The Decade in Review

Question of the week:  A look back at the ‘10’s decade from the lens of mortgages and the economy.

 Answer:  Last week we took at look back at 2019 for mortgages, housing and the economy. This week let’s take a look back to the beginning of the decade and compare it to the end of the decade.

We started the decade with the economy in the early stages of recovering from the Great Recession. While the recession ended in June 2009 (a recession is defined as two or more quarters of economic contraction, or negative Gross Domestic Product growth, a recovery starts when there is positive GDP growth after two or more months of negative GDP growth). Despite the economy starting to grow six months earlier, 2010 saw continued increases in unemployment and decline in housing prices for most of the country. The onset, depth and length of the recession were the result of a collapse in real estate markets across the economy that had been fueled by very easy to obtain mortgages.

One of the first results of the recession was the implementation of new policies for mortgages funded through Fannie Mae, Freddie Mac, using FHA or VA financing and eventually all lenders. As I said at the time, underwriting guidelines went back to the way they were when I started in the industry in 1987—you had to prove your income, verify your funds for down payment and closing costs were your own or source where they came from, and the property you were borrowing or refinancing had to have its value supported by an appraisal. While there has been some relaxing in underwriting guidelines over the past decade, most of the fundamentals remain the same for borrowers looking to obtain the least risky mortgages in regards to rates and terms.

Let’s look back at the data from 2010 and compare to today’s numbers and environment.

As we did last week, we will start with mortgages and interest rates. A big change in the mortgage market from 2010 is the maximum loan limits for Fannie Mae and Freddie Mac. In 2006 the conforming loan limit was raised to $417,000 and it stayed at this limit until 2017 when it was increased to $424,100; in 2020 the conforming loan limit will increase to $510,400. In 2008, to encourage home buying and enable more homeowners to refinance Fannie and Freddie added the “high-balance” loan limit for properties in high cost areas, such as Los Angeles and Orange Counties. This limit initiated at $729,750 for single family dwellings. In 2020 the new high-balance limit will be $765,600.

The decade started with the conforming mortgage rate at 5.125% (using the same parameters I use each Friday for rates in the WR&MU, purchase of a single family residence with 20% down and a borrower FICO score of 740). We end the decade with the conforming rate at 3.50%, and the conforming rate being at or below 4% for three-quarters of the year.

January 2010 saw the median priced home in the State of California selling for $284,600. Statewide the median home price bottomed out in February 2012 at $268,810. As mentioned last week the median home price in California in November 2010 was $589,770, 107% more than the at the beginning of the decade and 120% higher than the bottom in 2012.

More locally, as mentioned last week the median home prices in November 2019 for Los Angeles and Orange Counties were $594,840 and $822,000, like the state median, these prices were up significantly from January 2010. The LA County median price was $316,698 a decade ago, up 88% today from January 2010. Orange County’s median price was $527,477 in 2010 and has increased 56% from the median price to start the decade.

A very large factor in our economy this decade has been the actions of the Federal Reserve. To support the mortgage market, keeps rates low and push economic growth the Fed engaged in a few maneuvers. First and foremost it dropped its discount rate, used by banks to borrow money from each other, to near zero. This caused the Prime Rate, used by many lenders as their benchmark for consumer loans, to drop to 3.25% in December 2008 and remain at that level until December 2005. Today the Prime Rate is 4.75%, down from a post-recession high of 5.5% in August 2019.

Of much greater impact, and significance was the “Quantitative Easing” policies of the Fed. In November 2008 the Fed began purchasing Mortgage Backed Securities (MBS, these investment instruments are composed of bundles of millions of dollars of residential mortgages, mostly from Fannie Mae and Freddie Mac) and U.S. Treasury notes. By purchasing these investments the Fed kept money flowing through the debt markets enabling lenders to continue to make mortgages. The plan was to purchase $600 billion in mortgage debt (MBS) and $100 billion in other debt, mostly U.S. Treasury notes. By March of 2009 the Fed had accumulated $1.75 trillion, well beyond its initial target, and expanded the QE program, purchasing another $750 billion in MBS and $400 billion in Treasuries and other debt. By June 2010 the Fed’s balance sheet had grown from $870 billion in August 2007 to $2.1 trillion.

As the Quantitative Easing ended the  Fed, and others, were criticizing banks for not lending enough, banks countered that there were not enough credit-worthy borrowers. This led the Fed to start what became known as QE2. Starting in November 2010 and continuing to July 2011 the Fed purchased another $600 billion in MBS.

During this time the economy was growing, unemployment slowly began to level off and employers were slowing hiring instead of firing. Not fast enough for the Fed however. In September 2012 another Quantitative Easing process began. QE3 started with the Federal Reserve purchasing $40 billion per month of MBS, in December 2012 the Fed upped the amount to $85 billion per month, reduced the purchases of mortgages to $65 billion per month in July 2013 and stopped the policy in October 2014.

In 2017 the Fed began slowly selling off some of it assets to “normalize” its balance sheet. The selling stopped in august 2019 and the following month the Fed’s balance sheet hit a post-recession low of $3.8 trillion, today the Fed holds $4.2 trillion in mortgage, Treasury and other debt, almost four times the size in 2007.

This is significant moving forward because $4.2 trillion sitting in the Fed’s accounts is $4.2 trillion additional dollars in our economy, and enables the Fed to have even greater control over the economy than it has every had before. Keep in mind the Fed, ostensibly accountable to Congress, really isn’t and acts independently.

Some hard economic data numbers for the past decade for those who are data geeks like myself.

In 2007 the unemployment rate was 5.0% and inflation was a very robust 4.1%. Unemployment rose to 9.3% to start the 2010’s and was at 1.5%. In 2011 the nation experienced its twenty-sixth consecutive month of more jobs leaving the economy than being created.

Despite the recession ending in 2009, the year ended with GDP at 2.5%. By the end of 2010 the GDP was growing at 2.6%, through the 3rd quarter of 2019 GDP was growing at 2.1% on an annualized basis.

We are experiencing economic history as 2019 will be the eleventh straight year of economic growth, the longest period in history. Will 2020 see a recession and break the historic streak? As I mentioned in last week’s WR&MU I do not think a recession is in the cards for 2020 unless some catastrophic or unexpected event occurs.

We have come a long way since 2010, economic and emotionally as workers and consumers have gone from fear to economic optimism and stability. What will the next decade have for us?

Have a question? Ask me!

Rates for Friday December 27 2019: It’s over! After ten straight weeks of no change in the conforming mortgage rate from Friday to Friday we see a change from last week. Mostly because of the mid-week Christmas holiday and light trading the conforming rate has dropped from last week, the high balance rate is also down.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.50%     Down 0.125%

30 year high-balance conforming                    3.75%    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.

Reading through some of my Weekly Rate & Market Updates from 2008, 2009 and 2010 I found myself experiencing some of the feelings I had back then. In the first week of October 2008 the stock market plummeted, it ended the day down 30% from the year before. Leslie, the girls and I were on vacation in Scottsdale and as I watched the numbers come in on the alerts I had set up on my phone my stomach was in knots and my head was light. That evening I told Leslie, “this is really bad. I don’t know what we are going home to, what our future will be for Stratis if this continues.”

We made it through, not without some pain. Stratis never laid off an employee, though we did go to four day work weeks with our staff. Thankfully, we have had, and continue to have, great staff—almost everyone who was with us in 2008 is still with us. Because our business model has always been to concentrate on long-term fixed mortgages and quality over quantity, we have been able to retain our excellent referral bases from past clients and professionals in the real estate and other industries.

It has been quite a decade and we thank everyone who has stuck with us and Stratis Financial through not only the past decade, but the one before that.

I hope everyone had a wonderful Christmas and/or Hanukah with plenty of good times with family and friends. Cheers to 2019, to the 2010’s and for the joy and prosperity 2020 and beyond will bring to each of us.

Have a great week,

Dennis

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

What happened this year?

Question of the week:  What happened this year?

 Answer: It has been an interesting year, and a boring one depending on what issues and factors we are observing over 2019.

Since I am in the mortgage business let’s start our 2019 look back with interest rates.

After a run up of one-half of one percent (0.50%) in the conforming 30 year fixed rate from the beginning of September to early October in 2018 rates began to fall as 2018 came to a close. The downward trend caused 2019 to open the year with the conforming rate used for the Friday rate in the WR&MU (30 year fixed conforming with 20% down purchase of a single family residence with a cost 1.25 points and a borrower FICO of 740) at 4.125%.  

Rates bounced around between 4.125-4.25% through February, then in March rates declined to reach 3.875% for a few weeks before spending most of April and into May at 4.00%. In mid-May rates started to drop again until reaching 3.625% briefly to end June before spending July at 3.75%.

July ended with the largest Friday-to-Friday drop in conforming rates, one-quarter of one percent (0.25%) since October 3rd to October 10th 2014. Weekly Rate & Market Update readers will eidetic memory will recall that on the first Friday in August I was sending the WR&MU from Milwaukee, letting readers know that earlier in that week the Federal Reserve announced a reversal of its rate policy. In previous announcements the Fed had stated it would lower its Fed Funds rate by three-quarters of one percent (0.75%) in 2019, after four rate increases in 2018. Following its meeting in the final week of July, Fed Chair Powell announced that the rate drop that day would likely be the final rate change the Fed would make in 2019. Markets reacted by snapping up bonds and mortgages causing the extraordinary move down in mortgage rates that week.

Entering August, following the Fed rate move and announcement on July 31st, the conforming fixed stood at 3.375%, the lowest since November 2016.  The historic lows lasted about three weeks, until the Fed went against Powell’s announcement in July and lowered rates again in mid-September and rates rose to 3.625%, where they have stayed every Friday but one (October 4th when we dipped to 3.5% for a few days) since. This is our tenth week in a row, and thirteenth of the last fourteen, that our conforming fixed rate has remained at 3.625% from Friday to Friday.

Summing up rates in 2019, they have dropped one percent (1.00%) since the start of the year and have been virtually unchanged for the last quarter of the year.

With rates being so positive for borrowers it is no surprise that housing markets in most of California and especially Southern California saw positive gains in values and transactions.

Using data from the California Association of Realtors from sales in November, the most recent month available, sales of single family residences across the state were up 5.6% from November 2018 and the median price went up 6.4% from $554,240 in November 2018 to 589,770 in 2019. Condos statewide also faired very well, up 7.3% in sales from a year ago and an increase in median price from $458,00 to $485,110.

More locally, Los Angeles County, despite seeing a drop in prices and number of units sold from October to November, had an increase of 5.1% in sales and a 7.4% jump in prices from $553,940 last November to $594,840 last month. Neighboring Orange County saw a decline sales from October and an increase in the median sales price, but also saw gains from last November in sales and prices. The median price in Orange County for a home in November 2018 was $795,000, after a 3.4% increase in prices the November 2019 median price was $822,000, the increase in prices was driven by a 6.9% increase in the number of sales.

Investors in the equity markets had a very good year in 2019. Whether an institutional investor managing pension funds or mutual funds, or workers with retirement accounts, or retirees receiving income from their accounts, everyone benefited.

As is frequently mentioned in the WR&MU, there is a strong relationship between equtity (stocks) markets and fixed-rate investment (bonds and mortgages) markets. Historically as the price of one goes up the price of others goes down. This year saw both fixed rate and equity markets see higher prices. (Refresher, when the price of bonds, and similar investments, go up their yields go down. So, when the price of Mortgage Backed Securities rise then interests go down.) As mentioned above, 30 year mortgage rates have dropped one-percent (1.00%) since January, which means the prices investors have paid for a 30 year fixed rate investment has gone up. The result was whether an investor had all their funds in equities or bonds, or a mix, they almost certainly saw a positive return through the year.

Investors were reacting with their consistent investing in all markets to an economy that has had incredibly consistent growth since the Great Recession ended in June 2009. Pushing the economy has been consumer spending, which has grown each month of the year with the exception of a dip in October from September. Consumer spending is 65-70% of our economy, if consumers continue to spend on goods and services our economy will continue to expand.

The expanding economy is directly related to the strongest labor market in decades. The year started with the unemployment rate at 4% in January, and for the rest of the year has declined to November’s rate of 3.5%. With the low unemployment rate has been a steady increase in wages, which outpaced consumer spending almost every month of the year through November. With wages increasing 0.54% in November from October, the annualized rate of increase in paychecks has been about 4% the first eleven months of 2019.

Workers have kept more of their paychecks as well as inflation has been at or below 2% month after month. With paychecks growing faster than spending and inflation the result has been that American families rate of savings has also been increasing.

None of the numbers showing growth in any sector in 2019 have been outstanding. Everything has grown in moderation, and has been for several years. Towards the end of 2018 and early in 2019 the “experts” were predicting that our economy would be in recession by now. Obviously they were wrong, in part because economists are very slow to change and most are still using old models and economic theories to try to predict future events.

Historically very low unemployment, raising wages, increase spending, leads to higher inflation which would lead to higher and higher interest rates. Our economy the past several years has bucked historical data. The constant economic growth has not resulted in high inflation and high rates. In large part because the growth has been so moderate.

As an analogy, think of a track meet. The fast race is the 100 yard dash. The runners go as fast as they can from the start and when they finish, they are completely spent, bent over gasping for breath and it takes a while for them to catch their breath and stumble around gasping. The middle distance runners start at a medium pace and then sprint to the finish line, they can run longer because they don’t push hard until the end. After their race the runners are tired and it takes a while for them to catch their breath. Marathoners run a very long distance at a measured pace, trying to keep their times per mile consistent to ensure they finish the race. When they are finished they are certainly very tired, all their muscles have been used and they are certainly in need of a rest, but do not appear to be gasping for breath as you see with the sprinters. Finally, we have the long distance walkers. Their strides look funny but their pace is quick and measured. When they finish their race they are also tired from their exertion, but their recovery is fairly quick compared to contestants in other events.

When an economy grows at a very fast pace over a short, or medium, period of time is it prone to falling quickly into recession and have that recession last for a long period time. When an economy grows strongly over a longer period of time it will generally shrink into recession slowly and the recession will not be as deep or long as the recession that comes quickly. When an economy grows very moderately over a very long period of time it does not have a lot of shrinking that needs to occur to enter recession, and when it does enter recession it will likely be shallow and short lived before recovery back to growing again.

I think the last statement is true because we have never had an economy grow for so long at such a measured pace benefiting so many sectors of the economy. Theoretically, the less an economy needs to lose to enter recession the less the damage to the economy as it shrinks and is in recession, therefore the less repair needed to pull out of the recession.

Because of the pace and breadth of growth in our economy, I feel 2020 will see more of the same, with moderate growth in GDP, wages, spending and inflation. The greatest risk to our economy entering a recession, in my opinion, is outside influences, such as a major recession in China or Europe.

Home prices in California should continue to grow at a modest pace and rates should continue to be below, or near, 4% for the coming year.

Next week: What happened this decade? A look back at the 2010’s in mortgages, real estate and other areas that impact housing.

Have a question? Ask me!

Rates for Friday December 20, 2019: The positive economic news this week would normally put upward pressure on rates, but investors are perhaps reflecting on the Fed stating no intention to raise rates in not reacting as expected. This time of year is weird with holidays in the middle of the week, senior traders and fund managers taking time away from the office leaving their juniors at the desks with the instructions, “don’t mess up,” which leads to conservative actions—like moving money into cash. As well, many may be selling some holdings to take some capital gains which could lead to drops in market prices over the next five or six trading days in 2019. Rates are flat from last week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.75%      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.

A very exciting few days for the Smith home as our oldest comes home this afternoon from Boston. We haven’t seen her since August and looking forward to a few weeks with her before she’s off to Grenoble, France for her next semester. Her arrival is the best birthday present Leslie will receive for her big day tomorrow—which will be a “Leslie Day” as we do her favorite things, see the new Star Wars movie, having Mexican food for dinner and then going to Color Me Mine to chat and do a crafty project. She loves all three, Star Wars, Mexican food and crafts.

I hope Santa is nice to you all, filing your stockings with joy, love and friendship.

Have a great week,

Dennis

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

What should we offer?

Question of the week:  What price should we offer?

 Answer: This is a question we cover every couple of years and my answer has been pretty consistent. Offer what you can afford and what the seller will accept.

It is in our nature to want to negotiate and get a “bargain.” Why buy a pair of Nike Air shoes at one store for $100 when you can get the same shoe online or at another store for $95? Convenience?

The auto industry is set up to haggle, negotiate and make car buyers feel good when they can brag that they knocked several thousand dollars of the sticker price. Nobody brags around the office water cooler, “hey the guy would have taken $400 but I paid $500!”

Amazon, eBay and other internet vendors have reinforced, actually strengthened our primal instincts at getting a deal. Everything is more commoditized today than in the past.

But should this urge to buy as low as possible be followed when you are purchasing your new home?

Let’s look at the cost-benefit of haggling with a seller.

You have been prepping to purchase a home for several months. We have met and gone through your financial information and I am ready to provide a pre-approval package to your real estate agent when you find the right home and decide to write an offer.

You look at several properties in different areas of different sized and amenities, all within a defined price range. You finally find the property you want. It checks all your boxes and as you walk through you can imaging your family living in the home. The price is right in your qualifying range.  You know you can make the payments and you have more than enough in your accounts for down payment and closing.

So, what do you offer when you find the house you want to buy? My advice is always, offer what it takes to buy the home you want.

“But what if the seller would take less?”

What if they won’t and accept someone else’s offer?

Let’s take a look at the math of a sale for the buyer and seller on a property listed for $625,000.

For the seller, the costs of the transaction are about 7-8% depending on the commission he agreed to pay the real estate agents when he listed his home for sale, let’s use the higher amount. If he sells for $625,000 his costs are $50,000, his proceeds therefore are $575,000. If he sells his home for $600,000 his costs are $48,000 and his proceeds are $552,000. He sells his home for $25,000 less than his asking price and his proceeds are $23,000 less than had he sold the home for $625,000.

For a buyer on a $625,000 sales price, if he were to put 20% down that would be $125,000, and the loan amount would be $500,000. If the interest rate is 3.75% on a 30 year fixed rate his monthly payment would be $2316 per month.

The buyer however wants to see if he can get the property for a bit less and offers the seller $600,000. The buyer’s down payment would be $120,000, just $5000 less than if the offer was $625,000. His monthly mortgage payment would be $2326 on his $480,000 mortgage, $93 less per month than the $625,000 transaction.

The seller is out $23,000 with the lower price, while the buyer is saving only $5000 in cash. The buyer is also paying $93 less per month, a little over $1100 per month. The question for the buyer, is it worth losing the home you want for $5000 out of pocket and an additional $93 per month?

What do you spend $90 per month on? If you stop by an internationally known coffee purveyor you every morning on your way to work you are spending about $90 per month. If you don’t brown bag your lunch every day you are spending more than $90 per month.

There is another aspect beyond the cash in or out of pocket in the above scenario. There is good will. What is good will worth?

It is not uncommon in a real estate transaction on a previously owned home for the home inspector to present a report to the buyer with a list of issues with the property, many minor and a few less than minor. It is also not uncommon for the buyer to ask the seller for a credit to cover the costs to correct some of the issues with the property that they buyer will fix after he owns the home.

If the seller gives a credit to the buyer in escrow it is usually applied to offset closing costs, and not to lower the price. This is to the advantage of the buyer. For the seller it does not matter that much if the credit applies to buyer costs or sales price; as we saw above a reduction in sales price takes a lot of money out of the seller’s proceeds, about the same as a straight credit will.

For the buyer, as we saw above, any change in sales price has a small impact on the amount of cash needed to close, but a credit for costs is a direct dollar for dollar savings. For example, the buyer is putting 20% down, and the seller has agreed to a $5000 credit in lieu of making repairs requested by the buyer, the buyer is saving $1000 in cash—to make repairs that are estimate at $5000. If the $5000 is credited to offset closing costs the buyer saves $5000 in cash.

Back to goodwill. If the buyer was able to negotiate the seller down several thousand dollars from the price the seller really wanted, and then comes to the seller for several more thousand dollars, what is the mindset of the seller?

Yes, you may be able to purchase the home you want for less than the seller is asking. But before making that lower offer, consider the risk of not getting the home you want and the difference in how the math impacts you on a cash and payment basis. More often than not you will likely find the risk of losing the home you want is more than the cost of obtaining it.

Have a question? Ask me!

It was an interesting week. It was interesting in many respects, but I am referring to the news and information that impacts mortgage rates. In regards to economic data the Consumer Price Index for November showed strong growth at 0.3% for the month and pushed the annual inflation rate from 1.8% to 2.1%, the highest in twelve months. While rising prices are typically a push for higher rates, this weeks announcement did not have a large impact because the annual rate is in the Fed’s desired inflation rate. The other major piece of economic data was that retail sales in November were well below expectations at 0.2% growth from October (which was revised up to a very good 0.4% growth). A major reason for the somewhat disappointing showing was the late Thanksgiving this year, likely pushing a lot of holiday shopping into December. Since the consumer is 65-70% of our economy lackluster retail sales can be a concern, most investors held off on reacting to the news until they see how December sales go.

While the economic data is interesting to data geeks like me, political news has had more of an impact this week. As one commentator put it, “the news this week has been swirling like a dust storm making it hard to see where investors are going.” Early in the week Congress and the White House agreed on a new economic treaty with Mexico and Canada that will replace NAFTA, which is positive news for the economy. Yesterday the White House announced that the U.S. has signed a trade agreement with China resolving some of the disputed trade policies and not too long ago China followed with its own announcement that an agreement has been reached. Behind this backdrop of cooperation between Capitol Hill and Pennsylvania Avenue is the ultimate in non-cooperation as the House Judiciary Committee has sent articles of impeachment to the House for a vote, where it almost certainly pass on straight party lines initiating a trial in the Senate.

As mentioned often in the WR&MU, investors do not like uncertainty and when this happens they tend to flee to safety—which means fixed rate returns of bonds and investments like mortgages. The trade agreement announcements, being good for the economy pushed on rates to climb. Even though expected the breaking news of the impeachment proceeding has caused investors to pull back and they are pushing rates back down a bit.

Ignored in all the data, news and commentary is that earlier this week Fed Chairman Jerome Powell announcing that the Fed is looking to do nothing with rates in 2020. This takes pressure of rates for each economic announcement and creates stability, which is good news for those planning on purchasing a new home in 2020.

Rates for Friday December 13, 2019: After a spike yesterday and a gentle decent so far today rates are the same for conforming as there were last Friday, and the conforming rate is the same for the ninth consecutive Friday; I cannot recall this ever happening. The high balance rate slipped back down this week, continuing its see-saw course of the last few weeks.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.875%    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.

I think one of my favorite parts of Christmas is walking in the house at the end of the day, or coming downstairs in the morning, and smelling the freshness of pine from the tree in our front room. That may be a major subconscious allure to the mountains as the olfactory memory we have smelling the pine trees and creating the memory of Christmas time with family and home.

Have a great week,

Dennis

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

How does the impeachment process in Washington impact mortgage rates?

Question of the week:  How does the impeachment process in Washington impact mortgage rates?

 Answer: Directly there should be no impact. Indirectly, as economists like to say, that depends…

On September 24, 2019 Speaker of the House Nancy Pelosi announced that six committees of the House of Representatives would begin formal impeachment inquiries of President Trump.

Long time readers of the WR&MU know that disruption, uncertainty and crisis that harm the economy effect investors, who react by “flight to safety;” in other words they will sell riskier investments, meaning stocks, and purchase relatively safe investments, meaning bonds and other fixed rate investments. An alternative to what are considered the safest investment available, bonds issued by the United States Treasury, are Mortgage Backed Securities (MBS), in other words residential mortgages.

As investors sell stocks prices in the stock market will drop. As investors purchase bonds and other fixed rate investments like MBS those prices will rise. For interest bearing investments like mortgages and bonds as the prices rise the rates drop.

Back to our question. If investors consider the impeachment process, and actual impeachment, a disruption that would impact the economy negatively they would flee to safety, selling stocks and buying bonds and mortgages.

For the past two and a half months investors have ignored what is happening in the hearings in various committee rooms in the Capitol. Since mid-September the Dow Jones has gone up about 1000 points, 3.7%, and mortgage rates are about the same this Friday as they were on September 27th—actually the conforming high-balance rate is a tick lower.

Politics impact investors decisions only as much as they feel they will disrupt or benefit the economy. Should President Trump be impeached what will be the significant impacts to the economy as a result in any change in policies that effect businesses and markets? That is the question investors answer as they place their bets in the equity and fixed rate markets. From their reaction so far it appears they believe that if Trump is impeached the policies and actions of the new Pence Administration in regards to business, trade, taxes and markets will not be much different.

While individual investors may have personal political bias when making donations and punching ballots, investors as a group however are concerned only with the politics that impact the bottom line. It appears that the charts on the business pages are paying no concern to the news on the front pages.

Have a question? Ask me!

Big news for those seeking mortgages. The Federal Housing Finance Agency announced the new loan limits for conforming (Fannie Mae and Freddie Mac) for 2020. The new limits are $510,400 for conforming loans and $765,600 for high-balance loans in eligible areas (Los Angeles and Orange Counties are eligible). The loan limits are based on median home prices nationwide, the fairly significant increases from 2019 reflect a strong increase in prices across the country.

Investors are not the only ones. It appears that businesses are not concerned about a potential change in administrations in Washington. The Labor Department today announced that the economy added 266,000 jobs in November, well beyond the expectation of 180,000. Part of the increase was due to 50,000 striking workers at GM went back to work, absent those numbers the new jobs created still exceeded expectations. The unemployment rate dipped back down to its 50 year low in November, to 3.5%, and the average hourly wage rose to annualized rate of 3.1%–well above the rate of inflation which is below 2%. Overall the news is mortgage rate unfriendly as more workers means more wages means more consumer spending means more economic growth. As seen above, if bad news pushes stocks and rates down, good news pushes stocks and rates up.

Rates for Friday December 6, 2019: The conforming rate has been the same every Friday since in increased from October 4th to October 11th. That is eight weeks in a row, the longest streak since February 9th to April 13th 2018 when the streak was nine weeks. The high-balance rate drifted up slightly from last Friday.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                   3.875%    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.

It’s here. December filling our weekends with parades, parties, get togethers and music. This is the last month of the decade, a lot different than the first month of the decade when housing markets were still dropping in prices and our topics of discussion were foreclosures and short sales.

I hope you have a great month enjoying the opportunity to see family and friends and create wonderful memories with both.

Have a great week,

Dennis

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

Happy Thanksgiving

Question of the week:  No question this week. I hope everyone had a wonderful Thanksgiving.

Have a question? Ask me!

Big news for a short week, 3rd quarter Gross Domestic Product was revised to 2.1% from the initial estimate of 1.9%. The news is slightly mortgage rate unfriendly as it does not put pressure on rates to drop to stimulate the economy, which continues to lope along at a marathon pace instead of sprinting.

Personal Income and Consumer Spending data were also released this week. Consumers continue to spend. October’s spending was up 0.3% from September, the eighth month in a row spending has increased. Incomes however were flat, zero percent growth, from the prior month. This was only the fourth time in the past five years income has not increased from the prior month. A sign that the labor markets maybe loosening or a one off? We will see if future reports show personal income dropping. Overall the news is mortgage market neutral as consumer spending puts a bit of pressure on rates to climb and the income data putting pressure on rates to drop.

Rates for Friday November 22, 2019: Rates are flat for the week from last Friday as investors sit back and wait until Monday to get active.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                       3.75%      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.

How lucky is a guy who loves cooking and eating food, and whose favorite holiday is Thanksgiving, to have two home cooked Thanksgiving meals in six days? Very lucky, especially since they enable my wife, daughter and I to enjoy the two gathers with my sister and then members of Leslie’s family.

We have much for which to be thankful. I am part of a wonderful company with fantastic co-workers committed to enabling homeownership and excellent service. I have an incredible network of professional relationships with whom referrals for needed services can be made knowing experience, integrity and knowledge will serve our clients. I have been fortunate have terrific clients who we have helped in the past that continue to come back when they need mortgage assistance and who refer others. Most importantly, I have at home an amazing wife and two great kids.

There are many other gifts in my life for which I am grateful, but the list is long and there is a piece of apple pie that needs to be consumed so we can clean the pie plate.

I hope everyone had a great Thanksgiving,

Dennis

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

Why shouldn’t I save 15%?

Question of the week:  Why shouldn’t I save 15%?

 Answer:  Because it may cost you 20%.

It’s that time of year. As much as many of us wish it would wait a few more weeks, retailers will not wait and are all set up for the holiday shoppers and sales. One of the more traditional “sales” retailers use is the discount they will give you at checkout if you sign up for a credit account.

Have you ever checked out at Macy’s during the Christmas shopping season with the perfect sweater for your significant other and not been asked, “Would you like to get 15% (or 10% or 20%) off everything you purchase today? All you need to do is apply for a Macy’s card, it will only take a few minutes…”

I cannot blame the department stores for the marketing strategy, their business is to move product and make profits. Their biggest profit margin is not the mark up on Coach purses or Levi’s, but on the interest they can charge to their clients with their credit cards, in some states like California up to 20% or more.

Over the years many studies have been done on credit usage by consumers at Christmas time. One constant in the studies has been how long it takes the average consumer to payoff the debt incurred through holiday shopping. While the intentions are always good, to payoff the Christmas debt by the Super Bowl, or Valentine’s Day, or….the reality is most people carry the debt into late April or early May.

Once the department store card(s) is paid off many people do not use the card again, unless they are enticed back to the store by an offer of another discount if the card is used. It is not that uncommon for us to see credit reports with three, four, five different credit accounts on a report from different retailers, all with zero balance and available credit. This is good, having zero balance on credit accounts. What is not always good is having accounts with no balances that are rarely if ever used as they present an opportunity for fraud.

The more accounts you have open the more opportunity for someone to access and account for their own use. Department store credit accounts are some of the most breached historically due to the access available to a wide range of personnel through the checkout registers and the lack of use by many creditors who may not be aware of any charges until well after they have been made.

My advice for your holiday shopping and using credit is to have an account that provides a benefit, points for airlines, hotels or able to credit back to your account to pay down the balance. Confine your credit use to a limited number of accounts, preferably one, to more easily keep track of your use and monitor activity. Turn down the instant discounts with a higher percentage fee on a new account and instead obtain longer term benefits from a credit account with a lower interest rate.

Using one credit account for all your holiday shopping will also enable you to pay the holiday debt off faster. Instead of shotgunning payments across several bank and department store cards you can focus your payments on the one account and reduce the balance faster.

Finally, a significant amount of holiday debt is racked up with last-minute purchases, or “gag” purchases. The latter bring mirth and joy to the donor and recipient, but most often goes from under the tree to a closet for a few years and then to the Goodwill—with perhaps a few detours through the years as a re-gift at a white elephant exchange.

One more tip, this is for those of you who know golfers. Do not buy someone you know a sleeve or box of golf balls unless you buy the brand s/he uses. Most golfers are pretty particular about the brand of ball they like and while your gift is well-intentioned there is a good chance your gift will be donated to someone else.

Okay, one more—some of us like whiskey, and decent brands are always welcome and they are often shared with the gifter and others throughout the year! 😉

Have a question? Ask me!

Rates for Friday November 22, 2019: Nothing major in the economic news this week that had an impact on rates. We continue with a stable rate environment, with the high-balance conforming rate drifting down again this week after its drift up week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.75%      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.

The Weekly Rate & Market Update is coming to you live from San Jose Airport as we await our connection to Boise, where we are going to visit sister Sharon and enjoy an early, or pre-, or practice Thanksgiving.

Have a great week,

Dennis

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

Cautionary tale about student debt relief

Question of the week:  Why were local and federal law enforcement at your office complex last week?

 Answer:  Today the Question of the Week is meant to be a bit sensationalist and provocative to entice you so I can give everyone a warning and head’s up, for themselves and family members.

Last Wednesday, as I was leaving for my weekly meeting of the Rotary Club of Long Beach, I passed on my way down the stairs to the parking lot an Orange County Sherriff’s Deputy and a man in a suit who were headed up. The Deputy’s Sherriff’s Department SUV was parked in front of the building and in the parking lot was another marked SUV and a few generic sedans with government plates. I asked the Deputy if I could help him find an office and he replied, “we have it under control sir.”

Since they were standing on the outside walkway outside our office I was a bit curious, wondering if someone in our company was being served for some reason, and called a colleague asking him to let me know if there was anything I needed to know and continued to Rotary.

When I returned there were still some vehicles in the parking lot that we obviously government issue. I immediately went to our bullpen area and asked, “what was that all about?”

Evidently the company, Arete Financial, with offices next to us had been raided by the law enforcement officers. I was told employees were leaving the office one at a time, some with and some without boxes with what was likely their personal effects.

The raid was due to a suit filed in U.S. District Court by the Federal Trade Commission against the company for multiple counts of fraud and deceit. Essentially the company would market via telemarketing, mail and the internet student loan relief. Per the complaint, customers would pay an upfront fee for services, then would also pay monthly payments to the company that were intended to go to their student loan companies after Arete negotiated lower payments and/or balances. Except the payments in many, or most, instances never made it past the company’s own bank accounts and owners. The estimated total they collected is $43 million.

I write about this week because many of the readers of the WR&MU have student loans, have children who have, or will have, student loans, or have other family members or co-workers with student loans. I want to make sure that there is hyper-awareness in the market place about companies soliciting debt-relief services, not just for student loans but consumer debt such as credit cards as well. Some of these companies are legitimate and make honest efforts to assist their clientele, some are not and prey on individuals facing stress and anxiety of their debt and the challenges they may have making payments.

It is easy for us to understand the appeal for consolidating student loans. When we pull credit reports for clients who have financed most of their college costs we see multiple student loan accounts. If someone went to a school on the quarter system and received federal loans as well as obtained private lending from a bank, they could have two loans per semester on their credit report; one for each quarter from both loan sources for a total of up to twenty-four different accounts. It can get confusing as to what is owed on what loan and the statements they receive from some lenders are not the easiest to read. It often makes sense to consolidate all their loans into one new loan and payment.

My advice to clients in this situation is to do some homework and investigate traditional lenders to see what options they have for student loan consolidation. There are many legitimate banks and lenders that can assist with consolidating student loans with very good rates and terms for repayment that can reduce your payments.

As for complete relief, there are circumstances whereby federal student loans may be reduced or eliminated. Someone who meets these circumstances can work directly with the Department of Education, for free, to apply and obtain the relief—DO NOT go to a debt relief company for this service. Many will charge to see if you are eligible and charge to complete paperwork that is supplied by the Department of Education.

We saw many companies pop-up after the 2008 market meltdowns who were advertising “consulting” services to assist homeowners in negotiating short-sales, forbearances or other relief from their mortgages who have owners that later went to jail and/or paid huge fines for fraud and deceit. Today, instead of targeting underwater homeowners many “debt relief” companies are targeting young adults with student loans.

Today student loan debt is over one trillion dollars and growing, which creates a huge market for those looking to take advantage of others for their own financial gain. I have likened the extraordinary increase in college tuitions to the increase in the housing bubble prior to its popping in 2008, cheap money is offered to those who want something of which there is a limited quantity which forces prices up due to supply and demand. The target market for defrauding debtors with student loans is growing and it is a numbers game for the crooks, more calls made equates to more potential victims.

An aspect that makes it difficult to assist someone who may be vulnerable to a credit scam is that most people who are in financial trouble to do not talk about it to parents, siblings, friends, co-workers or even spouses. They may be embarrassed about having financial challenges, or feel the situation is too private and intimate to speak to others. Because of this I encourage sharing information about debt relief scams and fraud, not in a manner suggesting someone may be in trouble but as a heads up to be very wary if considering consolidating debt.

Clichés become clichés because there is a lot of truth in them, one is, “if it seems too good to be true it usually is not true.” This is very true with offers to assist you with reducing loan payments or eliminating debt.

Here is the link to the Federal Trade Commission website describing their action against Arete Financial.

For those interested in more of the details, here is a link to the complaint filed in Federal Court—where you can read how the company obtained powers of attorney and used them to change email addresses, log-in names and passwords so victims could not sign into their student loan accounts to see what was happening.

If you, or someone you know, has any questions about debt consolidation, credit issues or options please contact me and I will see if I am able to assist.

Have a question? Ask me!

After last week’s lack significant economic data, this week we have had several important data releases. Price data was released this week, with both the Consumer and Producer Price indices both jumped 0.4% in October, the highest in seven and six months respectively. The increase was mainly due to higher gasoline prices in the month. Regular readers of the WR&MU know that when looking at prices the “core” rate (strips out food and energy from the data) is the rate the Fed and other use to gauge inflation. In October, the core CPI rate was up 0.2% and the year over year rate was up 2.3%, down from 2.4% in September. Overall the news is mortgage rate friendly as it shows an absence of inflation to the extent that rates should increase.

Rates will be on hold, was the message from Federal Reserve Chairman Jerome Powell this week. Last year at this time the sentiment was the Fed would increase rates two to three times in 2019 after it raised rate four times in 2018 for a total of a 1% increase. As we got into the year the pundits and hand-wringers kept up a concern that the economy was headed to a recession by the end of the year and the sentiment was that the Fed would lower rates at least three times by the end of the year—the Fed has lowered rates three times for a total of a 0.75% decrease. Powell now says that absent significant decline in the economy. Powell stated the Fed’s outlook, “of moderate economic growth, a strong labor market and near our 2% objective” supports having a neutral policy on rates. The statement was neutral for rates since it called for the status quo.

Rates for Friday November 15, 2019: While the Fed announces steady rates that they control, in the open market there is a sense of a bit less stability. Stock markets continue to set new highs, but for how long and if/when there is a correction will funds flow into fixed rate investments and push rates lower? Maybe. For now, the 30 year conforming rate extends its Friday-to-Friday streak of no change to five weeks and the high-balance conforming rate bounces off its nine week low. There is more risk for loss should rates increase then the potential benefit from a chance rates drop further—do the math and you will likely want to lock your rate when possible.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                   3.875%      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.

Recognizing long ago what I strongly feel is false inflation in the college and university tuition markets, I have been waiting, and very much hoping from about ten years ago when the costs really began to jump, for the tuition bubble to pop. I contend that the increase funds are not going into classrooms to better educate the students than the education prior generations of students received. If a school wants to build a fancy new science lab, or a new school of sociology, they do not use tuition funds, but undergo tremendous capital campaigns. Most colleges with the highest tuitions are sitting on endowments of billions of dollars, and continue to raise tuitions. Growing in proportion to tuitions have been the size of the bureaucracies and administrations (redundant?) on campuses by adding new “Deans of ____.”

Part of the issue is the mantra that every kid needs to go to college. Many kids wash out of college very early on because it is not for them. Freshman dropout rates are growing exponentially, and not because of the costs so much as not being able to handle the workloads, independence and not being interested in what they are supposed to be learning. This increases the number of kids applying, which in turn enables the schools to raise tuitions. I have a lot of sympathy for these students who feel forced to go to college so as not to have the stigma as a non-college student, but at the same time wish their advisors, mentors and others who have influence encourage them to attend a local community college or state school to get their feet wet instead of tossing them into a foreign environment with highly competitive kids and academics.

As the parent of a student in her sophomore year in college and a student in her senior year of high school applying to colleges, I am pretty familiar with the financial challenges of students and families and the somewhat hypocritical position of colleges continually soliciting billions of dollars a year across the country while increasing the cost of their product with no tangible benefit to their clients, the students.

I listen to podcasts and one of my favorites is Malcom Gladwell’s “Revisionist History.” He had two excellent shows on college costs and financing, the first is “Food Fight,” which explores how two similar colleges use their funds differently, and the other is “My Little Hundred Million,” in which he looks at one man’s donation that altered a school’s history and compares it to other schools raising money just because they can. I encourage you to listen to them both (and all of his podcasts!)

Off my soap box…..for this week!

Have a great week,

Dennis

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

About that property tax bill…

This week’s question of the week is a repeat from last October, however the topic is one I feel should be addressed every year for homeowners in California.

Question of the week:  We just received our property tax bill…

 Answer:  Okay, okay this is not a question; it is the start of a question. There are several phrases to make it a question I will quickly go through this week:

…why is it lower than you estimated when we purchased our home earlier this year?

…why is it higher than last year since we are under Proposition 13?

…how much should we pay?

…why is it lower than you estimated when we purchased our home earlier this year?

If your property tax bill is significantly less than my estimates when we funded the loan to purchase your home then you will very likely receive a supplemental tax bill, if you have not received one already and the two bills added together, the tax bill you have just received from the County where your property is located and the supplemental tax bill, should be close to the estimate we used when you purchased your home.

In California, the fiscal year is from July 1st to June 30th. The tax bill property owners have received in the past week from their County Assessor has an option of paying half the bill by December 10th covering first half taxes from July 1st to December 31st and the other half by April 10th covering the second half taxes from January 1st to June 30th. The tax bill mailed in September or October is based on the prior tax bill as adjusted for Prop 13, or if there was a transfer the value on January 1st.

When you purchase a property the tax base for the property is adjusted based on your purchase price. Depending on when you purchased the property the new value may not be adjusted by the County Assessor before the tax rolls are set for the coming fiscal year. If this is the case the tax bill you have received reflects the prior assessed value plus and adjustments for Prop 13 (see below) or additional payments for taxes or bonds put in place by voters or local government. This is the primary reason your tax bill is probably lower than you anticipated, and why you will receive, or have received, a supplemental tax bill.

The supplemental tax bill covers the difference between the taxes on the tax bill and the taxes you should be paying from the date of the close of escrow on your property purchase to the end of the fiscal year, June 30th. Depending on the seller’s assessed value and your purchase price the supplemental bill can be very large, very small, or even “negative,” in which case you will receive a refund from the County.

Supplemental tax bills are only mailed a few times a year, so it may be some time after you closed your purchase before you receive your supplemental bill. Please note, if you have an impound account and your lender is collecting and paying your property taxes that your supplemental bill is not sent the supplemental tax bill, the payment is entirely your responsibility.

Confused? Let’s say you purchased a home for $650,000 and closed escrow on February 7th. Using our rule of thumb of your property taxes being 1.25% of the purchase price your annual taxes the first year of ownership should be $8,125 per year ($4062.50 for the first and second half tax bills). Your seller purchased the property in 2000 for $375,000 and their assessed value has risen through the years and their tax bill the year they sold the property was $5500. You just received your first property tax bill from your County Assessor and it shows you owe $5610 conveniently payable in two payments of $2805 each.

There is a difference in annual taxes between what you should be paying and what you are being billed of $2625. However, this will not be the amount of your supplemental tax bill as that is the annual property tax differential and you only owned the property since February 7th, not July 1st of the prior year. There are 143 days between February 7th and June 30th, and that is the period which the higher assessed value should be applied for property taxes. Therefore, your supplemental tax bill will be the annual property tax differential divided by 360 days multiplied by the number of days you owned the property between the sale date and end of the tax year:

$2625/360 = $7.29 per day x 143 days = $1042.71 as your supplemental bill.

Note that depending on your closing date you may receive more than one supplemental bill.

It can get pretty confusing, however most County Assessor websites have links where you can input your address, sales price and closing date and it will calculate your estimated supplemental tax bill.

…why is it higher than last year since we are under Proposition 13? Prop 13 was passed at the ballot box by California voters on June 6, 1978. There were three major items in the measure that immediately impacted property owners in 1978. First, it decreased assessed values by having all properties in California re-assessed to their assessed values in 1976. Second, it capped the assessed value of real property taxes by to the state at 1% of the ad valorem value of the property, i.e. the transaction value. Third, it limited increases to assessed values to an inflation index but not to exceed two percent (2.00%) per year.

It is the third factor that confuses many new or experienced property owners when they receive their property tax bill that the total is higher than what they paid the year before. Since property values are increasing your assessed value is increasing as well, but not more than two percent above the assessed value from the prior year.

Also surprised are those property owners who do not follow the news or politics. Their surprises come in the form of special assessments put on tax bills by either voters or elected officials in the form of bonds or taxes. For instance for our home in Long Beach we have nine such assessments that add 29% to our base tax rate of one-percent. Three of the assessments are local bonds for the Metro Water District, Long Beach Community College District and the Long Beach Unified School District; the other six are county measures and bonds for parks, flood control, sanitation, etcetera. Every city and county has different special assessments on their property tax bills that are added to the one-percent maximum taxable assessment from the state.

…how much should we pay? 

Before I answer here is the disclaimer: I am not a tax professional or accountant, before you make any decision as to how much you should pay in property taxes this year consult your tax preparer.

In December 2017, the federal tax reform was enacted in Washington D.C. Part of the new tax act was capping the deduction for State And Local Taxes (SALT) to $10,000. This impacts residents and homeowners in several states, including California. Why bring this up? Some individuals or families may want to consider paying their first and second half property taxes in 2019 if they will not reach the $10,000 limit in SALT paid in 2019 and predict they may exceed it next year. Before making this decision consult with  your tax preparer who can review your options and help you forecast next year’s income and possible tax liabilities for 2020.

Repeating my disclosure: I am not a tax professional. Before making any decisions regarding our taxes please consult with your tax preparer.

If you own property I strongly recommend you have two professionals assist you: a family law attorney to help you establish an estate plan with a trust and a professional tax preparer to ensure you are maximizing your tax opportunities as well as able to provide advice when needed.

If you have any questions on property taxes please do not hesitate to contact me and I will assist you the best I can.

If you, or someone you know, do not currently pay property taxes I am very willing and able to speak with you about how you can purchase property and become a homeowner!

Have a question? Ask me!

After last week’s busy economic calendar this week saw little in the way of major economic data that would have big impact on rates. What did have markets moving was announcement from Chinese government late Wednesday that China and the U.S. were very near a phase 1 agreement to rollback some tariffs. This made equity markets happy and bonds, mortgages sold to purchase stocks—stocks up, rates up. The news was called premature by the U.S. and was seen as a negotiating ploy by the Chinese to put pressure on the White House to take whatever China has on the table to announce a deal. Stocks sold, bonds and mortgages bought. So the see-saw in markets continues to go up and down based on rumors, announcements and tweets regarding the Sino-American trade dispute.

Rates for Friday November 8, 2019: After the inter- and intra-day ups and downs the conforming rate is flat for the fourth Friday in a row. The high-balance has dropped this week at two of our lenders. Why with some lenders but not others? Lenders have a bit of restriction on what percentage of their mortgages with Fannie Mae and Freddie Mac can be “high-balance” (over $484,350 and in LA and Orange Counties no higher than $726,525). When lenders are near the threshold they raise their rates on these loans, if they are not near their lending limit they lower their rates. The advantage Stratis Financial has is we can sift through several lenders to see who is offer what rates on any given day for any give product.

Rates and markets are still “edgy” to news and views, my advice is not to try to hit “the low,” but lock in your rate as soon as you are able.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.75%      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.

I don’t understand how when we travel to other time zones I almost instantly adapt to the new time, but when we change our clocks at home my rhythm gets messed up for several days. Maybe I should pretend I have travelled somewhere in the fall and spring when we shift our time pieces!

Have a great week,

Dennis

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

Can I get a mortgage if my parents co-sign because of my poor credit?

Question of the week:  Can I get a mortgage if my parents co-sign because of my poor credit?

Answer: Over the past year, years really, we have had several Questions of the Week that deal with credit reports; What can I do about my credit, Should we consolidate our credit, Why did my credit score drop, and How do inquiries impact my credit, are just a few of them.

What we have not addressed in several years is what if you have poor credit and want to buy a home. The question of if your parents, or another connected party, can help you purchase your new home if you have poor credit.

The quick answer is, No. Of the three factors that are considered for a borrower in loan qualifying, income, credit and cash to close, credit is the one area that outside assistance is not able to enable qualifying.

Mortgage underwriting guidelines state that the lowest middle credit score of all borrowers on an application is the score that will be used for qualifying and pricing the loan. For instance, Angela and Adam are recently married and wish to purchase a home. Angela’s credit scores from the three major credit agencies (Experian, TransUnion and Equifax) are 763, 744 and 768; her middle score is 763. Adam had a few issues in his past and his middle scores are 689, 703 and 679; his middle score is 689. Since Adam’s middle score is the lowest of the two, the score for the file is 689.

Some programs require a minimum score of 700 to be eligible. If one of these programs were the one Angela and Adam wanted for their home purchase or refinance they would not be eligible for the program. “Dennis, what can we do? Can my parents co-sign for us?”

If you are unable to qualify because your income is low, we can add a “non-occupant co-borrower” to your mortgage application to enable you to qualify. If you are short funds to close you can get a documented gift from your parents or other connected party to qualify. If you have a credit score that is too low for the loan program for which you are applying the only way you can qualify for that program is to increase your credit score.

All is not lost. There are different options that may be available to Angela and Adam to achieve their home purchase or refinance goal.

One option is to look at Adam’s credit report and see if there is something that can be done to increase his score. Perhaps paying an account down, or off, may raise the score the eleven or more points needed; or sometimes opening an account will get the extra points needed. Not all credit reports are the same and the composite data that creates the credit score is influenced by many, many factors. Depending on what is on the report it may be fairly easy to increase the score.

A second option is to see if there is another program that may enable Angela and Adam to achieve their goal. While more expensive because of mortgage insurance, FHA mortgages are often used for clients with lower credit scores because their minimum scores for different programs are a lot lower than those for conventional and most jumbo programs. The decision factor in this case is the trade-off between the current higher mortgage cost due to the mortgage insurance versus the potential higher cost if waiting to purchase or refinance due to higher home values and/or rates. It is not an unusual reaction to want to have the mortgage product with the lower costs, however that product is not available to you, a change in mindset may be the most beneficial to you in the long term as you are able to purchase your home today.

A third option is that perhaps mom and dad can co-sign—with Angela. Depending on the ability of everyone involved and the mortgage program, by dropping Adam from the mortgage and adding mom and dad as co-signers the transaction may be able to continue.  

One other option we have employed is for mom and dad to purchase the property as an investment property. Angela and Adam move in and make all the payments for the mortgage, property taxes and insurance. In the future, when Adam’s credit scores are better, depending on the rates and the market Angela and Adam may want to refinance to put the home and mortgage in their own name.

Since a low credit score cannot be cured with adding co-borrowers, it is advisable for you to know what is on your report and address any issues that are negatively impacting your credit as soon as you can. We have plenty of experience analyzing credit reports and assisting borrowers increase their scores.  Sometimes this can happen in a short period of time, sometimes not. For the latter, I always bring up a client from more than twenty years ago, Yvonne.

Yvonne and her husband wanted to purchase their home but had undergone some economic traumas that resulted in low credit scores. Yvonne was determined to own her own home and for almost two years she worked to improve their credit. She would constantly check in with me and we would review her accounts and her plan, checking her credit report every 5-6 months to see where they stood. Finally, the day came when their credit was rehabilitated and they purchased their home. When I called to tell Yvonne her loan had funded and she was going to be a homeowner she was not the only one on the call with a catch in her throat and blurry eyes.

Poor credit and low scores can delay your home ownership, but do not let it prevent it. Be like Yvonne and tackle the problem as soon as you can.

In regard to parents co-signing, in March we answered, “Should we co-sign for our son or daughter’s home purchase.

Have a question? Ask me!

This was a very busy week for market impacting news and data. In order of the announcements this week and positive or negative impact on rates:

One year after hitting a peak, consumer confidence in October was down slightly from September, but by less than prior months. Over the past year the consumer confidence chart looks like a ride at Knott’s Berry Farm. The valleys have been getting higher since January and the trend line looks like the next trend is back up. The over-riding news from the report is that consumers are reasonably confident and holiday spending should not be curtailed. Over all the news is somewhat negative for rates as high consumer confidence can lead to high consumer spending, which is about 65-70% of our economy, which leads to economic growth.

Consumer confidence and spending resulted in another positive quarter of growth for the Gross Domestic Product. The 3rd quarter increase of 1.9% was down a peg from the 2nd quarter growth, but higher than the 1.6% that was expected from most of the experts. Inside the report, the spending by consumers in the quarter more than counter-balanced a large drop in business investment caused by a drop in oil prices and the trade conflict with China. Showing stronger than expected growth, despite consumer spending dropping from the extremely strong 4.6% growth in the 2nd quarter to 2.9% in the 3rd quarter, plus residential housing investments increasing for the first time in five years, the GDP data is negative for mortgage rates.

Following the GDP data release was the announcement from the Fed that it cut its benchmark interest rate by 0.25%. This move was expected and on its own had not impact on mortgage rates. In making the rate announcement the Fed used its normal Fed-Speak to announce that it would likely take a pause before enacting any more rate cuts. Some investors have expected more rate cuts in the near future and a pause puts them on the wrong side of the market. From their announcement, it appears the Fed is content with the current path on rates as they forecast continued moderate growth in the economy, a continuing strong labor market and inflation very near its 2% target. Overall the news is a bit rate negative due to the Fed taking off the table the certainty of another rate increase and the more positive message than it has supplied in prior announcements.

Thursday, it was back to consumers as the Commerce Department released data for September on consumer spending, personal income and inflation. Consumer spending increased for the month at a mundane 0.2% rate, down from August’s dull 0.3% growth. While dull and mundane, September was the seventh month in a row of increased spending. The increase in spending was supported by higher earnings as incomes rose 0.3% in September, reflecting the strongest labor market in fifty years. With spending increasing at a slower pace than incomes it is not surprise that the savings rate increased to 8.3%, near post-recession highs and showing that while consumers are spending steadily they are doing so within budgets that enable saving as well—something that was absent prior to the Great Recession. Because the growth in spending and incomes have been moderate the pressure on prices has been the same, prices have increased only 1.3% from September 2018, the matching February as the lowest since 2016. This news is neutral for mortgage rates as it reflects an economy that is not booming nor busting but chugging along.

Rates for Friday November 1, 2019: Last week there was an error in the rate numbers below, the chart was correct but not the numbers, they did not reflect the 0.125% drop in the high-balance rate from the prior week. This week the high-balance rate further compresses to the conforming rate, which is flat this week. Following all the economic news reported today I was expecting rates to be a bit higher. We may be nearing the end of a cycle so a bump next week would not surprise me.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.75%      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.

Do not forget to turn your clocks back before you go to sleep on Saturday night or you’ll be early for church…or is it late? I can never keep that part straight.

If you live anywhere in Southern California you have likely smelled smoke over the past few days. Unfortunately, it is that time of year again where too many of our fellow Californians are experiencing trauma and tragedy due to major fires. Here is what has become a semi-annual link I provide for those who are wanting to help: Donate to the Red Cross The Red Cross does what no other entity, public, private or non-profit, does when it comes to disaster relief and assistance, every little bit helps. If everyone who receives this Weekly Rate & Market Update donates just $10, more than $6000 will be raised to assist with food, blankets and housing. Take a minute and click-it!

I was half-right last Friday, the Washington Nationals did win their first World Series ever, but it took more games than I thought. How amazing that every game was won by the visiting team!

Have a great week,

Dennis

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

What are your tips for making our home search easier?

Question of the week:  What are your tips for making our search for a new home easier?

Answer: This was a question asked last week by a young couple purchasing their first home. They were referred to me by her older brother and were just beginning their home buying process. Here is the plan I laid out for them.

The first thing I tell new clients is to remember a few things. First, when meeting with mortgage professional(s), real estate agent(s) or other service providers, you are conducting job interviews. You will be working with these people for quite a while, if you’re very lucky in finding the right home right away, are fully qualified, you are looking at a month minimum. The home buying process is somewhat emotional and you want to work with people you have confidence in their ability, are experienced and that you trust.

Either the first or second step was being taken care of, they were meeting with a mortgage professional. Being that they are first time buyers, our initial meeting was about an hour. We covered how mortgages work, the process once they have an accepted offer and the relationship between price, down payment, mortgage amount, rates and costs for closing. Then we got into their financial details to determine a purchase price range and subsequent funds needed for closing and their monthly housing payment.

With this information exchange, they were comfortable with the financial aspects of their purchase and we are able to generate a pre-approval package to accompany their offer when they find the right home. My objective is that when you are looking at homes in the price range we discussed you are focused on the properties and their plusses and minuses and not wondering if you can afford the homes you are considering.

If meeting with a mortgage professional is not the first step, the first step should be to meet with a licensed real estate professional. If you have not been pre-approved, or spoken to a mortgage professional to determine a price for which you can qualify, I advise that the initial meeting is to get to know one another. As mentioned, this is a job interview. Ask how they like to work with buyers, what is their process, when are they available to show you properties. If you have already met with a mortgage professional, let them know and provide contact information. If you have not met with me yet, please tell them that you have a mortgage guy with over thirty years in the industry and you will be meeting before you start looking at homes—unless you are out of state in which case I, unfortunately, cannot assist you.

Until you know how much of a home you can afford, an amount verified by a mortgage professional, do not start looking at homes. Most experienced agents will not start showing new potential clients homes until they hear from a lender letting the agent know they are qualified, any potential issues being addressed and how much the buyers can afford.

The obvious concern is you do not want to look at homes for $750,000 and find out you can qualify for a $650,000 home. However, we also have worked with many clients who were looking at homes with prices significantly lower than what they can afford. They made assumptions of what they can afford, or used simple on-line calculators, and after our discussions with them and educating them on the process and how we determine affordability adjust their sights a bit higher.

The next step I strongly suggest for home buyers before starting to look for property is a Must Have/Can’t Have list. If you are buying with your spouse or significant other I advise that you each be very selfish. Go into separate rooms and make a list of the three things, or less, that your home must have. Then make a list of three things, or less, that if a home has this feature you absolutely will not buy it. Then compare lists.

If there is something on your “can’t have” that is on your spouse’s “must have” list then you need to have a conversation because one of you might not be happy living in a home that either has that feature or does not.

Ideally, your lists are compatible and reasonable. When my wife and I were looking to purchase our current home 20 years ago her only “must have” was a formal dining room. I didn’t have a “must have” and my only “can’t have” was a rock roof.

Regarding the Can’t Have, I have had agents express to me, “I’ve shown them fifteen houses that are exactly what they say they want and they won’t write and offer.” I ask, “have you asked them what the home can’t have?” No infrequently that solves the problem, as the Can’t Have for some can be more important than the Must Have. Make sure you let your agent know any features that will stop you from buying a home, it will make your search easier. As well, if an agent continues to show you homes with features that you have expressed are deal killers you may want to look for another agent.

Once you have your list give it to your real estate agent. With your list, knowing the price range for which you qualify and the area where you would like to live, your agent should be able to show you homes that are on the market the meet your criteria, or most of it.

This is important—listen to your agent. If your needs list, amount for which you qualify and area where you wish to purchase do not match, then you need to make some changes in your expectations. Every agent has the story of clients who wanted what was impossible, essentially a $800,000 home with a $500,000 budget. The clients go from agent to agent to agent being told, “that is not possible,” but refuse to listen. These types of clients are still looking, only the house they could have bought for $500,000 a few years ago now costs $575,000.

Finally, on the home search, there is no perfect home. I have had clients have custom homes built and after they moved in there were features they wish they had added, not put in or built differently. Your objective is to get as close to your list as you can, but you may need to make a few concessions.

Once you are all on the same page be ready to buy. Your agent knows what you want, s/he knows what you can afford and has been monitoring the market, and making calls to past clients, for the home you want to buy. If s/he calls you on Tuesday and says, “I found it and it went on the market today..” go see it that day or evening and do not be afraid to write your offer!

One final point, this process is about you. You will be getting advice from a lot of people, some involved in the transaction, such are your agent and me (ideally); some not involved, such are you co-worker or cousin Linda. I tell clients to always remember they are in control, they make the decisions and everyone else reacts to those decisions, and that three things are true, at least when it comes to me and likely everyone else: 1) I am not spending any of my savings to buy your home 2) I am not going to dedicate any of my income to make your monthly payment 3) I am not going to live in your home. All advice you get goes through that filter—you are buying the home, paying for the home and living in the home, your opinion is the one that matters most.

Working with homebuyers to set up their purchase transaction and work with them through our closing of escrow to become homeowners is something myself, and our company, excel at, as thousands of homeowners in California can attest. We do not just punch numbers and say, “this is how much you can buy.” We work closely with our clients to ensure they understand the transaction, are comfortable with the financial aspect of the purchase and have all their questions and concerns addressed.

If you know someone considering a home purchase in the near, or even distant, future please have them call me.

Happy home hunting!

Have a question? Ask me!

California home sales a bit mixed. The California Association of Realtors released sales data for September home sales. Total units sold statewide were down 0.5% from August, but up 5.8% from last September, while the median price dropped 1.9% for the month to $605,680, which 4.7% higher than the median price in September 2018. More locally, while total units sold in LA County was down 9.4% from August, sales volume was up 9.2% from last year and the median priced home in the county was up over $35,000 (5.6%) from August to $663,110, a 4.5% year over year gain. Orange County has been up and down all year, due to smaller number of sales and a wide spread in home values. In September the median home price was $830,000, up 0.6% from August and a whopping 16.4% from 2018; the number of units sold was down 9.1% from last year but up 2.5% from August. Low rates are supporting the housing markets, which are tempered by high prices and reducing inventory—active listings statewide are down almost twelve percent from last September and the number of active listings has been falling for three straight months.

Rates for Friday October 25, 2019: We saw fractional improvement in the mortgage market from last Friday, not enough to move the rate on the 30 year conforming rate, but enough to drop the high-balance rate back to the more traditional 0.125% (one-eighth of one percent) spread above the conforming rate. The market has priced in a rate drop by the Fed next week. If the Fed does not change the rate we can expect rates to pop up, if they drop the rate and release a statement that somehow forebodes another rate decrease in the near future rates may/should soften and perhaps dip a bit more.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                     4.00%      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.

This Indian Summer in California, temperatures in the mid-90’s to 100’s depending on where you live. In many parts of the country Indian Summer is when the thermometer reaches mid-60’s to 70’s. We can complain about hot weather in October, but….when our “cold days” are in the low 50’s during the winter how empty are those complaints about our October temperature spikes?

The World Series thus far has not gone as many expected, myself included. Being a Phillies Phan I do not hold much love for the Nationals, but very much appreciate the season they had after a horrible start and the way they play the game. Speaking of which, no matter who your team is, if you are a baseball fan you have to love to watch Jose Altuve of the Houston Astros play the game. I’m still hoping for an Astros comeback, but I think I will be disappointed and Washington will be hoisting a trophy and hosting a parade before the next Weekly Rate & Market Update.

Have a great week,

Dennis

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