How can we make our loan process easier?

Question of the week:  How can we make our loan process easier?

Answer: Be like Mark.

The loan process is not that hard, what is hard for many is the collection of items that are required for you loan to be approved and getting them to us so we can present to underwriting. This is made more challenging for many due to the pandemic restricting movement and personal interactions as the transfer of most of the items needed for loan applications is primarily done electronically.

For every mortgage application here is the basic list of items you will need to provide your lender:

  • Driver’s licenses, or other form of identification (i.e. passport)
  • Most recent year W2’s
  • Most recent paystubs
  • All pages of most recent two months’ statements primary checking/savings accounts, NOTE: if first page of statement says: “Page 1 of 4” we will need all four pages regardless of information on any of the pages
  • Mortgage statement for current residence/properties owned
  • Insurance statement showing premium and coverage for current residence/properties owned
  • HOA statement for current residence/properties owned, if applicable

Depending on your situation you may also need to provide:

  • Most recent year (possibly two) of personal federal income tax returns
  • Most recent year (possibly two) of business tax returns if you own 25% or more of a business
  • Two months’ statements for retirement or investment accounts if funds needed for closing, to be used for income or needed to show reserves

The list of items is a lot of pages, but not a lot of items. As well the list contains items everyone should have access to with relative ease.

Delivery of the items is sometimes the challenge, especially for those with no access to a copier or a scanner. Ideally, you have electronic copies of the items, or the ability to scan them. If this is the case, I use a secure cloud-based program and will open a folder we will share for you to copy the items to me.

If you do not have a scanner or copier then we need to have you provide me with the original documents for me to copy/scan and then return to you. With the current environment this is not simply dropping them by my office, as I likely will not be there.

If you wish to make your loan process easier, be like Mark. Mark was provided the above list of items, plus a few more due to this. When provided with the list of items we needed Mark quickly copied the items he could off various web sites, primarily bank statements, insurance information, mortgage, etc into our shared cloud-folder. He obtained an electronic copy of tax returns, scanned paystubs and W2’s and copied those into the folder and within a day we had all the items requested.

Once we have all these documents, we go through them to see if anything is missing, or if one document causes a question we will want to be answered, such as a large deposit on a bank statement or payment of a creditor not seen on our credit report. If this is the case, we will ask for additional items.

After the initial start of the loan package there will likely be some additional information requested when your file is reviewed by a processor, and then an underwriter. We try to anticipate what they may be requesting and ask for the items early in the transaction, but sometimes we miss things they find. If there is an additional request, here is where being like Mark is very helpful, ask questions as to why another document may be needed, but do not argue and say, “they don’t need that…” to someone with over thirty years in the industry. If someone is asking for it you can bet it will be something that can delay your closing if you do not provide it.

Our industry is packed with files right now, historically packed, and many people at all stages of the process are working from home. Our objective is to present to the underwriter the most complete file we can, so when it is opened for review the loan is approved with few, if any conditions that require more information or documentation from you. Due to the longer times in processing and underwriting we will likely need to update bank statements and pay statements.

Our application process is almost fully automated now with the use of DocuSign to sign application documents and disclosures. These are all very time sensitive. Be like Mark, when you see an email sent to you via DocuSign from your lender’s company open the item, review it and click to sign as soon as possible; especially once your loan is approved.

Some tips to make your loan application easier to process and underwrite:

  • Quickly respond to requests for documents
  • Monitor your email box for electronic signature requests
  • Keep all bank statements, pay statements and other financial documents through your escrow
  • If you are moving before your escrow closes, have a box or a folder for your financial documents, like pay and bank statements
  • If in doubt whether you think we need something, send to us
  • Return items sent to from escrow as soon as possible

There are three main factors that we see delaying a file in process or underwriting:

First, the borrower did not fully disclose something of importance. For example, borrower is getting or paying spousal support and there was a change in the amount being paid that will impact our ability to qualify. We discover this once we delve into bank statements to track payments.

Or perhaps there is another property that is owned. At the initial application interview client says they own no other property. Our initial pre-approval from Fannie Mae does not require tax returns. As part of our process we have to request from the IRS an electronic statement that is a line-by-line of your tax returns. When we get the results, it shows you have filed a Schedule E that shows other property owed that has expenses. “It’s not something we really use so I didn’t think it was important…”

Income you receive that requires you to file a Schedule C, other properties owned, regular deposits on your bank statements, or payments going out that do not match your credit report. All these, and others are bumps that could derail your loan approval, or cause significant delays.

Second, missing pages from bank statements. Actually, this should be listed first as it is the primary follow up item we need. On the list above of items needed, which is a cut and paste from message I send to all clients, you see the following, “NOTE: if first page of statement says: “Page 1 of 4” we will need all four pages regardless of information on any of the pages.”

A large percentage of our files have requests made back to borrowers, “can you please send me pages 2, 5 & 6 of your June and July statements for you accounts with your credit union?”

Often, we get the response, “there is nothing on those pages, one is just the legal stuff, another is an add and the last one is contact information.”

It does not matter if any of the pages are blank, if the first pages says “page 1 of 6,” or any page says “page W of Y” we need all pages from the first page to page 6, or Y that is labelled. The underwriter has no idea what is on pages 2 or 5 or 6; for all she knows one of these pages shows a loan not on the credit report, or a series of large deposits, or large transfers, or another account.

Third, respond and acknowledge requests for items or actions with a time frame when you will be able to provide what is needed. This not only lets me know you are aware of what is needed but also lets me know when I can expect what is being requested.

How can you make your loan process easier? Be prepared and be responsive; be like Mark.

Have a question? Ask me!

Rates for Friday July 24, 2020: Not a lot of rate impacting news this week. Rates move down slightly from last Friday for conforming loan amounts and up slightly for high-balance loans—likely due to lenders reaching their funding limits for the month for these types of loans.

We are still seeing large disconnect in the high-balance market from purchases and refinances, as well the spread remains larger than it has historically between “no-point” transactions and those with one or fewer points. Call for details and quotes.

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

30 year conforming                                            2.625%   Down 0.125%

30 year high-balance conforming                   3.125%   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.

Before I sign off, a thank you to friend, and agent, Mollie for suggesting that I put the question of the week in the email subject line so she can find topics easier to forward to clients and friends. Let me know if you like the crowded address line, do not like it, or don’t really care—in which case I doubt you would let me know!

Sounds like our Friday afternoons as since the initial restaurant shut downs in the state in March Fridays have been our night for takeout dinner. In the beginning there was lobbying for one place or another, then it morphed into someone say, “not that.” Now we are at the stage where someone will offer up, “How about we get _____ tonight” and it is met with either no response or “that’s fine.”

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 we remove our loan contingency?

Question of the week:  Can we release our loan contingency?

Answer: This is a question ever lender is asked on every purchase transaction mortgage package they are working on.

Section 3, Item J of the California Association of Realtors’ California Residential Purchase Agreement and Joint Escrow Instructions, aka “RPA” or “the offer,” has five clauses that deal with the loan terms of the offer to purchase a property.

  • Clause one deals with loan applications and requires that within three days, or other stipulated time frame, after acceptance of offer, the buyer needs to deliver to seller a letter from buyer’s lender stating that after receiving application and credit report buyer is prequalified.
  • Clause two is titled loan contingency and states that buyer shall act “diligently and in good faith” to obtain financing and that buyer’s qualification stipulated in clause 1 is a contingency.
  • Clause three are the terms regarding loan contingency removal and states that within twenty-one days, or other stipulated time frame, of acceptance of offer the buyer must remove the loan contingency or cancel the agreement.
  • Clause four gives the buyer the opportunity to declare that the offer is not contingent on the buyer’s ability to obtain financing.
  • Clause five deals with credits to the buyer and what happens if credits exceed limits imposed by buyers’ lender.

Our question of the week deals with clause number three, removal of loan contingency, and tangentially clause four, there is no loan contingency.

What is a contingency and why do is matter?

When you make an offer to purchase property you will almost always need to put up an initial deposit when you and the seller reach an agreement on price and terms. In the RPA where you indicate the price you are offering for the property, you also indicate how much of a deposit you will be sending to escrow should your offer be accepted. The amount of your deposit can vary, but generally the higher the deposit the stronger your offer is considered to be. Most offers are generally around 2% rounded to the nearest $5000 level. For instance, on a $300,000 offer you may have a $5000 deposit, on a $400,000 offer you may have a $10,000 deposit. If you have a $400,000 and your deposit is $25,000 then  you are telling the seller, “we feel really confident we will be able to close this transaction and are putting up $25,000 to show our confidence.”

The deposit really matters because if you cannot close your transaction after you have removed contingencies the seller has a claim on the deposit.

Notice “contingencies,” the loan contingency is mentioned above, other contingencies are for appraisal, physical inspection, documents pertaining to a homeowners’ association if applicable, sale of buyer’s current property, termite report and clearance are the most common and included in the purchase agreement’s boilerplate language.

The impact of removing contingencies is covered in Section 14, Item F, effect of buyer’s removal of contingencies, which basically says you are satisfied with all inspections and ability to obtain funds to close and are moving forward to close the transaction and accept liability if you cannot perform actions needed to close; i.e lose your initial deposit.

Item H of Section 14 contains the language regarding the effect of cancellation of the contract on deposits. Essentially, both parties must agree in writing to the cancellation and the disposition of the deposit. If one party refuses to agree to the cancelation and disposition of funds, then the clause addresses the steps to be taken due to the adversarial nature of the issue.

The bottom line is that removal of contingencies are a big deal if later in the transaction something happens that inhibits either party’s ability to close, but especially the buyer’s inability to close.

Circling back to our question regarding the loan contingency clauses stipulated in section J, within twenty-one days you have to inform the seller you are removing the loan contingency or are canceling the agreement.

If you choose to cancel the contract rather than removing the loan contingency then you are entitle to your deposit being returned, less any costs incurred on your behalf.

If you do not remove the contingency then the seller has the right to terminate the contract which generates a return of your deposit.

If you do remove the contingency and cannot obtain financing to close the transaction by the agreed upon close of escrow date, the seller can cancel the transaction and demand your deposit be transfer to them from escrow.

Can we release our loan contingency?

For many years our company has replied to this question based on advice from our legal counsel. Because California is a litigious state, we have been advised and follow the advice, that we will not tell clients, “Yes, remove your financing contingency.” If we say that we are telling our client that their loan will be funded and their deposit is secure based on the ability to fund that loan.

There have been many instances over the years where after a loan contingency has been removed a buyer has lost their job, has suffered some calamity that exhausted funds needed for closing, had an IRS or other tax lien appear that was not on a credit report, that precluded the ability for the buyer to obtain final loan approval and funding of their mortgage. In these instances, should we have told a client they were okay to remove their loan contingency and they lose their deposit we are open to action by the buyer to reimburse them for their lost deposit and possibly other expenses.

In our current environment, where many people are being laid off, furloughed, having salaries and wages reduced, due to the Covid-19 pandemic, increases the chances of something occurring that may prevent final loan approval and/or funding. This is one reason why the mortgage industry has dramatically increased employment and income verification after loan approval and before drawing loan documents and the day of funding.

What we can tell a client when asked if they can lift their loan contingency is that they were qualified when we took the application and are still qualified. However, funding of the loan will be contingent on no changes to their income, employment or other qualifying factors until the funding of the loan.

When the time comes for you to remove your loan contingency, consider all the factors in your employment, income, funds for closing, and objectively consider if there is a chance any of those may change enough to change your ability to qualify. If you feel there may be some change to your income then run it by your lender to see how that changes your qualifications and chances to close.

More importantly, before writing an offer, consider your employment, income and funds for closing and determine if there could be an impact on any of them before you close escrow that may change your ability to qualify. If so then you may wish to delay your home purchase until you are certain your ability to close has stabilized so as not to be put in a position to potentially risk several thousand dollars put on deposit.

In the end, your decision to remove your loan contingency or cancel the purchase contract is a risk assessment you need to make based on what you feel may happen after you make that decision.

Have a question? Ask me!

Rates for Friday July 17, 2020: Economic data a bit mixed this week as reports for June retail sales continued the gains seen in May, consumer prices increased on higher demand, both of which are good news for the general economy….but….initial jobless claims for the week ending July 11th were still over the 1 million mark and continuing jobless claims are over 17 million, which reflects a reset in many states as they close some parts of their economies that had opened in May and June.

For the week the high-balance rate remains flat from last Friday and we see a bit of a bump on the conforming rate from last Friday.

We are still seeing large disconnect in the high-balance market from purchases and refinances, as well the spread remains larger than it has historically between “no-point” transactions and those with one or fewer points. Call for details and quotes.

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

30 year conforming                                            2.75%   Up 0.125%

30 year high-balance conforming                   3.00%    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 is usually the time of the summer that Leslie and I are off on our annual summer road trip. We usually start talking about our possible trips in January or February. Even before Covid-19 was on the radar we still had not had any discussions about where we wanted to go. Probably because we still did not know the girls’ plans for the summer.

Our drive trips have been up to Northridge a few weeks ago to visit my brother’s family, and again tomorrow to see them and also my sister who is on her own drive trip from her home in Boise.

I miss the small roads and towns we won’t be seeing this summer.

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 will we know which home to buy?

Question of the week:  How will we know which home to buy?

Answer: It will tell you.

In the summer of 1987, I was starting my career in the mortgage industry, at the time not know it would in fact become a career. My territory for the company I was working for was the Fullerton area and I would spend my days visiting real estate offices trying to get appointments with agents to introduce myself and solicit business. On weekends I would drive around the area following open house signs to meet agents and hopefully some buyers looking at homes.

One Saturday or Sunday I walked into a home being held open by an agent I had met several times after he invited me to come by when I saw him on Friday. I cannot recall his name, I’ll call him Bob for convenience sake, and he had a real estate agent since the 1960’s. The door was open and as I walked in, I heard his booming voice, “Do you want to buy it?”

The price was around $175,000 as I recall and I replied, “I can’t afford to buy it.”

“But if you could afford it, would you want to buy it?”

By now I had walked through the entry way and a hallway to where Bob was standing in a dining room-living room area off a small kitchen. I replied that I did not think it would be a home I would like to buy, but it sure looked nice and I was sure he would get a buyer that day.

Before I had a chance to ask if he had any buyer, Bob wanted me to speak with about qualifying or mortgage questions he explained why he asked me if I wanted to buy the house when I walked in. “It’s the three-step rule.”

Bob told me that over his twenty years in the business he learned a long time ago that people knew if they wanted to buy a home by the time they had taken three steps into the home. He said that for the past several years he asked everyone as they entered his open houses if they wanted to buy it and often times could guess how they would answer by their faces and body language. Something about when you first enter a house you quickly decide if it can become your home, he said.

Over the years I have told this story to many of my clients after our conversations for pre-qualifying or pre-approval. From my own experience I have expanded my views on the matter beyond three-steps.

Here’s where Dennis gets a bit metaphysical.

After initial conversations with clients I tell them, “now that you know you are ready to buy your new home don’t be surprised if later today, or this weekend you come upon a home for sale and want to buy it.” And very often that is the case. And very often after that I ask, “did you know within three steps of walking into the house? And very often, sometimes with a pause, “yes, how did you know?” I know because Bob told me.

I am a firm believer that while you are looking for your home, it is looking for you, for the right family to occupy it and make it happy.

Decades of experience working with and speaking to buyers about their experiences has validated my belief. Families that are ready to buy but want to wait until…after school is out, after a job promotion, after they get their home ready for market, after…after…after…call me up, “Dennis, we were driving home from having brunch with friends and saw an agent putting up and open  house sign, we decided to just have a look and we love it! We want to write an offer.”

“Dennis, we said we wanted to wait, but my co-worker said her sister is going to put her house on the market because they are moving out of state. She told me where it was and I drove by on the way home last night and it is perfect. I saw it at lunch and we want to buy it.”

When they were pre-approved to purchase a home, a barrier was lifted and they became open to a new home. Once they were open for a new home then homes are available connect with them and they find each other. The home needed a family and the family needed a home.

When the home owners enter the home they know quickly if they want to buy it, why? Because they feel very comfortable, they feel calm, they feel at home. It happens, time and again.

Carrying on with this line of thought. You home is a primal need. Food, clothing, shelter are basic human needs for millennia. When you decide you want to purchase a new home, and are open to changing such a major part of your life, you open yourself to other changes. Okay, Dennis is getting a little weirder here.

There are times in our life when we are open to change. The younger we are the more frequent these openings occur in our lives, as we get older they still appear but they become further apart. But once we are open to change in a relatively short period of time a lot of change can and will happen so be ready. Often the trigger is a change in housing.

Over the years, working with individuals or families purchasing new homes I have seen (and personally experienced) them under going many other changes within a few months or year.

I have seen couples dating for years and not yet formally engaged get married. Conversely, I have had two couples in the middle of selling a current home and buying a new home separate and file for divorce.

I have seen individuals who were single and buy a home call me not too much later saying they have met someone, are getting married and they are looking for a bigger home.

I have seen many, many buyers changes jobs in or right after escrow closes for better opportunities and more pay. I have seen a business owner sell his business after moving into a new home, “because the timing felt right,” and semi-retire into consulting. I have seen another client purchase a business for the same reason.

Personally, I bought my first house not too long after Leslie and I started dating and she was still living in Sacramento, knowing it would be our home. That was in mid-February, we got engaged Memorial Day weekend and married Labor Day weekend, all in 1994. In August 1998 we sold that home and moved into the home we are in today. We had been trying to become parents for a few years, in December we conceived. The following September our daughter was born ten days before my partners and I started Stratis Financial. We were open to change and it happened. My wonder is what change will be open to in about four to five years when both girls are finished college and starting their careers somewhere? How much with their openness to change and decisions influence our own?

Bob was right, three steps you and your new home have likely connected, you found each other. And once that connection is made be ready for other connections to be made.

How will you know which home to buy? Listen, it will let you know!

Have a question? Ask me!

Rates for Friday July 10, 2020:  No economic news this week impacting rates, which have been in a very tight trading range for a few weeks with slight drifts up and down, this Friday we catch a down drift from last Friday. We are still seeing large disconnect in the high-balance market from purchases and refinances, as well the spread remains larger than it has historically between “no-point” transactions and those with one or fewer points. Call for details and quotes.

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

30 year conforming                                            2.625%   Down 0.125%

30 year high-balance conforming                   3.00%   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.

Recalling my experiences from over thirty years ago as I started out in the mortgage industry, the first vision that came to mind is my 1980 Toyota Celica. I purchased the car the last week of my freshman year at college, May 1981, from Kimio Hirano, a Japanese student who lived in next door, through our shared bathroom. Kimio was one of many Japanese students on campus as part of the English as a Second Language student. His English improved dramatically in the second semester when he stopped going to every class every day and hung out with us more. He purchased the car and drove it around the Western United States and sold it to me before he went back to Japan.

It was bare bones car, the only “luxury” was the leather seats. Five speed manual transmission, hand crank windows, all black interior, no air conditioning, a perfect first car for an 18 year old.

Not as perfect for a young 20’s man of business driving around North Orange County on hot summer days calling on real estate offices. In those days we always wore suits and I would be donning my jacket every stop to cover the very evident perspiration dampness on my shirts. In the glove box was a Ziploc bag filled with quarters, dimes and nickels—my “car phone.”

When my pager went off, I would try to stop by real estate office to call into the office for my message and then make the return call—often a friend wondering if we were going out that night or asking what time our softball league game started. Very often though I would stop at a pay phone, pull out my car-phone-bag and return calls. I knew where almost every pay phone was in the Fullerton-Yorba Linda-La Habra-Placentia area.

That was a great car, no A/C and all.

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 Independence Day

Question of the week:  How are you celebrating Independence Day

Answer: I can’t say quietly as, like most of you, our neighborhood and surrounding areas have been practicing celebratory fireworks for a few months….

With no parades, picnics, official firework shows this 4th of July will be reminiscent of those I had when we lived in Belgium while I was in high school. The two big American holidays, Independence Day and Thanksgiving, were just another day on the calendars of the locals and we created our own little celebrations and remembrances at home.

One thing I like to try to do every year, and usually accomplish because of the Weekly Rate & Market Update that is sent out every Friday, including before or on July 4th with a link, is to read the Declaration of Independence. As I read it I consider that it was a historically unique document in that it had never been done before, representatives of a colony declaring their independence from their monarch, establishing their reasons and clearly indicating they will have “full power to levy War, conclude Peace…”


It was the first political document produced in human history to state, “all men are created equal…endowed by their Creator with certain unalienable Rights, that among them are Life, Liberty and the pursuit of Happiness.”

Here is the link to the Declaration of Independence from the National Archives; I give you less to read this week so you will have time to read our founding document.

Have a question? Ask me!

With employment increasing so does confidence. For now. June saw a large increase in consumer confidence as the economy opened up across the country. With the higher confidence we should see higher retail sales and consumer spending for June as well. There is a “but,” with the spike in positive Covid-19 tests across the country some of the loosen on the economy by governors and mayors are being tightened back up which can, likely will, reduce confidence, spending and employment.

June saw another leap in employment, 4.8 million jobs were added to the economy in June. That brings the total to about 7.5 million jobs coming back in May and June, well below the estimated 22 million jobs that were lost. Because most of the jobs that were lost due to the pandemic were lower wage jobs, the re-hires are also skewed to the lower wage jobs so average wages dropped for the second month in a row. The bar and restaurant sector gained almost 1.5 million jobs in June and have recovered approximately half of the jobs lost by the massive closings in March.

Rates for Friday July 3, 2020:  Rates dip a little ahead of the long weekend as investors put funds into fixed rate investments, bonds and mortgages.  We are still seeing large disconnect in the high-balance market from purchases and refinances. Call for details and quotes.

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

30 year conforming                                            2.75%   Down 0.125%

30 year high-balance conforming                    3.00%   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.

Whenever I see or hear a public protest, a demonstration against any sector of any level of government, comments condemning one official or another or several, it pleases me to see that our Constitution still works as these are examples of the freedoms provided, starting with freedom of speech. The Declaration of Independence was the first step towards the Constitution and the Bill of Rights. It is easy to criticize words and actions of those from the past when framed under current conditions and the progress of history, it is harder to imagine the inherent genius in those words and actions that speak today to a different society and culture, still with great meaning and intent.

Our nation is not perfect, nor will it ever be. Our institutions and national ethos has always recognized imperfection and has in place the opportunity to constantly become less imperfect. Criticizing those who created those foundations for their actions not fully matching their words ignores the words they chose to die for established a vision we shall constantly strive, as a nation and world, to fulfill.

Our nation is not perfect, but it is the least imperfect of any nation in history.

God Bless America, and each of you, on this Independence Day weekend and every day; we are blessed to live in the freest nation ever created.

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

Why does it matter to lender if our home is house, condo or townhome?

Question of the week:  Why does it matter if our home is a house, condo or townhome?

Answer: Because of data analysis of defaults and foreclosures.

All of the above, house, condo and townhome, are under the general classification of single unit dwellings. As showing in the name, these types of dwellings are meant for one-family occupation. However, they are not the same legally.

Huh?

Legally, what do you own when you own with a house, a condo or a townhome? Legally, what obligations do you incur, or have put upon you, when you own a house, a condo or a townhome? Is a townhome a legal type of dwelling or a style? Are apartment style units the only condos?

With each of these types of properties you own something different, let’s take a look.

For mortgage purposes the different classifications for lenders are single-family residences (aka houses), condominiums, and Planned Urban Developments (aka PUDs). Depending on the historical rates of default and foreclosure for each classification the cost of a mortgage can be higher than the baseline dwelling cost.

The baseline dwelling is a free standing, i.e. detached, house, generally referred to in mortgage-speak as SFR, or Single-Family Residence. The owner of the property owns the land and all structures and improvements on the property and, unless deeded to some other entity in the past, all mineral rights to what is below ground.

The title for an SFR will state the page, lot and parcel number of the subject property and everything on that parcel is owned wholly by the owner(s) listed on the deed.

Townhomes get a bit confusing, especially for dedicated mortgage professionals trying to get an accurate rate quote and qualification to borrowers who say they are buying, or refinancing, a “townhome.” To be fair not only are borrowers confused by the meaning of “townhome,” but so are real estate professionals. This is because in the lending world “townhome” is a type of building design, not a legal form of ownership, or title.

A row of multi-story dwellings sharing adjacent walls are commonly referred to as “townhomes.” They share many characteristics of detached single-family residences, but what they do not share is full ownership of everything they own.

Because townhome is style of dwelling, it is important for lenders to know what the title of a subject property that is in the townhome style shows is being owned and by whom.

Like the SFR, or detached home, a PUD typically has no rate-cost adjustment because of its property classification.**  When you own a PUD, you own the structure and the land below the structure. For your dwelling, you own the interior and exterior walls, the roof and the foundation. Where the ownership varies is that typically there is also shared ownership of common grounds, facilities such as clubhouses or garages, and an association. For pricing a mortgage, PUDs are priced the same as SFRs.

Not all townhome style properties are PUDs however, many of them, actually most in Southern California, are condominiums. As are many detached dwellings that look like single-family residences.

Condominiums are shared ownership of land and improvements. The overwhelming majority of condos are apartment like in appearance, however appearances can be deceiving.

When you own a condominium, you share in a partial ownership of the entire property and, through the homeowners association, responsible for all the maintenance and upkeep of the property and improvements that are commonly owned. What do you own that is not joint? When you stand inside your unit and look around, everything you see you own, what you do not see is common ownership. For instance, you own the kitchen cupboards, but not the studs holding up the cabinets. You own the sink but not the pipes in the walls that bring you water and take away waste. You own your wood floors and carpeting, but not the subfloors beneath.

As mentioned, many townhome style properties are condominiums due to how the properties are titles and who owns what. As well, there are free-standing dwellings in many parts of the region that from appearance would seem to be single-family residences or PUDs, but in fact are condos.

This matters because pricing for condominiums is higher than for SFRs and PUDs.  As discussed in prior WR&MUs, lenders have pricing adjustments for risk based on the loan-to-value (LTV) of a mortgage. The higher the LTV the higher the price for the same rate. The lower the credit score the higher the price. Non-owner occupied properties have a higher price. Condominiums have a higher price for all transactions over 75% loan-to-value, generally about 0.75 points (0.75% of the loan amount, or $750 per $100,000 in loan). This can translate to up to one-quarter of one percent higher interest rate (0.25%, i.e. from 3% to 3.25%).

Why do condominium units have higher costs? Because of the risk associated with them. Condos have higher foreclosure rates than SFRs and PUDs. As well, they generally are converted to income property more frequently than SFRs and PUDs, which can be problematic if a large percentage of a complex is tenant occupied as opposed to owner-occupied.  Prices in complexes that become heavily tenant occupied are more inclined to see slower price growth, and faster price decline, than heavily owner-occupied complexes as absentee landlords are more like to sell units under market, or let properties go in foreclosure.

When you own a home you are loose business partners with your neighbors. Loud music, unkept lawns or houses, cars on the lawn, impact the values of immediate homes surrounding the lousy neighbor, but overall the values in a neighborhood are not impacted by a few bad neighbors. In a condominium complex you are intimate business partners with every owner. You share a homeowners association that is responsible for collecting monthly assessment fees, maintaining the grounds and structures, being responsible financial stewards to ensure funds will be available to replace roofs and plumbing, paint the exterior on a regular basis and generally ensure the complex is in good shape to retain values. A poor HOA board and management can result in financial troubles that require large assessments from owners to correct, and lead to prices stagnating or deteriorating as potential buyers see the financial reports and walk away.

Lenders are wary of entering into business relationships with all of your HOA partners and neighbors as they know they have little to no control of the situation and as a result the value of their collateral is at risk.

When speaking with clients about a purchase or refinance we always check to see what type of property we are working with to be accurate on rate and cost quotes. This is from making errors in the past when a borrower, or agent, tells us a property is a “townhome,” and not a condo only to discover when the title report arrived that the property is a condominium and the cost of the rate is higher than we initially discussed.

While your enjoyment of your home will not differ if it is a house, condo or townhome in how it is titled, your mortgage may differ.

Sidebar From this commentary it may appear that I am not a fan of condos and advise clients to not purchase condominium units. To the contrary, I am a believer in condos and the great value they provide many homebuyers and owners. Most complexes are well maintained and have active, engaged HOA board members and property owners who ensure the quality of the property and that values reflect the health of the organization and its members. There are many benefits to owning a condo as opposed to a home that are perfect fits for many looking to own their own home.

Have a question? Ask me!

Concern over increases in positive Covid-19 tests across the country has the markets spooked this week. After the sharp rebound in employment and sales, investors (and non-investors) are concerned the increase in positive C-19 cases will cause many governments to shut down parts of their local economies again. As result equity markets, stocks, have dropped this week and mortgage rates have softened a bit.

Rates for Friday June 26, 2020:  Rates are flat from last Friday for our benchmark quote (see fine print below), however a bit softer for lower LTVs or  higher FICOs. We are still seeing large disconnect in the high-balance market from purchases and refinances. Call for details and quotes.

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

30 year conforming                                            2.875%   Flat

30 year high-balance conforming                   3.125%   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.

Anyone ready for a road-trip or family vacation? Even though we have been cooped up together since our oldest returned home in mid-March, I think the Smiths are ready to be cooped up in a different location. Personally, I am itching to pack up the Honda Odyssey and start driving around the state and country on small county roads, eating in local diners and restaurants and staying in a series of Best Westerns in the middle of not-much. On the plus side we, like many families, are saving money from no Spring Break or summer vacations, but….

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

Will rates go lower?

Question of the week:  Will rates go lower?

Answer: {shakes Magic 8 Ball} I do not see rates being able to go much lower. There are several factors, but the primary one in my opinion is the cost of originating mortgages and the rate of return from the rates paid on the mortgages.

When looking at the flow of money through the mortgage process there are several slices taken out of a mortgage payment before it reaches the ultimate investor. For conventional loans, the loan servicer takes a small bite, then Fannie or Freddie take a bite and then the remaining amount of the interest is provided to the investor.

Who is the loan servicer? Commonly referred to as “the lender,” loan servicers are the entities that collect mortgage payments. Sometime the servicer is also the original lender, but very often it is a different company—and not always a bank. Mortgage servicing is a segment of the mortgage industry that is regulated and enables mortgage lenders to relieve themselves of the costs of a collections, or servicing, department by selling the servicing rights to the mortgages they fund.

Just as conventional mortgages are sold to Fannie Mae or Freddie Mac to provide liquidity, many mortgage lenders also sell the servicing of their mortgages to other companies. The servicing company then sets up the borrowers’ accounts and collects the monthly payment for principal and interest, and if the loan is so set up property taxes and insurance payments are collected as well.

The servicer then forwards the payments to Fannie or Freddie, and if collect the property taxes to county tax assessors and insurance premiums to insurance companies. If payments are not made the servicer has a collections department which will then proceed through the steps of attempting collection, working out a payment schedule with borrowers. If necessary, this department start the foreclosure process and see it through to conclusion—either foreclosure or all past due payments and charges paid in full by the borrower or from their sale of the property.

Servicing charges generally range from 0.25% to 0.50% of the loan remaining loan balance, so the longer the loan is serviced the less the servicer gets paid for the servicing as the principal drops.

Following the flow of the funds, as discussed through the years of the WR&MU, after lenders sell their loans to Fannie or Freddie, those entities package mortgages into big bundles called Mortgage Backed Securities (MBS) which are then sold to investors. You can purchase MBS through broker-dealers, depending on how much you can invest either into large pools, or purchase shares in mutual funds or ETFs that hold MBS in their portfolios.

Once the MBS are sold to investors the investors want to get paid, which they are as monthly principal and interest payments are made by borrowers to servicers who then pass funds along to Fannie or Freddie who then pass payments onto MBS investors. For this Fannie and Freddie take a slice of the payment as well, retaining a portion of the interest payment. I have been unable to find out how much this portion is, my assumption is that it is near 0.25% of the payment as well.

Let’s look at a $500,000 mortgage with a rate of 4% and a payment of $2387 per month. The payment is made and the servicer retains $104 of the payment and sends $2283 to Fannie Mae. Fannie retains $104 and sends $2179 to the investor. The principal part of the payment is $720, so the investor is collecting $1459 in interest. This reflects a return of 3.5%.

Now let’s look at the same mortgage with a rate of 3% and a payment of $2108 per month. The seller retains the same $104 and Fannie Mae its $104. Of the $2108 payment Fannie passes $1900 to the investor, of which $858 is principal, therefore the investor collects $1042 in interest. This is a return of 2.5%. 

How much demand will there be for 30-year investments with returns of 2.5% or lower?

As discussed in our May 1st WR&MU, mortgage servicers were on the brink of collapse in April after the CARES Act passed requiring servicers to grant forbearances to homeowners who requested them while still having to advance payments to Fannie and Freddie. This cash flow risk increases the return desired by everyone through the industry, which puts upward pressure on rates.

It is estimated that around 5 million homeowners across the nation are currently in forbearance, about 9% of outstanding mortgages. This has pulled billions of dollars per month out of cash-flow through the servicing industry, and to investors. What is next? These 5 million homeowners will be faced with a settlement statement from their servicers for a lump-sum amount that will be due when the forbearance period is over.

Most servicers will then proceed to contact borrowers to work out payment modifications that will pay down/off the outstanding balance that will be in addition to their contracted payment. Other servicers may, can, will, file notices of default and begin the process of foreclosing.

What will homeowners do? Will their income be sufficient to afford a higher mortgage payment for the next year or two? Will they have enough equity to sell their home to payoff the mortgage and back amounts due?

Whatever decisions are made, there are costs to servicers that are more expensive than normal mortgage payment collections. At a time when their receipts are down.

One more factor. Many of the mortgages being paid off in the current refinance cycle were made less than a year ago. It generally takes about one year for a loan servicer to recoup the acquisition costs. For all their mortgage clients that pay off in less than a year the company loses money.

As shown above, the very rough calculations on payments and the flow of funds from borrower to investor do not take into account many other variables such as purchasing the MBS at premium or discount. However, they show how investor return on investment is greatly impacted by payment collections.

As can also be seen, there is a tremendous amount of costs and decline in cash-flow for servicers that has them operating on razor thin margins with little room for more disruption.

As a result of these pressures, from investors to servicers, the mortgage markets should be at, or very near, the lowest rates can go and still have a functioning industry with smooth flow between investors, agencies, lenders, and borrowers of funds borrowed, funds loaned, payments made and payments collected.

Finally, there is very little left that the Federal Reserve, or the Federal government, can do to further reduce rates in the retail sector. Actions already taken by both the government and the Fed through the mortgage industry into disarray in March, when we saw mortgage rates spike around 1% in less than two weeks. There are no actions left they can take that would lead to lower rates.

As stated many times over the years, mortgage rates are not dependent on the Federal Reserve’s rates, but rather on investors and what they are willing to pay for Mortgage Backed Securities. As also mentioned through the years, in certain markets lenders keep rates higher than the MBS markets are willing to take to control their volume flow and also to mitigate their risk. With rates at their current levels both factors are in play as MBS investors are looking at extremely low returns and the mortgage industry is looking at reductions in payments, government policy enabling further reductions in payments. Not mentioned in the above is the very complex system of lenders hedging rate locks and pipelines being disrupted due to the Fed’s actions.

Finally, (thank goodness thinks the reader…) long time readers know that rates are dependent on the economy and overall economic activity. As well, they know that 65-70% of our nation’s economy is consumer spending. With the country opening up at different speeds across the company, consumers are beginning to spend, people are going back to work, economic activity is slowly increasing.

As this continues there will be upward pressure on rates. Maybe not enough to cause rates to increase to pre-Covid levels, but enough to provide a floor below which rates will not drop.

Can rates go lower? Yes, but if they do it is my opinion that any drop will be incremental from where we are today.

I hope I am right as if they do drop significantly more (one-half percent or more) that will mean our economy is in really bad shape.

Have a question? Ask me!

The big number this week was 17.7%. That was the growth in retail sales in May from April. Sales in April dropped 14.7% from March, and the consensus was for sales growth of 8.5% as commercial establishments across the country opened up. Auto sales were a big part of the jump in sales, up 44%. That increase is only about a quarter of the increase in clothing stores sales, which were up a staggering 188%. As a benchmark, May 2020 retail sales were 6% below sales in May 2019 so there is a way to go for the retail industries to get back to pre-Covid activity. In normal times this news would spike interest rates, but these are not normal times as you know.

Rates for Friday June 19, 2020:  Thirty-year fixed rate mortgage rates are at their lowest since 1971, as discussed above will they go lower? Market indicators and projections are rates remain very close to today’s rates for the near future. We are still seeing large disconnect in the high-balance market from purchases and refinances. Call for details and quotes.

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

30 year conforming                                            2.875%   Flat

30 year high-balance conforming                  3.125%   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.

Monday, I went to my office for the second time in over 90 days, my last visit was very briefly, less than two hours around day 60 of being working from the home office. As I left for the office Monday morning I said to Leslie, “I think this is the first time in four weeks or more that I have long pants on.” I have no records or concrete proof, but it is likely the longest I went wearing only shorts since the last semester of my senior year in college (1984).

The work-at-home policies have killed the dry cleaning industry since no one dry cleans shorts, pajamas or sweats.

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

Should we pay points to refinance our mortgage?

Question of the week:  Should we pay points to refinance our mortgage?

Answer: Yes, maybe no.

My mantra for over thirty-years has been, “do the math.” Our industry has been disrupted since the CARES Act was passed in March, as result we have seen more points being paid for refinance transactions in the past three months than over the last decade plus combined as “doing the math” has led many families to choose paying points for a refinance.

Why is this? I see the two primary reasons more points are being paid to refinance being cost vs. savings driven and opportunity driven.

Before we explore what I mean by cost-savings driven and opportunity driven let’s review the difference between points and rates.

For a mortgage the rate is the on-going cost of a mortgage and the points are the one-time upfront cost of a mortgage. Both are a percentage of the loan amount, the rate being how much interest you will pay on your outstanding balance, the points how much you will pay for the rate.

For example, on a $500,000 loan at 3.5% for a cost of one point, the annual interest is $17,500 and the cost is $5000. For a 30-year mortgage this translates to having a monthly principal and interest payment of $2245.22 for 360 months.

There is an inverse relationship between rates and points. Think of a teeter-totter where one kid has the rate and the other kid has the points. The higher the points the lower the rate, and therefore payment; the lower the points the higher the rate, and therefore payment.

Using our $500,000 mortgage above, if the rate were to be 3.25% the cost could be two points: Monthly payment would be $2176.03 per month, for a cost of $10,000. As you can see the payment is $69.19 lower per month, but it costs you $5000 more to lower the payment.

If the rate were to be 3.75% the cost could be no points: Monthly payment would be $2315.58 for zero cost for points. Doing the math, we see the payment is $70.36 more per month, but you save $5000 from the 3.5% mortgage.

There are many factors that go well into the weeds as to servicing costs, origination costs, risk factors of early pay-offs or forbearance requests that go to cause. From the consumer side the reason we are seeing more points being paid is the spread in costs from lower rates to higher rates is out of traditional proportions. Historically, the general rule of thumb has been for every one-eighth of one percent in rate (0.125%) the cost difference is one-half of one point (0.500), as shown in the example above.

This one-eighth in rate for one-half point in cost relationship has been thrown disrupted for many reasons I will go into here (though covered in some prior WR&MU’s covering forbearances and the Fed lowering rates causing mortgage rates to increase—you can find all the WR&MU on my blog page). For many factors, the rates on no-point loans are higher relative to rates with points in the current market than the were prior to March.

Instead of the traditional rate/cost ratio from one-point to no points go from the traditional quarter-percent in rate (as seen above) to as much as three-quarters to one point. On a daily basis this ratio varies from lender to lender and transaction to transaction, but the variance between paying a points and not paying points has a great spread in interest rates that previously.

Back to our example, above the rate climbed from 3.5% to 3.75% when going from paying one point to paying no points, saving $5000 for an additional $70 per month. In the current market, depending on type of transaction, property, borrower credit, etc we have seen the no point rate climb to perhaps 4.5% with the one point rate being 3.5%. This results in a payment increase of $357 per month to “save” $5000 in costs.

For borrowers making the points/no-points decision using costs vs. savings the traditional example would entail a decision of seeing how many months it would take them to recoup the cost of the points due to the monthly savings. In the above example, the monthly savings due to the lower rate and higher points will take about six years to recoup the additional cost. If you take the $70 per month savings per month and divide into the $5000 cost the result is 71.43 months, or almost six years.

The cost per point in rate is about six years in payments to save or recoup the cost. Your decision is do you want to pay the additional funds if you will have the home, and the loan, for more than six years; or do you want to pay the higher monthly payment to not have the costs.

For the cost/savings decision, in the traditional market it may make sense to pay points. In today’s market it makes a lot more sense as the rate at no points may be near, at or above your current rate.

For those using the opportunity decision making process. They are looking at a chance to get a very low rate for a cost, that when doing the math enables them a very long time with a much lower rate. This factors in the assumption, or probability, that rates may not get this low again and wanting to take advantage of this opportunity while they can.

Whether the decision is cost/savings based or opportunity base, always run the numbers and do the math. Whether you are buying or refinancing with your mortgage ask for the cost and payment differential for higher and lower rates so you can determine the best situation for you and your family.

Naturally, I am happy to run those numbers for you, just give me a call. Or a Zoom!

Have a question? Ask me!

Economic data is having close to no impact on mortgage rates, and will not until after most of the country is “open” and businesses are operating as near as they will get to pre-Covid operations. What will this look like? Will restaurants, bars, theaters be able to operate as maximum capacity? When will this occur? Until then the economy will be unable to reach full potential and economic growth will be stunted. Knowing this, investors are making bets on ability of companies to grow profits moving through the current environment and whatever the next environment is. Poor data on retail sales, prices, employment, are not moving rates—this type of data would push rates down further. Conversely, really good news, such as last week’s employment data, will not move rates up.

The Fed took a lot of speculation out of rate markets when it announced this week that it will keeps its benchmark interest rate at its current near-zero level through the end of 2022. As well, it will continue to purchase debt from the Treasury and mortgage-backed securities from Fannie Mae and Freddie Mac. This will ensure a very stable, and low, rate environment for a long time.

Rates for Friday June 12, 2020:  Conforming rates tick down from last Friday as a result of yesterday’s drop in the equity markets and the Fed announcement. Note that rates are for purchase transactions, refinance rates can vary—see commentary above. Call for details and quotes.

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

30 year conforming                                            2.875%   Down 0.125%

30 year high-balance conforming                    3.25%      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.

I remember very little, almost nothing, of my high school graduation. Vague picturing of our gym with all the chairs, but nothing of the ceremony. I have better memories of the party afterwards that lasted all night and then being picked up by my family and going almost straight to the airport for a family trip.

I don’t think my daughter, and her fellow classmates across the country, will forget her graduation. The actual ceremony was on-line, which was neat for her school. Both my daughters attended Long Beach Polytechnic High School, which has a very many very famous alumni, several of whom recorded messages to the Class of 2020—among those speaking were several Olympians from track and field, past and present players in the NFL, and really big names like Cameron Diaz, Snoop Dog and Billie Jean Moffitt King.

Our daughter sat in her cap and gown, had her friends on facetime and they watched together—as they would have done in a traditional ceremony.

Like many schools, Poly had a “drive-thru” ceremony for the seniors. We participated and it was very moving for the whole family to drive through the campus, with teachers, staff, the band, lining the route, cheering, using noise makers, and lifting the spirits of the grads. I, and the rest of the car, lost it a bit when our daughter’s favorite teacher ran to the car and they exchanged a prolonged-teary-hug. Not the good-bye they wanted, but they made the best of the one they got.

Our daughter reminded us last night that her class was born either just before or after 9/11, they were in elementary school when the Great Depression hit and many had to move as parents lost jobs and/or homes, and have finished their K-12 education at home without proms, senior ditch days, signing yearbooks in hallways, or walking across a stage to receive a diploma.

The Class of 2020 has been tempered, but from what I have seen not hardened. They have grown up through three very tumultuous eras, and retain incredible spirits, optimism, humor and love of life. We can hope no more is tossed at them as they move on to their next adventures, be it getting jobs, going to college or the military or entering careers in sports or entertainment. I feel pretty confident that they will be able to handle whatever challenges may, or rather will, be thrown at them in the future.

Congratulations Class of 2020, you taught us a lot about resilience, friendship, optimism and what is important in life.

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

Does my insurance policy cover my home if it is damaged due to civil unrest?

Question of the week:  Does my insurance policy cover my home if it is damaged due to civil unrest?

Answer: The answer is the same as many answers to the question of the week: yes, no, maybe.

I asked this question to two friends of mine, Eric Lenahan and Todd Caviliglia, who are agents with State Farm and Allstate respectively. Their answers resulted in the answer above.

Some carriers have written in their homeowners’ policies coverage for “civil commotion or riot” that result in “pillaging, looting, vandalism, damage…” These policies also cover your personal property if it is damaged, lost or stolen at the “scene of civil commotion or riot.” In other words, if you are filming such activity with your video camera and it is grabbed and smashed, it would be covered if your policy has this coverage.

Some carriers have written in their homeowners’ policies exclusions that specifically state that damage, loss from looting (or pillaging), as a result of civil unrest or rioting are not covered by the policy. If a policy has this exclusion and you want the coverage it may be found through a broker who can find a policy specifically covering civil unrest damages and claims.

What if you live in a condominium? There is a greater likelihood of a condominium complex, or individual unit, in a city sustaining damage due to civil unrest than a single-family home in the suburbs. Condos are interesting because most units have two policies. A master policy covers the homeowners’ association and all the common grounds and structure owned by all the owners. For example, the exterior walls, fencing, garages, the roof. An individual policy owned by the owner of a unit in the complex will cover the personal property of the homeowner, and cover furnishings and coverings in the unit. For instance, the individual policy will cover the replacement of kitchen cupboards, appliances and other damage to the interior of the unit if there is a kitchen fire.

What if the condo complex has damage to the lobby, vandalism on walls and broken lights in common areas due to a civil disturbance? What if the ground floor of the building is commercial space and there is damage to those spaces, as well a fire is started that damages units above the ground floor? What is covered by the master policy? What is covered by the individual policy?

Eric and Todd both stressed that it is important that homeowners know what their policies cover and what they exclude. As Eric said, the policies are written by attorneys and the language can be very difficult for many lay-people to understand as to wherefor is covered except when who-fore acts in certain ways unless what-for condition is in existence.

If you are concerned if you home is covered should it be damaged, looted or otherwise harmed as a result of civil unrest it is highly recommended you read your policy and also go through the coverages with your agent or broker. Not all policies are the same, know what your policy covers.

It is my hope that none of the readers of the WR&MU will need to file any claims on the homeowner policies for any reason, but if you do need to file one that you are aware of what is and is not covered.

Have a question? Ask me!

<Insert shocked face here.> A shocked face is the reaction of almost everyone when the employment data for May was released today which showed 2.5 million jobs were filled for the month. Expectations were for the economy to shed 7.25 million jobs in May. The re-opening of the economy in states across the country fueled the surge in employment as workers returned to jobs. Bars and restaurants, the first and hardest hit of all industries, recalled 1.4 million workers in May, out of over 6 million servers, bussers, cooks and other workers who lost their jobs in March and April. Construction jobs saw 464,000 return to work, retail increased payrolls by 368,000 and 225,000 returned to jobs in the manufacturing sector. After record job losses in April, the healthcare industry brought back 312,000 workers.

It seems odd that this is good news, average hourly wages declined in May. Why is this good news? As mentioned last month, April saw a spike in average earnings as the overwhelming jobs lost were to lower wage earners. With the return of workers in bars, restaurants, retail and other industries that have a lot of lower-wage workers the average wages naturally decline due to math.

Economists and data geeks like myself are expecting another surge in jobs in August after the CARE Act benefits for unemployment insurance expire in July. With unemployment payments being boosted $600 per week due to the CARE act, the Congressional Budget Office estimates that five in six with unemployment claims are earning more money from unemployment benefits than they did from their jobs. Once it becomes more financially beneficial to go back to work many workers collecting the additional income will look to get off the unemployment program and back in the workforce.

Rates for Friday June 5, 2020:  Rates softened a bit earlier in the week as tensions between China and the U.S. ramped up again. As the week progressed, tensions eased a bit and with the employment report today bonds lost some ground as money moved into stocks. The result is rates today are flat from last Friday—good news as stability is slowly returning. We are still seeing large disconnect in the high-balance market from purchases and refinances. Call for details and quotes.

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

30 year conforming                                            3.00%   Flat

30 year high-balance conforming                     3.25%   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 wise old owl lived in an oak. The more he saw the less he spoke. The less he spoke the more he heard. Why can’t we all be like that wise old bird?”

In our home in Pennsylvania we had a large wall hanging by our kitchen. It had a branch and four or five owls (I think five since there were five in our family), that depicted father, mother and children, all made out of brass or copper and painted. The saying above was written on the background.

Every day for years we would read about the wise old owl. It was invoked many times by our parents, and later us kids. All that would need be said, “A wise old owl…” and the meaning was clear, ssshhhhh, listen!

For the past several years it has become apparent that there are not many wise old owls on most social media. This past week it has become apparent that there are not as many wise old owls in our neighborhoods, communities, cities and nation. It seems few are willing to be silent and listen to what others have to say. A cacophony of voices, some shouts, some whispers, not speaking with others but telling others what they think the other must believe results in people not listening but reacting.

Turbulent times need wise old owls. We need listeners. When you are heard you are understood, when you are understood and are in turn willing to listen then I am heard and understood. Once we understand each other we can talk. Once we talk, we have removed barriers for solutions to problems.

I don’t need you to agree with me, but I would like you to make the effort to understand. Understanding why I think or feel does not mean you agree with me, it means you care about what I think or feel. If you care about me, and I care about you, we can both be wise old owls and work together.

Try to be a wise old owl, I know I am trying to be one.

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

Is now a good time to buy a home?

Question of the week:  Is now a good time to buy a home?

Answer: This is an easy follow up to last week’s question of the week, Should we buy a property with a friend or family member?

It is a great question that a lot of families have been asking the last few months. With interest rates down home affordability is up, for example in LA County the median price for a single-family home was up 3.9% from April 2019 to April 2020, but the monthly payment on a purchase of the median priced home with 20% down is lower by 5.3%. In plain numbers the median house price is $21,000 higher but the mortgage payment on the median home is $111 lower per month.

Based on interest rates alone, the answer to our question is yes, now is a good time to buy a home.

But…..

What is prompting the question for most families is the sub-question, “will prices fall in the near future due to the Covid-19 pandemic?” To answer this, we move from pure mathematics to some conjecture.

This week the Mortgage Bankers Association reported that 8.4% of home loans in the United States are in forbearance, i.e. have suspended payments, that represents 4.2 million mortgages. While the number of mortgages in forbearance has increased, the increase has slowed considerably.

What impact will the large number of mortgages with no payments being made have on real estate values? Part of that answer will depend on what the property is located.

A recent study by the Kroll Bond Rating Agency ran an analysis on 22,000 mortgages looking at factors such as geography, interest rate, credit scores and employment status to determine which factors would likely determine the likeliness a borrower would go into forbearance. The base-line, or benchmark, borrower was a wage earner (i.e. not self-employed), with a 750 credit score, has a fixed rate mortgage of 4.25% and does not live in New York, New Jersey, Texas, Nevada, or…California.

Being a California homeowner is the fifth likeliest attribute for a forbearance (the first four are property in New York, property in New Jersey, borrower is self-employed, borrower’s rate is 200 basis points).

There are about 11.5 million households in California, the homeownership rate, which has been declining, is just under 55%, so there are about 6.3 million homes that are owner-occupied. Nationally approximately 65% of homes have mortgages, which would mean about 4.1 million homes in California have a mortgage. If California is in line with the national forbearance rate of 8.4%, there are 345,000 homes in forbearance in California.

Our guesstimation is that about 5.5% of owner-occupied homes are currently behind on their mortgages. Statistically, most of these homes would be in areas that have lower median incomes and are below the median price.

At the beginning of April we discussed how a mortgage deferment, or forbearance, worked and its impact on the borrower. The short answer is that when the forbearance period ends you have to pay the lender the full amount of money owed that was deferred. If you have a $2000 monthly mortgage payment and you defer payments for six months, you have to pay the lender $12,000. Some lenders will then provide a payment plan for the funds owed; others want the full amount due.

What this means is that many homeowners in forbearance may not be able to re-pay the deferred payments. This will leave them with few options. Because of the increase in real estate values over the past several years and reduction in cash-out refinances over the same period, many homeowners have decent equity in their properties. This means the best option for borrowers who are unable to make up their deferred payments will be to sell their homes, payoff the mortgage and back payments and ideally still have some money after the sale. The other options would be going through the foreclosure process and receiving no funds from the sale, or negotiating with the lender for a short-sale on the property.

This is all very reminiscent of the real estate crash in 2008. Which is why many families are asking, “is now a good time to buy a home.” They do not want to purchase a home in June if the value of the home is going to drop significantly by December.

Back to our mathematical analysis. In some areas with high incidents of forbearance, lower wages and income and lower home values and appreciation, there will likely be some softening of real estate values. Values depend on the most basic economic principle of supply and demand. If several houses in a neighborhood, or region, are put on the market due to homeowners having entered into forbearance agreements that they cannot repay, supply increases which dampens prices.

However, if the affordability rate is higher in those areas, some families will be able to purchase homes they could not afford before, which increases demand. Will the demand exceed, meet or be less than the supply?

Overall, I do not foresee a significant drop in real estate prices in the major markets of Southern California, by significant I mean 10% or more. Some areas, as mentioned above, may see strong drops while the markets sort out the end of the forbearance era, but most should see no, or slight, drops in values.

Currently, through the first two months of the pandemic real estate market, prices in Southern California are only down slightly from March to April, and up from 2019. With the economy opening back up, more people going to work and consumers spending more, we can expect stability in all markets in the near future.

I don’t think I have answered the question, is now a good time to buy a home.

In my opinion, yes now is a good time, a very good time, to buy a home. Will there be an increase in distress sales, short-sales and foreclosures in the state? Yes, but it appears that perhaps as few as 500,000 homes or less, across the state, may be in delinquency as a result of C-19. Yes, that is a lot of homes, but should the rest of the market retain the strong fundamentals that existed prior to March then those properties should have minor impact statewide and in most major markets.

Not only do I think it is a good time to purchase your new home, but as I have been counseling many first-time buyers, perhaps your “next” home. With the lower rates many families can afford to buy-up, instead of purchasing a starter two-bedroom home than can look to purchase a three-bedroom home in the same area. The way I put it is instead of buying the  home for your new, or soon to be new, family that will be sufficient into or through elementary school, you may be able to buy the home that will be sufficient through your children’s high school years.

What is your purchasing power in the current market? Give me a call and let’s discuss your financial situation and home buying options.

Have a question? Ask me!

More detail on April home sales in California show that year over year sales were down in April 30.1% from 2019 and 25.6% from March, while the median price was almost the same from last year and down only 1% from March. More locally, as mentioned above in LA County the median home price is up 3.9% for the year and was down 0.5% from March while total sales dropped 30.6% for the year and 15.5% for the month. In Orange County sales were down 36.7% for the year and 27.1% for the month, with the median price down 2.4% from March and up 4.4% year over year.

Earlier in the week Redfin reported that 43% of homes sold nationwide sold above list price. The California Association of Realtors reports that statewide the sales-price-to-list-price ratio was 100% in April, which means a significant number of sales in the state also were over asking price. With total active listings declining for ten straight months, and prices going up through that period, the math indicates there is still very strong demand for homeownership. The total inventory in April would cover 3.4 months of sales, flat from a year ago, which supports higher prices if demand stays constant.

It appears that unemployment is leveling off as the number of first-time filers for unemployment insurance grew only slightly from last week. Thanks to the government transfer payments, i.e. the stimulus check you received, personal income climbed 10.5% in April, taking out the stimulus checks and personal income dropped 8% in April after a 3.5% fall in March.

Consumer spending fell for the month, not a big surprise given the loss of jobs across the economy and the lockdowns hindering purchases small and large as reflected by a 16.4% drop in retail sales in April.

Showing that Americans are ready to spend once freed from home, the savings rate in April surged to 33% from a very high rate of 12.7% in March. Between higher unemployment checks, stimulus checks and lack of big ticket purchasing, the American consumer has stowed away cash to wait out the pandemic. It is safe to say that once all restraints are lifted that cash will transfer from bank accounts to cash registers.

With the second estimate of Gross Domestic Product showing a 5% decrease in the 1st quarter (ended in March), the increase in savings is very good news. Sixty-five to seventy percent of our GDP is consumer spending. While the 2nd quarter GDP will also be negative, officially signaling a recession, the depth and length should be shallow and short if consumers quickly resort to prior pre-pandemic spending—which that WR&MU readers with good memories will recall showed robust spending but also higher than normal savings rates.

Rates for Friday May 29, 2020:  Rates are softer from last Friday, while the 30 conforming fixed is that same as last week, it does have slightly lower costs; the high-balance rate drops for the second week in a row. Note, these rates are for purchase transactions and refinance rates vary greatly depending on many variables for loan amount, loan to value, FICO scores, purpose of loan, etc., call for quotes.

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

30 year conforming                                            3.00%   Flat

30 year high-balance conforming                    3.25%   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.

How nice it was to spend some time in the chair yesterday talking to my friend Erick as he cut my hair for the first time in ten weeks. Leslie was tire of my shaggy-dog look and was very happy with Erick’s skills returning me to my pre-C-19 somewhat-respectable look. Rumor has it there is a run on hair dyes in salons across the state as bookings for Erick and others in the industry have solid bookings for the next few weeks.

Former client Dennis B. sent an interesting email this morning. The theatre producers (they are called theater producers in the U.S.) in London have agreed to release archive recordings of musicals, plays and shows so we can stream them for free. Great shows from the West End district in London are now available to you, from Lion King to Henry V to Hairspray to Cirque du Soleil are a click away. Certainly they are better options than Tiger King or Cheers re-runs. Here is the link to the London theatre (er) shows that are available to stream. Cheerio!

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

Should we buy a property with a friend or family member?

Question of the week:  Should we buy a property with a friend or family member?

Answer:  Most questions of the week are the result of a topic coming up in conversations over the course of several weeks. This week’s question came up several times this week; which is not that unusual, especially if there is a big mortgage, real estate or interest event or news that week. This topic, owning property with someone other than your spouse, is a bit off-beat so it was surprising to me that I received several calls this week on the topic.

Back to our question, should you buy, or own, property with someone other than your spouse?

My short answer is “No.”

When consider most issues concerning real estate and mortgages, I look long-term as owning real estate is very rarely a short-term proposition. When looking at anything long-term a factor to consider is that no one lives forever, not you nor the individual(s) with whom you may own property.

Another long-term factor is that people’s lives undergo changes, some good and some bad. This is true for you and for your potential real estate partners.

Let’s dig into why I am not in favor of co-owning real estate.

The three most prevalent scenarios for co-ownership are purchasing a vacation home to share with a sibling’s family or close friends, purchasing investment property to share the acquisition and carrying costs, and inheriting property as a co-owner with your siblings or other relatives.

Each of these has some positive characteristics. Enjoying a mountain, beach or desert retreat with your family can create wonderful memories for siblings and cousins. The ability to purchase an investment in real estate with less cash out of your savings and less downside on months where expenses exceed revenue. Sharing legacy real estate owned by your parents, grandparents or other deceased relative can benefit you and other descendants.

One purpose of how title to real estate is held is what happens to ownership of the property when one of the title holders dies. Because of this there are several ways title to property can be held.

Self-explanatory is taking title as an individual. When the individual title holder passes away disposition of the property will depend on if s/he has a will, if not the property will go through probate and a judge will decide who receives the property.

If the property is held in trust and the trustee(s) pass away the disposition of the property is completed according to the instructions in the trust.

If the property is held by one or more individuals it gets a bit trickier. If title is held as joint with right of survivorship, when on owner dies the other owner gets full title to the property and will own as an individual. This is most common with married couples. With joint title ownership neither party can sell or encumber without the other party’s consent.

Title can also be held as tenants in common. Under this form of ownership does not have to be equal. For instance, Bill and George can own a condo in Mammoth as tenants in common each with a fifty percent interest, or as tenants in common with Bill having a seventy percent interest and George having a thirty percent interest. (Sidebar, I had a married couple purchasing their first home several years ago and the wife wanted title to be tenants in common with her having a 95% interest and her husband a 5% interest since her parents were gifting some of the down payment. As I recall they ended up owning as joint tenants…I am not sure if they are still married.)

Another aspect of tenants in common is that each owner can sell their interest without the consent of other owners, as well each owner can encumber their portion of the property.

Most partnerships to purchase property take title as either tenants in common with percentages of ownership, or form an LLC or S Corporation to own the property and the partners each have a certain number of shares in the corporation.

Back to our condo in Mammoth. Because they are pooling money Bill and George do the math and see they can buy a $450,000 three bedroom condo together, a bigger and better condo than either could buy individually. Bill and George buy the property as tenants in common each with a fifty percent share. They agree to a schedule to use the property themselves. Because of the desirability of condos in the area for short-term rentals (i.e. AirBnB), and the higher rental rate for a three-bedroom unit, they agree to have a schedule segmented into three weeks divided between Bill, George and renting the property. If either Bill or George decide to not use the condo on their week and rent the unit, they get credit for the rental revenue. They set up a checking account to handle the income and expenses and each agree to put in $10,000, if account runs below $5000 if rental revenue does not cover expenses they agree to each put in another $2500.

Bill is married with two children, one almost out of college and the other out of school and working. George, his best friend since grade school, has been divorced twice and has two kids from each marriage.

Being responsible, Bill puts his portion of the property in the living trust he has with his wife.

Possible scenarios, actually realistic as I have seen many of these occur:

  • George is killed in an accident driving home from Mammoth. He had no will or trust so his estate, which includes a fifty percent ownership of a condo in Mammoth, goes to probate. During the time it is in probate Bill has to maintain the property and has to stay in constant communication with the probate attorney for accounting for expenses and income. Eventually the probate is completed and George’s four children, who do not get along, are all given a share of the property, 12.5% each. Bill is now partners with four adults he barely knows, who do not all get along. Does/can Bill buy them out? What about being able to use unit, who gets to use it when? When will it be rented? Will all four new partners agree to share in expenses? What if Bill sees the light and wants to sell, but two of the children do not?
  • Bill passes away from a heart attack. His wife, Sally, is surviving trustee and is now partners with George. They have been cordial through the years but not real close. She does not want to be partners with George, but he does not want to sell the unit because he likes being able to spend time up there with his kids or his latest girlfriend. Because of some financial issues after his and Bill’s purchase of the property he cannot qualify for a refinance to buy Sally’s share. Sally makes inquiries to see if she can sell her portion of the property but any potential buyers want to pay a lot less than half market value. Sally is partners with George and then the above scenario occurs, George dies and Sally is partners with four others.
  • George has some financial challenges with his company. He has committed underhanded accounting and ends up in court on criminal charges, including unpaid taxes to the county, state and federal governments. George’s assets are seized by the IRS. The IRS investigates to see if Bill is somehow involved, if the 50-50 ownership was part of George’s financial scheming and Bill spends a lot of money, tens of thousands to pay for accountants and attorneys to prove his innocence.  Bill is now partners with the IRS on a condominium in Mammoth.
  • Bill and Sally get divorced. It is ugly and the division of assets results in Sally getting half of Bill’s share of the condo. George now has two ex-spouses who cannot speak to each other as partners. He proposes the sell the condo. Sally, to be spiteful, says she does not want to sell. Bill goes back to his attorney to open up the divorce to see if judge will force Sally to sell. Result is Sally gets a larger portion of Bill’s retirement accounts in exchange for her portion of the condo.

What about inherited property where siblings inherit one or more properties from their parents? The same issue above can occur, and do. Exacerbating the potential issues are the spouses of the brothers and sisters. While the inherited property is exempt from community property, that does not prevent any person from deeding their share into community property or a living trust—the result of which is that the other siblings can/will become partners with their brother/sister in-law or nieces and nephews.

Inherited property typically comes with some emotion. Attachment to the family home, a vacation home with happy memories from summers and holidays. In many instances even investment properties can carry positive emotions wanting some family members to retain them.

Other factors that cause some family members wanting to retain inherited property are financial. The step up in basis for tax purposes that can minimize future capital gains taxes. In California the retention of very low property taxes. And of course, the possibility of monthly income from rental properties.

Before deciding to enter into a co-ownership relationship you need to consider the what-ifs regarding title should one of the co-owners passes away, or gets divorced, or other major life event, but also some financial considerations.

One such consideration is that real estate has very expensive exit costs. Depending on real estate commissions, transfer taxes and other potential costs in your area, the cost can be as high as 8-10%. Add in acquisition costs, which depending on the price and loan amount can add another two, three or four percent, and you will need your property to increase in value ten to fifteen percent just to break even if the partnership is not working out and all parties agree to sell.

As for buying another party out, you will need to agree to the amount of the buyout. Is it based on market value for closed properties, which include commissions? Once an amount is agreed upon you need to qualify for a cash-out refinance transaction, which has higher rates and costs than a rate and term refinance.

One suggestion I have for those who do enter into a co-ownership relationship is both parties pay for an attorney to draw up a partnership agreement that spells out what happens if one party wants to sell, a time frame which the agreement is revisited and if one party does not agree to continue the relationship the property is put up for sale or one party can buy out another with the formula for calculating the price entered in the agreement.

I have not painted a real rosy picture for those interest in co-owning property, which was my intention. Before entering any co-ownership relationship, or continuing one if property was bequeathed to you and others, consider the possible negative consequences. There are many variables that can go wrong that can be very costly in time, money, energy and relationships.

All that said, if you are interested in entering a co-ownership transaction please give me a call to run through numbers and what-ifs for the costs, payments and prices.

Have a question? Ask me!

Rates for Friday May 22, 2020:  Rates are barely impacted by any economic news, everyone anticipates bad news so bad news is already priced into the markets. With tensions heating up between China and the United States we have seen some instability in equity markets, enough that I anticipated rates to drop today ahead of the three-day weekend. This did not happen and rates were flat for the day. For the week the conforming rate for purchases is flat from last Friday and the high-balance rate is down a tick. Note, these rates are for purchase transactions and refinance rates vary greatly depending on many variables for loan amount, loan to value, FICO scores, purpose of loan, etc., call for quotes.

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

30 year conforming                                            3.00%   Flat

30 year high-balance conforming                    3.375%  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.

Just because we cannot have parades or ceremonies does not mean we honor and respect those who have lost their lives wearing the uniforms of our nation’s military. For those who have lost a parent, child, sibling or close friends, I have greater sympathy for you this year as you may be impeded from visiting a grave site or attend a special memorial.

Having many of our freedoms restricted these past several months has given a greater appreciation for the freedoms we are so used to enjoying. Monday let’s all take a moment to honor those whose lives have been lost to protect those freedoms and the rights we enjoy that have always been, and will continue to be, a beacon for others who desire the same freedoms and rights.

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