mac. Once mortgages approved under these guidelines are funded they are sold by the lender in bundles of tens of millions of dollars to either Fannie or Freddie. While very similar with their guidelines, each of these agencies have some slight differentiation that dictates a loan can only be approved under one of their guidelines or the other. For instance in many instances Freddie Mac may only require the most recent year of Federal income tax returns for income verification for a self-employed borrower, whereas the guideline for Fannie Mae is two years of tax returns.


Conventional mortgages have two different loan tiers, labeled conventional and high-balance, which have different loan amounts, pricing and some different guidelines for qualifying and approval. These are the loans I put in the WR&MU rate quotes below. The maximum loan for single family residences for 2018 is $453,100, the maximum loan limit for “high-cost areas,” aka high-balance loans, for 2018 is $679,650. It is important to note that while Los Angeles and Orange County are considered high-cost areas, other counties in Southern California are not and have varying maximum loan amounts; for instance the maximum loan amount for Fannie or Freddie in Riverside County is $453,100 and in San Diego $649,850 in 2018.


The loan limits are established by the Federal Housing Finance Agency (FHFA) and can be adjusted annually. New loan limits for 2019 have not yet been announced, usually the loan limits for the following year are published in late November—you can be sure I will have the new limit announcement in the WR&MU the Friday we are made aware if the limits are changed.


Conforming mortgages can be used for one to four unit properties for primary residence, second homes and investment properties, different guidelines will apply depending on property use. As well fixed and adjustable rate programs are available.


Jumbo: Also referred to as non-conforming. These loans vary greatly from lender to lender as far as underwriting guidelines, loan amounts and pricing. Many lenders will start their jumbo loan programs at $453,101—just over the conforming limit—and go to several million dollars. The higher your loan amount the lower the loan to value you will have to have. For instance a lender may fund a loan up to one million dollars with a maximum loan to value (LTV) of 80%, another lender may fund up to $1.5 million with a maximum LTV of 80%. With a low LTV, say 60%, some lenders may have maximum loans of two million dollars, others may go up to ten million, or higher.


Most lenders in our market do not retain their jumbo mortgages but sell them to investors after funding, it is the investors who create the guidelines and determine the loan limits. Because different lenders use different jumbo investors we are able to fit specific criteria for clients to the jumbo programs available through different lenders.


A rule of thumb for jumbo loans is that the underwriting guidelines are stricter, how much stricter depends on the investors. As an example, one program may require any income to show it has been paid on a monthly basis for six months or more, say for payments from a retirement account, whereas another lender may use the annual distribution from the account, or show that an automatic payment has been set up. Reserve requirements, property features, income calculations, and other quirky guidelines differ from lender to lender and from Fannie and Freddie that may help one borrower or hurt another.


Another rule of thumb is that jumbo loans are higher priced than conforming; however this is not always the case. Not infrequently we will find a jumbo program that has a lower rate than other lenders high-balance conforming rates, when this is the case we ensure that the clients meet the more restrictive guidelines of the jumbo program and if so we lock them in at the lower rate and fund the jumbo mortgage. It makes no difference to the borrower that they do not have a Fannie Mae or Freddie Mac loan, especially if they are able to save money on a lower interest rate or cost of the mortgage.


Jumbo mortgages can be used for one to four unit properties for primary residence, second homes and investment properties, depending on investor, different guidelines will apply depending on property use. As well fixed and adjustable rate programs are available.


FHA: The original 30 year fixed rate mortgage for homeowners in the United States. The Federal Housing Administration was created in 1934 as part of the National  Housing Act that established the Department of Housing and Urban Development (HUD) as part of President Franklin D. Roosevelt’s New Deal agencies, also referred to as his Alphabet Soup. The New Deal Agencies were created by Roosevelt as part of his plan to pull the nation out of the Great Depression and besides HUD and FHA included the Securities and Exchange Commission (SEC), National Labor Relations Board (NLRB) and many other more specific purpose agencies such as the Tennessee Valley Authority (TVA) and national agencies like the Public Works Administration (PWA).


Homeownership prior to the Depression was very low and most homeowners had short term mortgages held by banks. The terms of the mortgages were very much in favor of the lenders and as a result foreclosure was relatively easy and could occur quickly, often with only one missed payment. The Depression caused a significant percentage of homeowners to lose their homes and farms to foreclosure.


The purpose of FHA was to insure mortgages funded by banks and lenders to encourage and enable lending to potential homeowners. It created 30 year mortgages, which resulted in lower monthly mortgage payments and established guidelines that made foreclosure a more difficult process for lenders to enable homeowners to recover from a brief set-back and retain their homes.


FHA still does not fund or purchase mortgages, instead the agency insures mortgages against default provided the mortgages follow the underwriting guidelines established by the agency.


Guidelines for FHA mortgages are generally more lenient than for conforming or jumbo mortgage products, especially for down payment requirements, income to debt ratios for qualifying and use of co-borrowers and gifts for assisting in qualifying. Looser guidelines mean riskier loans, but because the mortgages are fully backed by the United States government lenders are willing to make these loans at rates very near, often below, conforming lending rates.


The insurance the mortgages are paid by the borrower in two manners. There is the upfront mortgage insurance premium that is added to the loan amount at closing, plus a monthly mortgage insurance payment that is paid for the life of the loan. This adds to the cost of the loan, which depending on the rate markets could cause it to be more expensive than a conforming mortgage, however due to the looser guidelines it is often the best opportunity for many families to purchase or refinance their home.


It is important to note that the loan limits for FHA mirror those of Fannie Mae and Freddie Mac.


FHA mortgages can be used for one to four unit properties for primary residence, second homes and investment properties, depending on investor, different guidelines will apply depending on property use. As well fixed and adjustable rate programs are available.


VA: Congress passed the Servicemen’s Readjustment Act of 1944 and signed into law by Roosevelt. The law is more commonly known as the G.I. Bill and among the many benefits included in the Act was the establishment of the VA loan to enable active duty members of the military and qualified veterans to purchase homes with no down payment.


Like the FHA, the Veterans’ Administration does not fund mortgages but does insure them, which is why lenders will provide mortgages to those eligible with no down payment. The insurance, known as the funding fee, is added to the loan amount which would result in a loan above the value of the property, or if agreed upon the seller may pay the funding fee for the borrower. Due to the ability to finance the funding fee over the period of the loan a VA mortgage of the same amount and interest rate will have a lower monthly payment than a FHA mortgage.


There are similarities to FHA in guidelines for VA loans; however the biggest difference in the qualifying guidelines is that VA is not dependent on the debt-to-income ratio for loan approval. Residual income is the underlying guideline for VA loan qualifying. Instead of having a hard debt-to-income ratio of 50% of your gross income for total housing payment and debt obligations, the VA uses a minimum residual income amount for qualifying if necessary.


For instance in qualifying for a mortgage the applicant may have a debt-to-income of 55%, above most loans qualifying limit. However using residual income calculations the new housing payment including taxes and insurance, federal and state withholdings and payment for debt obligations, including but not limited to car and student loans, credit cards, alimony and/or child support are added up and subtracted from the applicant’s gross income. Depending on the amount of residual income the veteran can be approved. The amount of residual income required depends on the where the property is located and the number of family members; a single veteran purchasing in eastern Georgia will have a $441 residual income requirement whereas family of four in Southern California will have a $1003 requirement.


There are some criteria to be eligible for a VA loan, primarily the veteran must be honorably discharged from the service. There is a calculation for the maximum eligible loan amount based upon the entitlement available to the applicant from the VA. If a veteran has not used any of his or her entitlements the maximum loan amount, if qualified, could exceed one million dollars—there would be a down payment required, but significantly less than what would be required for FHA, conventional or jumbo loans for the same property.


VA loans are only available for the purchase or refinance of the veteran’s primary residence. In some instances a second property can be purchased using a VA mortgage, but it is a rare set of circumstances that would allow this.


VA loans can be used to purchase 2-4 unit properties as well as single family residences as long as the veteran will be occupying one of the units. Different guidelines may apply regarding loan amount calculations. As well fixed and adjustable rate programs are available.


Non-Qualified Mortgage: Also known as Non-QM, non-traditional, asset-based, or hard money, these loans practically disappeared following the passage of Dodd-Frank in 2010. The Wall Street Reform and Consumer Protection Act, commonly known as it Dodd-Frank after its sponsors Senator Christopher Dodd and Representative Barney Frank, was enacted following the 2008 housing and mortgage market melt downs.


One of the provisions of the law is that residential mortgages must meet certain guidelines to be considered a “qualified residential mortgage”. Among the qualifications are that the borrower must show evidence of income to support repaying of the mortgage; note not cash or assets, but evidence of income, the loans not be amortized for more than 30 years, do not have total points and fees in excess of 3% of the loan amount and cannot have interest only or negative amortization features.


These guidelines was in response primarily to the proliferation of no-income-verification mortgages that were funded by banks and lenders and either held in private portfolios or for the bulk of such mortgages purchased by Fannie or Freddie. The other factors such as negative amortization and interest only features in loans certainly contributed to the ease of credit that created the market collapses, but were secondary to the stated income mortgages as the primary cause.


If a lender funds mortgages that do not meet the guidelines of the qualified mortgage (QM) rule then the lender must retain at least 5% of the loans they sell into the secondary markets. This 5% rule creates a risk-retention factor for lenders in the Non-QM sector, or mandating they have some skin in the game.


Over the past few years we have seen an exponential growth in the number of Non-QM programs and lenders in the market offering loans using bank statements or other methods to determine ability to qualify for mortgages. Qualifying income is not the only reason these products are utilized for residential borrowers, others include issues with credit, subject property or chain of title and ownership history that do not meet the guidelines for conforming or jumbo products available. These loans are often part of a long term plan of obtaining funds for the purchase or refinance of a property with the intention to replace with a conventional or jumbo mortgage with more favorable rates or terms in the future.


Due to the considerably looser underwriting guidelines and the retention requirements for the loans these mortgage products have higher interest rates than conforming and jumbo mortgages.


Non-QM mortgages can be used for one to four unit properties for primary residence, second homes and investment properties, depending on investor, different guidelines will apply depending on property use. As well fixed and adjustable rate programs are available.


Stratis Financial has many other mortgage and home loan products available depending on the needs of property owners. If we do not offer a product, or I feel we are not competitive with a product, I routinely refer out to other lenders who have those products and meet the service levels we require for our clients.


What is your mortgage need? If you are uncertain please give me a call to discuss your needs and we can determine the options available for you.


Have a question? Ask me!


A few economic bits of news this week that investors key off of when making decisions which could impact mortgage rates. Consumers charged less in September than in August but borrowed more. For the fifth month out of the last eight, credit card use declined, which can be of some concern if the reduced credit card purchases result in lower consumer spending—which accounts for 65-70% of our nation’s economic activity. Total consumer debt continues to grow, at a slower rate than prior months but still growing, however much of the borrowing is for long term purchases such as vehicles and homes. The other somewhat significant piece of news was the release of the Producer Price Index for October.  If investors digested their news like many individuals do, i.e. just read the headlines without reading the details, they would have sold, sold and sold mortgages and bonds today causing interest rates to spike. The headline was that wholesale prices jumped in October for the highest increase in the PPI since 2012, climbing 0.6% for the month. Reading into the data we see that the increase was primarily due to higher gas prices. When the “core” rate of wholesale inflation is examined, with gas and food stripped out of the index, the rate of increase drops to 0.2% for the month, which is what investors expected.  Year over year the wholesale inflation rate is 2.9%, up 2.6% from September.


The Federal Reserve met this week. As expected there was no change in interest rates, what most followers of the Fed were interest in was the statement following the meeting regarding policy and future expectations. The statement on the economy was pretty much the same as it has been, mentioning the positive job growth and economic growth and that the Fed expects to gradually increase the federal funds rate in the future. Absent some major change in the economy from its current path, or a major non-economic event, we can expect the Fed to increase rates by one-quarter of one percent (0.25%) in December and then three times in 2019.


Rates for Friday November 9, 2018: Mortgage rates bounced around a bit this week but we finish with the conforming rate being flat from last Friday and the high-balance rate declining one-eighth (0.125%). Rates have been within a tight range of one-eighth of a percent for the past six weeks, any news positive or negative could prompt a break out of to higher or lower rates. In other words we continue to have a volatile somewhat unstable rate market.



30 year conforming                                            4.75%       Flat

30 year high-balance conforming                   5.00%      Up 0.125%


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 with 740 FICO score for purchase mortgages.



Another milestone in the Smith household as our youngest passed her driver’s test and drove herself to school on Tuesday instead of taking the bus. It also has resulted in the big car shuffle as she took my 2006 Pilot, I am now in the 2010 Odyssey and Leslie moves into what was our oldest daughter’s 2001 Infinity until we decide it is time to get her a more recently manufactured set of wheels. We’re not real big on buying new cars in our family on a very frequent basis.


Have a great week, and drive carefully—especially around Bixby Knolls!




Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

11-7-18 Should I refinance and payoff my HELOC?

Question of the week:  Should I refinance and payoff my HELOC?


 Answer:  My most frequent response to questions of the week definitely applies to this question: It depends.


There are several factors to consider when deciding if now is the time for you to refinance and fix the rate on you Home Equity Line of Credit (HELOC).


Before we get into various factors to discuss, let’s take a quick look at why the question is being asked. Your HELOC has three components that determine your current payment, the balance, the prime rate and the amount added to the prime rate (called the margin) that results in the rate you are being charged.


Of the three factors the only one you somewhat control is the balance; you can impact your payment by paying down the balance on the HELOC. Obviously, the more you pay towards the balance the lower your payment will be on a monthly basis. Most HELOCs have two periods of repayment. The initial payment period usually has a minimum payment requirement that is the interest accrued on the loan since the last payment. The next stage of payments is usually a fully amortized period for the remaining life of the loan; if you may have a HELOC that is a twenty year loan, in this case typically the first ten years of the loan have an interest only payment, at the start of the eleventh year the loan will be fully amortized based on the remain ten years of the loan.


Example: You have a $150,000 balance on your HELOC that you obtained in December 2008 and the current rate is the prime rate, currently 5.25% plus one-half of one percent (0.500%) for a payment rate of 5.75%. Your minimum payment for November is the interest on the balance, $718.75 (balance times rate divided by twelve months). Next month you begin your eleventh year and the loan payment is now fully amortized using the rate that month plus the remaining term of 120 months. The rate for the December payment is the same as November, since the prime rate has not moved, at 5.75%, since you paid the interest only payment in November balance is still $150,000 but now instead of interest only the payment is amortized to include principal reduction and the payment will be $1646.54. Since the Federal Reserve is expected to increase its funds rate by 0.25% in December that means the prime rate will increase by 0.25% as well so the January payment will be calculated at 6.00%** and your payment will be $1655.00 for the month.  **Since the Fed will increase rates into the month the rate will only be for part of the month with the earlier part of the month being calculated at the 5.75% rate, but for demonstration purposes easier to show as one complete month.


The lower your balance when you enter the fully amortized payment portion of the repayment of your HELOC the lower your required payment will be.


If you have a HELOC for three years or more you have seen your rate increase by two percent since 2015 and one percent since last November. The chances are you will see at least another one percent increase in the next year, with a 0.25% in December when the Fed is expected to increase rates again.  (To see why the Fed increasing rates impacts your HELOC rate here is link to WR&MU from a few weeks ago addressing the issue.)


With rates having climbed one percent or more in the past twelve months the decision to refinance is a lot harder than it was one year ago, or even two to three months ago and moving forward the decision might not get easier.


The first consideration is if you are risk averse or not. The risk averse individual would be more inclined to want to refinance to avoid future increases in rates on their HELOC as well as for long term fixed rate mortgages that would be used to refinance. The person more comfortable with risk might be less inclined to refinance. Why?


The person who is willing to accept more risk may take the stance that their underlying primary mortgage has an interest rate that is lower than the rate available to refinance their primary loan plus their HELOC and will accept the higher rates on their HELOC in the future and if need be make interest only payments with the hope that rates decline in the future so refinancing makes more sense, or to enable easier paying down of the mortgage.


The risk averse person does not want the uncertainty of not knowing how high their rate and payment will go on their HELOC and is more willing to trade off what would probably be a higher payment in the short term for what may be a lower payment in the long run. The risk averse person knows if rates do drop in the future they can likely refinance and lower their payment.


What are the factors in terms of payment that need to be considered? First and foremost is the payment differential between doing nothing and refinancing. There are four primary factors that will determine the payment at which the interest rate for your refinance will be calculated: balances, credit score, loan-to-value and whether the transaction would be considered cashout or not.


The first three factors are pretty elementary; the combined balances of your existing primary mortgage and your HELOC will determine the refinance loan amount, your credit score is determined when we pull a credit report, the loan-to-value is determined by the estimated value of your home and the refinance loan balance.


The fourth factor, whether the refinance transaction is considered a cashout transaction or a rate and term transaction. For conventional mortgages unless the HELOC can be proven to be part of the purchase price of the property the transaction is considered to be a cashout transaction, if your HELOC was used to purchase your property the transaction is considered to be a rate and term refinance, and will have lower costs than the cashout. If the loan is a jumbo loan we have several programs that will consider the refinance a rate and term transaction is you can prove you have not accessed any funds from the HELOC in the past twelve months.


Once we know the four factors we go to our rate sheets and determine the rate, and also your what your new payment would be after refinancing. With this information you can determine if you want to refinance and payoff your HELOC into a fixed rate mortgage, or continue as you are with your current primary mortgage and HELOC.


Since the minimum payment for most HELOCs is interest only even if you were able to refinance near what your current mortgage rate is the chances are you will see some increase in total payment as you move from interest only to paying down principal on your HELOC. With rates higher and most homeowners with rates closer to 4.00% than today’s rates the chances are that your payment will likely increase a few hundred dollars per month, or more, when refinancing to pay off your HELOC. And this is the basis for the hard decision, is the extra monthly payment worth it to remove future risk based on rising interest rates, or is the cost too much for you to want to remove the risk?


This is a question I am very willing to help you answer by running the numbers and options for you and your particular situation. For several years we have been encouraging homeowners with HELOCs to refinance to fix their rate and payment on their mortgage debt, while I still feel it is a good idea for most homeowners, it may not be your choice, however I encourage you to run the numbers and know the options. If your HELOC is converting from an interest only payment to fully amortized in the next few years you may want to give refinancing even more consideration due to the sharp increase in your monthly payment when that occurs.


If you, or someone you know, has a Home Equity Line of Credit please contact me to go through your information so you have the information needed for making a decision on whether to refinance.


Have a question? Ask me!


Better economy, higher rates. That correlation is something long time readers of the WR&MU have learned over the years. This week we have positive economic news released every day, some data a lot more positive than others. Here are the data releases that have the greatest impact on rates.


Households made more and spent more in September. Income growth for the month was slower than August but still positive at 0.2% matching the core inflation rate for the month. Holding back income growth was a slow down for self-employed businesses. Savings rates dropped as consumer spending increased in September by 0.4%, the seventh month in a row with spending increasing by 0.4% or more. The disparity in spending and income growth may have been impacted by Hurricane Florence. The very good news for the economy inside the data is that there was a sharp increase in the purchase of new cars and recreational goods—the sort of spending that occurs when the economy is strong and consumers are optimistic. The news is not good for interest rates, though tempered a bit as the year over year inflation index of 2.0% is in line with the Federal Reserve’s target.


My oldest was one the last time the American consumer was has confident as s/he was in September, as the consumer confidence rose to its highest level since 2000. The cutoff date for the survey was mid-October, before the stock market slump so the expectation is that the index will drop in November. This news also puts upward pressure on interest rates.


Continuing the short term historic gains was the Employment Cost Index which showed wage gains in the private sector reached their highest level in ten years in the third quarter, with wages, salaries and benefits increasing 0.8% for the period. The gains reflect the lowest unemployment rate since 1969. A very big concern for economists is wage inflation, higher prices driven not by demand but by the cost of production of goods and services being driven higher by employment costs. The ECI report puts that concern very much in the center of the inflation and rate conversation. While this news is good for workers it is bad for those wanting lower interest rates.


Today’s data just piles on. The jobs report was released by the Labor Department today showing the labor situation in September. The news shows a very strong labor market, stronger than expected. Nonfarm payrolls increased by 250,000 in September, well above the forecast of 208,000 jobs. Included in the report was year over year growth in wages of 3.1%, the highest gain in one year since 2009 when the recession ended, the average hourly pay is now $27.30. This report fully supports future rate hikes from the Federal Reserve and continued upward pressure on mortgage and other long term rates.


Rates for Friday November 2, 2018: Despite the quantity and quality of positive economic news conforming rates hold on from last Friday, high-balance loans ($453,101 to $679,650) increased from last week back to seven year high first reached in early October. The only reason I can see for rates to undergo a migration down would be a catastrophic event causing investors to flee to the safety of long term fixed rate returns available in U.S. Treasury bonds and mortgages.



30 year conforming                                                4.75%       Flat

30 year high-balance conforming                       5.125%     Up 0.125%


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 with 740 FICO score for purchase mortgages.




As many of you know I love baseball. During the season most afternoons I have the Phillies radio broadcast, or some other game back east playing on my computer and on weekends I listen to games from Philly or around the country while driving around or doing chores. Last Friday night’s game between the Dodgers and Red Sox that went 18 innings was pure heaven for me and I was thrilled the way it ended, not necessarily because the Dodgers won but that it was won on a great home run and not an error. Every inning was thrilling and had fans on the edge of their seats. While mildly upset the Red Sox won another championship and the Dodgers drought is now thirty seasons, I admire the Sox for the way they played this season and through the playoffs; the best team hoisted the trophy to end the season.


Now we wait until the end of February when Spring Training starts!


Have a great week,



Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

10-26-18 Why can’t you use my bonus income to qualify me for my new home?

Question of the week:  Why can’t you use my bonus income to qualify me for my new home?


 Answer:  Income must be of a constant and continuing nature.


What constitutes “constant and continuing?” Generally, at least a two year history of receiving the income fulfills the requirement. There are some exceptions which I will cover below, but the question of the week specifically addresses bonus income, and much of this will apply to overtime and commission income as well.


Bonus income typically fluctuates from year to year depending on the matrix upon which the bonus is based. Because of the fluctuation there must be a guideline for the lender to consider the income for qualification purposes for your mortgage application. The industry standard is that if you have received a certain type of income for two years are more then we have reached the threshold of constancy. To reach the continuing nature policy we generally need a statement from your employer that the bonus will in all probability continue; this guideline is usually met with a letter from the employer or with a Verification of Employment (VOE) that we send your employer to complete. The VOE has sections for your employer to complete stating the length of employment, income for each of the past two years plus year to date broken down into base, bonus, overtime and commission. As well there is a place to indicate whether the continued payment of bonus, overtime and commission is likely to continue in the future.


Whether your bonus is paid annually, quarterly, monthly or per pay period does not matter for qualifying, we will convert the amount received into a monthly amount based on the amount received for the past two years, and if applicable year to date. The rule of thumb for bonus income, as well as overtime and commissions, is to use at least a two year average, unless the most recent year is lower than the prior year in which case the lower amount is taken.


Example: You have been with your company for five years and have received bonuses every quarter for the past three years and the bonus is paid on the first paycheck after the end of the quarter. In 2016 your bonuses totaled $12,000, in 2017 $12,600 and on your October 15th pay period your total bonuses year to date including September totaled $9700. The total amount received in bonuses is $34,300 over the past 33 months (two full years plus nine months in 2018), so we divide the total amount received by the time period over which it was received and get $1039.39, this is the amount of bonus income we will use for your qualifying for your mortgage—provided your employer verifies that you are likely to continue to receive bonuses in the future.


Example 2: Same employment scenario as above, however in 2016 you received $12,000 bonus, in 2017 you received $10,000 bonus and through September you have received $9000 in bonus income as reflected on your recent paycheck. It is evident you received $1000 per month in 2016 and so far in 2018. However, in 2017 your bonus was $833.33 per month—this is the bonus income that most lenders will use for income qualifying as it follows the standard guidelines from Fannie Mae and Freddie Mac. Even with a letter from your employer regarding 4th quarter bonus the lender will take the worst case scenario when calculating income.


All this covers how we do calculate and count your bonus income, back to our question, why is your bonus income not allowed? Reading through the above it is likely because of any or all of the following:


  • You have not received your bonus for at least two years
  • Your bonus has been inconsistent, i.e. you received bonus income in 2016 but not 2017
  • Your employer will acknowledge that your bonus is likely to continue, which we saw not infrequently during the recession with employers very hesitant to put in writing bonuses are guaranteed or likely to continue creating a legal document an employee may use against the employer should bonuses be canceled.


Any non-wage employment income is generally treated in a similar manner, most prevalent being overtime, commission and self-employment income.


As mentioned above there are some exceptions to the two year income rule:


New job—If you are starting a new job, depending on the circumstances, we can generally count your income with a short, or perhaps no, history of employment at the new job. Typically, showing at least thirty days of income is needed. If you are transferring from working for Dennis Sprockets to Smith Widgets and in somewhat the same type of work, we can use your new income—but not overtime or bonus unless expressly addressed and quantified in an employment contract and if you received similar amounts in your prior job. New professionals can also have “young” income used for qualifying with proof of education in the field and an employment contract. If transferring geographically and a new job with a new company we can usually use your new employment income before you start on your job with an employment contract and separate letter from a senior executive at the company.


Spousal support—If you have a divorce decree or separation agreement that is recorded that includes your receiving alimony or child support we can use that income once you can prove you have received six monthly payments in a timely fashion. Note the income must be received as one payment every six months and not six months’ worth of payments upfront. As well the agreement must indicate the income will be received for at least three years after the date of your mortgage application; for instance, if you are receiving $800 per month for each of your two children until they are 18 and your son is 16 then we will only accept $800 for qualifying for your youngest child.


Retirement income—If you receive a pension or social security income you do not need to show a two-year history. Provide your award letter stating the amount of income you are to receive and we will use the current income for social security; for a pension, we must show that the pension income will continue for at least three years.


Asset accounts—Most individuals and couples have their financial assets in a retirement account and/or taxable investment and bank accounts. Depending on several factors these accounts could be used for qualifying income. Retirement accounts can be used for income if you are taking regular withdrawals from the account. Depending on your age and the type of retirement account you may be having to take mandatory distributions on an annual basis, this can be used for income. Or if you are taking regular distributions we can use those amounts as income as well. If you have funds in non-retirement accounts there are some cases where we can perform a calculation called “asset depletion” so we can achieve qualifying income.


Rent—If you are purchasing a new home and renting out your existing home there are guidelines we can follow to use the rental income from your current residence as qualifying income to offset the mortgage, tax and insurance payments.


Bonuses, commissions, retirement, wages, there are many different sources of income; whether yours is eligible for use as qualifying income can depend on different factors. If you, or someone you know, if looking to purchase or refinance property please contact me to ensure you are fully qualified for the transaction you want to make.



Have a question? Ask me!


Don’t bury the lead. A couple of big pieces of economic news, since weekly update is primarily about mortgages and real estate we will start with the major news on home sales. This week the California Association of Realtors released its housing report for September. Based on the data I am of the opinion the real estate markets have become a buyer’s market. Los Angeles County saw the median home price increase 4.5% from August and 4.7% from 2017 to a value of $634,680. While the median price increased there was a dramatic drop in total sales. Sales volume for the month was down 18.3% from the prior month and 22% from last year. Neighboring Orange County saw both the median price and total sales volume drop in September. The county median price of $825,000 was down 1.6% for the month and 3.3% for the year, total volume was down 20.3% from August and 21.8% from September 2017. The data that supports my contention of our regional market being a buyer’s market is the increase in the number of active listings on the market and the time a home is on the market before it is sold and enters escrow. Basic premise, more supply leads to lower prices. Supply is growing and demand is not due to several factors, primarily higher interest rates.


Impacts sales and refinances. The softening market not only impacts sellers as they see values slowly erode, but also can have an impact on homeowners looking to refinance to lower payments, consolidate equity lines or obtain equity for various reasons. How? With a softer market there is more downward pressure on appraisals and therefore values needed for refinancing, or the rate and cost of the refinance due to potentially higher loan to value based on potentially lower appraised values.


The national economy is not following housing. This morning the initial estimate for the Gross Domestic Product was released and it showed growth in the quarter of 3.5%, slower than the 4.2% GDP growth in the second quarter. The expectation is that 2018 will end with total economic growth of 3% or greater, the first year with such growth since 2005. The report was, as you can expect, sprinkled with good news most notably the decline in inflation from 2% in the second quarter to 1.6% in the third quarter. That is good for consumers, but is it good for the economy? With some weakness in business spending and investment, slowing inflation and the equity markets dropping in recent weeks the signals are there for economic growth slowing, or reversing in 2019. It is quite possible, probable?, that a mild recession will begin in the third or fourth quarter of 2019. Overall the GDP news was market neutral as the growth figures met expectations.


Rates for Friday October 26, 2018: With stocks falling this week investors have been moving their funds to bonds and mortgages resulting in rates falling from last Friday. We remain in a volatile market and caution is strongly advised when thinking about floating your rate.



30 year conforming                                            4.75%     Down 0.125%

30 year high-balance conforming                       5.00%     Down 0.125%


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 with 740 FICO score for purchase mortgages.





Few things are better than a short trip that feels like a very long trip. That was the experience Leslie, our daughter and I had last week when we flew out to Boston to see our college freshman. Leslie and I walked about 13 miles on Saturday, mostly up the Charles River while the internationally famous Head of the Charles rowing regatta was going on, watched a performance by the marching band, where ironically our daughter is the tallest in the flute section as she was in high school, then we all enjoyed a fantastic and leisurely lunch/dinner at an Italian restaurant, topped off with the ubiquitous visit to Mike’s for some pastries. Another long walk to LL Bean to get our girl squared away with duck boots for the coming winter and it was back to our hotel for a few hours of catching up and just being together. A packed day, with plenty of needed hugs, mostly for me, and just seeing how happy she is with her friends, college and new city and mom and dad have come home at ease.


Now we are looking forward to our next time seeing her when she is home for four weeks at Christmas!


Have a Happy Halloween and don’t get too spooked by the gremlins and goblins showing up on your doorstep…I’ve noticed they leave you alone if you bribe them with some sugary treats!


Have a great week,




Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com