Why do loan limits matter?

Question of the week:  Why do loan limits matter?

Answer:  Because they determine the approval guidelines for mortgages within the loan limit range.

Brief recap, “conforming,” or “conventional,” mortgages are funded by lenders and sold to either Fannie Mae or Freddie Mac. Fannie and Freddie (aka the GSEs*) then pool mortgages and create Mortgage Backed Securities (MBS) and sell them to investors.

*Government Sponsored Enterprises; entities created by Congress to help specific sectors of the economy obtain credit. GSEs are privately held and facilitate borrowing in several areas including student loans, residential mortgages, and farm loans.

Lenders approve and fund conforming loans using guidelines established by either Fannie or Freddie (there are some slight variances). If a mortgage fits the guidelines it can be purchased by the GSE.

Investors purchase MBS from either Fannie or Freddie know that their investment meets the criteria required by the issuing GSE, thereby reducing the risk of purchasing a mortgage on a home in Tornado Alley in Oklahoma, or in Torrance, California.

Loan limits are set to ensure the GSEs are facilitating financing for families that can benefit the most from lower down payment, lower interest rate mortgages. The family in Norman, Oklahoma purchasing a home for $275,000 instead of the family in Sausalito, California purchasing a home for $2.5 million.

The question of loan limits come up as this week the Federal Housing Finance Agency announced that the conforming loan limit for single family residences will increase from the 2020 level of $548,250 to $625,000 for 2022, a 14% increase.

Every year the loan limits are reviewed and adjusted according to the home values across the country. When I started in the industry in 1987 the single-family limit was $153,100. During the Great Recession, the limit remained at $417,000 from 2006 to 2016. Since the creation of the conforming mortgage products in 1980 (limit $93,750) until 2007 there had never been a year without an increase in the loan limit; but there was one year (1990) when the loan limit declined, from $187,600 in 1989 to $187,450. More on the period from 2006 onward further down in the commentary.

The FHFA determines the loan limits with its House Price Index report which tracks the average increase in home values over the year and then adjusts the loan limit accordingly.

Since its inception, the loan limit has had a separate column for traditionally high-cost markets, defined as Alaska, Hawaii, Guam and the U.S. Virgin Islands. The loan limit in these areas is 50% higher than the continental United States.

In 2008, as a reaction to the severe decline in real estate sales and values, the brand new Federal Housing Finance Agency created the “high-balance” or “conforming jumbo” products for the GSEs. This new product would have slightly stricter underwriting guidelines, higher loan limits, and higher costs/rates.

The high-balance loan limits would be calculated the same as the limits had been calculated for the prior high-cost markets, 50% higher than the conforming limits.

While the FHFA has not announced the new loan limits for high-balance conforming mortgages, a simple calculation lets us know that if the conforming limit is $625,000 in 2022 the high-balance limit will be $937,500, up from the current limit of $822,375.

Why is this important? The family needing a mortgage for $600,000 can get a conforming mortgage at 3% instead of a high-balance mortgage for 3.25%. The family needing a mortgage for $950,000 can now benefit from easier underwriting standards and possibly a lower rate from a high-balance conforming mortgage instead of a “jumbo” mortgage.

Why else is this important? Higher loan limits will enable families to afford a higher priced home, or the same priced home with a smaller down payment, thereby potentially putting upward pressure on home prices. Or, dampening any slow down in prices.

This week every lender we work with has indicated they will accept conforming loans using the new conforming loan limit. Note they have not yet indicated they will be accepting loans under the new high-balance loan limit. As well, if you have a loan in process over $548,250 up to $625,000 it can be underwritten and priced with conforming guidelines instead of the high-balance guidelines in place when you made your application.

Have a question? Ask me!

The chicken you paid $1 a pound for in 1991, now costs $1.93 per pound, or 93% more. Why 1991? That was the last time inflation was at rate of growth it was in September, 5.4%. Prices rose 0.4% in September putting the annual rate at a 30-year high. For some perspective, the 10-year average is about 1.75%. Leading the way on price increases was the 1.2% increase in gas at the pump from August to September. As costs to transport goods increase, costs of goods increase.

With extended supply chain issues, plus rising energy costs, it will be a tough and expensive winter in many parts of the country.

The Fed has targeted 2% as the preferred rate of inflation to support economic growth in a steady and sustainable manner. A few months ago when growing inflation became more newsworthy the Fed pooh-poohed any concern stating it saw price growth as “transitory” and that it would subside once the economy settled as it came out of the pandemic. This week the Fed acknowledged that high rates of inflation will last into 2022; some economic experts are indicting into 2023 is more likely.

The Fed has indicated it will focus on labor markets and their health before making any moves that could push interest rates higher; jobs trumping prices of whole chickens at Ralph’s. In reports released earlier this week we learned that there were 10.4 million job openings in August, down from 11.1 in in July. As well, it was reported that 4.27 million workers quit their jobs. Many for higher paying jobs or the opportunity to start in a new industry.

Retail sales bounced back in September, up a healthy 0.7%. However, subtract the 0.4% increase in prices the increase is 0.3% for the month, still healthy, but not as healthy. The somewhat strong spending by consumers is due to higher wages and higher savings. Americans are being a bit more choosy as to where they are spending their inflation shrinking dollars, reports indicating much of the immediate post-economy-opening spending has slowed in hospitality and “splurge” products and services.

Rates for Friday October 15, 2021: Despite the economic data that should be pushing rates higher, we see rates drift down this Friday from last week’s spike. Primarily investors are looking at the debt-ceiling can being kicked down the aisles of Congress for another two months, and the apparent reduction in the initial social spending bill sought by President Biden and the progressive members of Congress.


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.

Last week in this section of the WE&MU, generally of a personal nature, I wrote about the excitement of the Giants and Dodgers facing off in the playoffs for the first time since their rivalry started in 1890.

One of the wonderful aspects of sports is that you often know when you have seen something historic occur. The PhillySpecial play at the end of the half in Super Bowl 52 to give the Eagles a 10-point lead over the Patriots (yeah! Fly Eagles Fly!). Kirk Gibson’s home run to beat the A’s in the first game of the 1988 World Series. The Miracle on Ice at the 1980 Winter Olympics. All great uplifting moments.

But there’s the other side of sports. Bill Buckner booting Mookie Wilson’s ground ball in game 6 of the 1986 World Series leading to Ray Knight to score the winning run, leading to game 7 that the Red Sox lost, denying Sox fans their first Series win since 1918 (they finally won in 2004).  There was Buffalo Bills kicker Scott Norwood missing a 47-yard field goal attempt to win the Super Bowl in 1991, kicking the trophy to the Giants. It was the first of four straight Super Bowls the Bills would lose. They still have not won one. Golf fans will recall Jean van de Velde standing on the 18th tee of the final round of the British Open in 1999 with a 3-stroke lead. For non-golfers, this is akin to a ten run lead in the 9th inning. He hit his drive in the rough, tried to do too  much and put his next shot in deeper rough, from there he hit his ball into the creek going across the fairway in front of the green, he dropped a new ball, taking a penalty shot, hit that ball in the bunker (sand trap), hit the ball on the green, made the putt and shot 3 strokes over par. His three shot lead gone, he had to face Paul Lawrie and Justin Leonard in a four-hole playoff that Lawrie won. Van de Velde’s melt down is the only reason he and Lawrie are remembered.

Which brings us to Gabe Morales. Some of you reading this know who I am talking about, but prior to last night would not have. For those not in the know, Morales was the umpire at first base last night for the win-or-go-home game between the Giants and Dodgers. In the bottom of the 9th inning the Dodgers led 2-1 and their ace was called in to pitch the final three outs. With two outs, a runner on first base, and the count no balls and two strikes, Dodger pitcher Max Scherzer threw a slider to Giants hitter Wilmer Flores.

The Baseball Rules Academy defines a check swing to not count as a swing if, in the judgment of the umpire, the batter did not make an “attempt at a pitched ball.” There is no rule regarding if the bat crosses the plate, or the batter’s body, or breaks his wrist. If the umpire feels the batter “attempted at” the pitch, then he can call the missed attempt a strike. If the umpire feels the batter did not “attempt at the pitch,” the batter is considered to have checked his swing and if the pitch was out of the strike zone a ball will be called on the pitch.

If the home plate umpire does not call a strike on the attempt at the pitch, the catcher usually asks either the 1st base umpire (for right handed batters) or the 3rd base umpire (for left handed batters), if that umpire felt the batter attempted at the pitch.

Last night, on the 0-2 slider that Scherzer threw to Flores was caught by Dodger catcher Will Smith (no relation) outside of the strike zone, low and away. Flores started to swing his bat, but held up the swing. Smith appealed to the 1st base umpire, Morales, hoping he would say that Flores attempted at the pitch.

 Morales raised his hand in a fist, indicating Flores, in Morales’ opinion, attempted at the pitch. Therefore the pitch was considered a strike due to Flores swinging and missing, which meant a strike out. Which meant the Dodgers won the game, advancing to play the Atlanta Braves to see who will represent the National League in the World Series.

Everyone who has at the minimum a passing knowledge of baseball, with the exception severe, myopic, they-can-do-no-wrong Dodger fans, and umpire Gabe Morales, knew that Flores checked his swing, and the pitch should have been called a ball—letting Scherzer strike out Flores with his next pitch.

That pitch and call instantly became part of baseball, and sports, lore. Gabe Morales, unknown to 99.9% of the population of San Francisco is now cursed by nuns and school children.

And the 130 plus year Dodger-Giant rivalry became a bit more bitter.

Let’s go Dodgers, beat the Braves!

Have a great week,


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

How is a mortgage a financial tool?

Question of the week:  How is a mortgage a financial tool?

Answer:  Acquisition, cash-flow, capital improvements, debt management, partner buy-out, legal settlement, are some of the activities that businesses engage in using revenue, assets and debt.

Same with households. Your revenue (salary), assets (savings, equity) and debt (loans, revolving credit) enable you to acquire property and goods, remodel or maintain your property, restructure loans and credit, payout someone else on title either willingly or due to legal settlement, can all be enabled with a mortgage.

Financial tools are not just mutual funds, stocks, life insurance, annuities and retirement accounts. Those items are all assets on your personal balance sheet. On the other side of the balance sheet are your liabilities. The primary liability for most families is their mortgage. Mortgages are critical to financial planning and long-term goals.

Consider acquisition. Most families cannot afford to purchase a home with all cash, therefore a mortgage is required. Using a 30-year fixed rate mortgage you benefit from a low monthly payment, relative to the amount you are borrowing, and the ability to budget what is likely your highest expense with a fixed amount well into the future.

Once you own a home you benefit from growth in equity as prices rise, either slowly or quickly, during you time of ownership.

As the equity grows you have the ability to access funds from your home by either increasing the amount of your mortgage through a refinance (a “cash-out” refinance), or obtaining a Home Equity Line of Credit (HELOC). Using a HELOC leaves your mortgage untouched, thereby keeping your interest rate and monthly payments the same.

Why would you want to access equity from your home?

There are circumstances when it makes sense to refinance your mortgage, pull cash out and use the funds to reduce other debt to improve your monthly cash-flow. For example, your home is valued at $700,000 and you undergo an extensive remodeling project.

When the dust is settled, and cleaned up, you have a HELOC with a large balance, as well you took advantage of “same as cash” financing items from furniture and appliance stores. The credit balances total $150,000. The monthly payments on these balances are about $1100 per month—and that is just the minimum payments which means the balances will not be paid off for years. Further, the HELOC balance is adjustable and rates will likely go up.

You owe $500,000 with a 3.5% mortgage and a payment of $2400 per month on your now remodeled home now worth $900,000. Your monthly payment for your mortgage and the remodeling expenses on credit total $3500 per month.

If a cash-out refinance for $650,000 ($500,000 pays off mortgage, $150,000 your remodeling costs) has a rate of 3.75% your monthly payment is $3010 per month, you save almost $500 per month.

A mortgage has enabled you to improve the value of your property, improve your cash-flow from the remodel by restructuring your debt.

Another way a mortgage is used as a financial tool is to settle a legal claim or complete a legal settlement.

The two most frequent mortgage transactions for these types of situations are divorces or partner separations, and inheritances. Here is an example of each.

Bill and Mary are separating after 10 years of marriage and two children. They own a home valued at $700,000 and have a mortgage with a $450,000 balance. They agree that Mary will remain in the home with their children to prevent further disruption in their lives. They must agree on how to divide their assets, bank accounts, retirement accounts, vehicles, and the equity in their home. For the settlement they agree that Mary will refinance the home to remove Bill from the mortgage and title. For this to happen they agree that Bill will receive $100,000.

Mary refinances the home for $550,000 with the net proceeds of $100,000 being paid directly to Bill from the escrow closing. Because Mary is not directly receiving any proceeds from the refinance, the transaction is considered a “limited cash-out” refinance, not a “cash-out” refinance, therefore the interest rate/costs are lower.

Example number 2: Jane, Sally and Brian’s mother has passed away in their family home. Their father passed away several years ago and the home, valued at $650,000 is part of Mom’s estate. Also in the estate are a retirement account valued at $210,000 and bank accounts valued at $30,000. The retirement accounts and cash in the bank are to be divided evenly between the three siblings.

Jane and her husband want to keep and move into Mom’s home. There is a reverse mortgage against the property that has a balance of $145,000. Sally and Brian agree to $160,000 each from the property, and Jane agrees to have her share of the cash in Mom’s bank account to go to her brother and sister.

To recap, Brian and Sally get $160,000 each for the property, $15,000 each from the cash in Mom’s bank account and $70,000 each from the retirement account. Provided Jane can get $320,000 for Brian and Sally, she will get the family home and $70,000 from the retirement account.

Jane and her husband fund an owner-occupied mortgage for $465,000 to payoff the reverse mortgage ($145,000) and pay out her siblings ($320,000). At closing the proceeds of $320,000 are paid directly to Brian and Sally, $160,000 each. Like the divorce scenario above, because Jane and her husband are not receiving any proceeds from the divorce the transaction is a limited cash-out refinance, therefore a lower rate/cost than a cash-out mortgage.

Many families are reluctant to utilize the equity in their home to consolidate debt, or leverage to obtain additional assets such as a vacation home or investment property. In many circumstances, the best option to achieve your financial objectives that results in a better overall financial position is using a long-term, low-cost financial tool, a mortgage.

These are just some of the scenarios where a mortgage is a beneficial financial tool for homeowners, call me with your financial objectives and we can discuss whether a mortgage is the right tool for you.

Have a question? Ask me!

More pay, more costs, fewer workers is a take away from today’s jobs report from the Department of Labor. The economy netted only 194,000 new jobs in September, well below the forecasts of 500,000 new jobs. The unemployment rate drop to 4.8%, a pandemic low, however the labor force shrank by 183,000—meaning that many people dropped out of looking for work. Businesses are being squeezed due to lack of workers, higher costs for materials and rising wages to entice workers. The options are either to see a cut in profits or increase prices to consumers. With wages increasing 4.6% and inflation up 4.3% from last August, workers’ pay increase is being eroded by inflation. Estimates are that if there had been no pandemic the economy would see approximately 6 million more people in the workforce.

Bad news good news? The unsatisfactory jobs report portends slower economic growth than predicted. For those looking to borrow the bad news could be good news for rates not increasing as soon, or fast, as the Fed has announced its plan to taper its Quantitative Easing purchases of Treasury debt and mortgages is reliant on not only inflation and economic growth, but also the health of the labor markets. Today’s report does not represent a healthy labor market.

Rates for Friday October 8, 2021: Mortgage Backed Security prices dropped through the week as investors were concerned about the debt ceiling dance in Congress, the Fed’s pending tapering, and subsequent anticipation of higher rates. The result is that after nine weeks of rates being flat week-to-week, rates have increased for the second time in three weeks.


30 year conforming                                         2.875%  Up 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.

In 1890 the Brooklyn Dodgers entered the National League, joining the New York Giants, who played in Manhattan. And the longest rivalry in baseball began. In 1958 both teams left their boroughs in New York City and re-settled in Los Angeles and San Francisco, becoming the only teams west of Kansas City. The rivalry moved with the teams, fueled by the NorCal-SoCal differences in lifestyle and cultures.

There have been many games and series through the decades (century plus) that have determined which of these historic teams make the playoffs. Thanks to a walk-off, pinch-hit home run on Wednesday night by Chris Taylor for the Dodgers, the two rivals will face each other in the playoffs for the first time.

All season long the Dodgers chased the Giants for the National League West title, coming up one game short. Adding some more fuel to the intra-state feud.

It should be a great series, more so if the Dodgers come out on top.

Play ball!

Have a great week,


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

Will increase in interest rates cause property values to drop?

Question of the week:  Will increase in interest rates cause property values to drop?

Answer:  This is a good question, in large part because property values began to increase starting in early 2019 when interest rates began to drop, and then began to jump after the initial spike in rates the third week in March 2020 when lockdowns were put in place at the beginning of the pandemic; in less than two months from late March to early July the conforming rate dropped 1.25% (from 3.875% to 2.625%).

If dropping rates cause property values to increase, shouldn’t rising rates cause property values to drop?

Yes, no, maybe.

There are many factors that influence the price of a good or service. The primary factor is supply and demand. The higher the demand the higher the price, the lower the demand the lower price, the higher the supply the lower the price, the lower the supply the higher the price.

The surge in real estate prices during the pandemic was the result of higher demand and lower supply.

The initial increase in demand was due to the drop in interest rates, increasing purchasing power for those in the market. Using 35% of gross income for a mortgage payment, a couple making $90,000 would have a mortgage payment of $2625 per month.

In March 2019 when the high-balance rate was 4.375%, this payment would support a $525,000 30-year mortgage.

In July 2010, when the rate for a high-balance mortgage was 3.00% a $2625 month payment would support a $623,000 30-year mortgage.

In fifteen months, without any change in their income, this couple saw their purchasing power increase $100,000, a 20% increase

What this also meant was that couples making $50,000 saw their purchasing power increase from about $300,000 to $365,000, an increase of 22%.

From entry level home markets to upper, upper, home markets the lower interest rates enabled homebuyers to buy more house for the same monthly payment.

The pandemic caused a unique factor in demand as suddenly families who were comfortable living in their homes with parent(s) going off to work and children off to school most of the time and generally sharing the home in the evenings and weekends, found their homes had become offices, call centers and classrooms. Every room had one or more family members trying to work or study.

Families that pre-pandemic planned on staying in their homes until their children at least graduated high school suddenly needed more room. And thanks to low interest rates they could afford a bigger home with more room for everyone.

Families in apartments who previously could not afford homes in their areas suddenly could thanks to lower interest rates and were willing to buy the homes from the families who needed more room, because they too needed more room.

Vertical demand increased due to needs for more space and the ability to afford it.

A double-vortex of cheap money and need for more space pushed many families into the housing market who otherwise would not have been. This quick increase in demand overwhelmed the supply and prices started to increase as sellers had multiple offers on their properties.

The pandemic also put unique pressure on supply. Many families that thought about selling their homes, especially as prices were rising, were reticent because they did not want strangers going through their homes possibly leaving behind Covid-19 particles that could infect them. Remember in the early days, weeks, months of the pandemic? Could you become infected from surfaces, could someone with the virus infect a room and for how long? Will there be a vaccine in months, or years?

As the pandemic wore on and initial concerns (I almost typed hysteria), calmed, potential sellers then faced the dilemma of selling their home and then not being able to purchase a new one to move into. In March our question of the week was for people trying to sell a home to buy but couldn’t get offers accepted due to demand.

Sellers controlled the market and buyers were in a frenzy. Sellers were not seeing “multiple offers” in the traditional sense of three or four offers defining a hot property. They were receiving up to twenty, or more, for pedestrian listings and condition.

Over the past several months the markets have cooled somewhat. Despite rates being flat from July into September, the market has begun to level out as demand has cooled and supply has remained somewhat constant.

Back to our question, will rising rates cause demand to drop significantly or supply to increase thereby resulting in falling home values.

We now get to another aspect of supply and demand in real estate. The three golden words, location, location and location. In some areas of the state, and nation, supply is influenced by the ability of builders to add more inventory to the market in the form of new homes that compete for buyers with existing homes being put up for sale.

In areas where supply can be added to the market, home values are more susceptible to economic factors that can impact demand, such as higher interest rates.

In areas, such as most of the LA/Orange County region, where there is little to no vacant land to build large tracts of new homes, the amount of supply is limited to existing homes. This reduces the impact that economic factors can have on demand, such as higher interest rates.

In areas where supply is elastic there is a greater probability that home values may be negatively impacted by higher rates than in areas where there is low elasticity due to lack of space to increase housing supply.

The real underlying question to the impact higher rates will have on prices is, “will we see a drop in housing prices akin to a price bubble bursting?” Essentially, will higher rates pop the bubble.

Popping a price bubble, in my view, results in not just a cessation of price increases, but a reversal and prices declining. If this is the real question as to what may occur when rates begin to rise, my answer is in our region, no.

What I see as the impact on values from increasing rates is a return to a more balanced market in a region with limited supply of single family housing. While supply may remain relatively low, demand should be at a level that flattens the price curve to flat or slightly positive (think 1-3%) for the next cycle.

In real estate price bubble pop by a combination of over-supply and very small demand. The over-supply is typically created by families in economic trouble, primarily due to job loss, and selling their homes to eliminate their mortgage debt. Also adding to supply in these markets are foreclosed on properties being put on the market by lenders.

The current state of homeownership in our country is one of tremendous stability due to low fixed rate mortgages, families with mortgages they qualified for when funded, and most importantly significant equity. The final factor is what cushions any potential foreclosures as troubled homeowners have the equity to sell their homes, pay their mortgages and expenses of sale and likely have some equity left over.

As there always is when a market transitions from a sellers’ market to a flat or buyers’ market, there will be a period where sellers’ trying to capitalize on the spike in values are a bit late to market and price their homes based on the prior several months of climbing prices. These sellers, and their agents who put the properties on the market, choose to ignore the data showing more listings on the market and properties on the market for a longer period of time. In many cases these sellers are willing to sell, “only if I get my price,” which they want to be the highest in the market.

Yes, with higher rates the same income will transfer to a lower mortgage amount for qualifying, or a higher payment for the same mortgage, than current rates. Yes, this will result in some buyers foregoing moving up to their next home, or entering the market. However, families grow, families desire to own their own homes, people want to own their own homes.

Higher rates will dampen the frenzy we have experienced the past eighteen or so months, however they will not pop the bubble and result in a significant drop in prices. Some areas may see a drop of up to 5% in the short term, other areas may see their home values flatten out, and others see very small but steady increase in prices. Which of these results will occur will most likely be based as much, or more on location, location, location than increasing rates.

Let’s check back in a year and see what happened.

Have a question? Ask me!

Having said that rates will not have a big impact on home values, I will say that employment can be a much larger factor. Fewer workers in jobs that support homeownership means fewer prospective homebuyers as there is less income.

Today data was released showing personal incomes rose 0.2% in August, a modest increase due to reduction in government checks going out for pandemic relief. The increase in income was more than wiped out however by prices increasing 0.4% for the month, and 4.3% year over year. Inflation in consumer goods resulted in consumer spending showing a 0.8% increase from July. Normally increased consumer spending is good news for economic growth, less so however when a good portion of the increased spending is not resulting in more goods and services due to higher prices account for much of the increase.

Rates for Friday October 1, 2021: A lot of forces on rate markets with inflation, government debt ceilings and borrowing that has caused day-to-day turbulence. Week over week however, rates are flat from last Friday.


30 year conforming                                         2.75%  Up Flat

30 year high-balance conforming                   3.00%  Up 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.

Once again, this week we are presented kabuki theater courtesy of our elected officials in Washington. In what has become an almost annual event the two parties square off in bluster, rhetoric, posturing and foot stomping threatening the end of democracy and our nation is near if the other party does not support their sides position in regards to raising the debt limit and passing spending resolutions. In the end the bills are passed and signed by the President at the last minute with each side scurrying to the cameras and microphones to encourage their base supporters to continue to provide them votes and cash so they can do it again. And again. And again.

The beauty of our political system is it results in the government we deserve. We have raised our daughters with the knowledge of consequences for their actions. They learn from these consequences, hopefully, and modify their behavior.

The American voter does not seem to understand the relationship between their votes, and support, of essentially the same people election after election, as they seem to expect better results, i.e. consequences, after each ballot they cast. The candidates no longer matter it seems, only the (D) or the (R) seem to matter. Hence…kabuki theater.

Have a great week,


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

What is “tapering” and why does it increase interest rates?

Question of the week:  What is “tapering” and why does it increase interest rates?

Answer:  This week’s answer may get a bit wonky and in-the-weeds, but I will try to avoid both and provide a somewhat simplified response to economic principles that impact mortgage rates. For those of you well versed in the relationship between the rates, inflation, supply and demand, and the Federal Reserve’s role, or those whose eyes are already glazing over, have a good weekend!

For those who have seen “Hamilton,” or know the history, as Secretary of Treasury, Hamilton put forth a plan to have the U.S. government take on all the debt accumulated due to the revolution. This idea created a large rift amongst the states, especially opposed were Southern states that had already paid off their debt. Jefferson and Madison proposed a compromise to Hamilton to have the debt plan passed by Congress, they would support the bill, if Hamilton supported building the nation’s new Capitol in the South, on land spanning the Potomac in Virginia and Maryland. They were the ones in the room where it happened.

Hamilton’s next step was to create the Bank of the United States which would receive taxes, be the depository for government funds and make loans. This was also opposed by the South, claiming it was unconstitutional. This was one of the first big issues between those who favored a larger Federal government and those who favored more power being given to the States. In the end Hamilton got his bank, creating a very strong federal monetary and financial system that enable the nascent country to become a stronger nation on the world stage.

The Bank of the United States was chartered in 1791, it lasted until its charter was not renewed by Congress in 1811. A Second Bank of the United States was created in 1816 and lasted until President Andrew Jackson removed all federal funds in 1832 and its operations ceased when its charter expired in 1836.

In 1913 Congress established the Federal Reserve System (aka the Fed) that serves as our central bank. The purpose of the Fed is to supervise and regulate banks and financial institutions to ensure safety and stability of our monetary, banking and financial systems. In doing so the Fed is also protecting consumers and businesses.

Congress’ goals for the Fed are monetary, to maximize employment and to stabilize prices, i.e. low, stable inflation.

The primary tool the Fed uses to achieve these goals is manipulating the rates it charges banks to borrow money from the Fed to meet their reserve requirements. The Fed sets the reserve requirements (what percentage of a bank’s deposit it must have in cash each night). By altering reserve requirements and the cost to borrow funds to cover the requirements (the federal funds rate), the Fed influences the rates the banks charge their borrowers and the amount of funds they can lend. If the Fed raises the reserve requirements, and/or the federal funds rate, banks will have less money to lend and, if they lend more than their reserve requirements allow, they will charge higher rates to their customers for loans for businesses, homes, vehicles, lines of credit, etc.

Conversely if the fed funds rate is low, today it is near zero, and the Fed lowers the reserve requirements, banks have plenty of money to lend at low rates which increases the funds available for businesses to expand, or start up, and for families to obtain new homes or cars.

Historically, manipulation of the fed funds rate and reserve requirements have been the primary way the Fed controls inflation and encourages more hiring by businesses. High rates and reserve requirements restrict the flow of cash in our economy, which hurts economic growth and traditionally slows, or lowers inflation. This action also slows the expansion of labor markets and economic growth.

Low rates and reserve requirements increase the amount of cash flowing in our economy, creates economic growth and hiring, which leads to higher prices and inflation. This action is taken to prevent the economy from slowing into recession, or to help the economy come out of a recession.

As a reaction to the financial crisis in 2008, the Fed instituted what is known as “quantitative easing.” Quantitative easing (known as QE) is when the Federal Reserve purchases assets, thereby absorbing supply in the market and pushing money into the economy. The intended result is to depress interest rates, increase borrowing and stimulate economic growth and job creation.

The assets purchased by the Fed in its QE programs are bonds issued by the United States Treasury and Mortgage Backed Securities (MBS) from Fannie Mae and Freddie Mac. These are the primary financial instruments that determine interest rates in our economy, not just for government borrowing and homeowners seeking mortgages, but also bank loans, credit cards, student loans, any debt in our economy.

U.S. government debt is considered the safest investment in the global economy as the United States has never defaulted on its obligations. If you purchase as 10-year Treasury bond with a yield of 1.25% for $10,000 you will receive $62.50 every six months and in 10-years your $10,000 will be repaid to you.

Mortgage Backed Securities (MBS) are pools of mortgages that are bundled into securities and traded like bonds. The biggest issuers of MBS are Fannie Mae and Freddie Mac. Since they are long term instruments, mostly 30-year mortgages, mostly with fixed rate returns, MBS are alternative investments to U.S. Treasury bonds that have a higher rate of return.

Like any market the bond market (inclusive of mortgages) have prices that fluctuate based on supply and demand. In bonds the higher the price the lower the rate of return, i.e. interest rate; a high demand for bonds raises prices and pushes rates lower. If there is an excess of supply of bonds on the market prices drop to draw demand, for bonds lower prices mean higher rates.

What quantitative easing does is absorb all, or most, of the supply resulting in lower rates.

Because the traditional methods of stimulating the economy were completely ineffective, the Fed entered into three separate quantitative easing programs (QE-1, -2, -3) from November 2008 through October 2014. For six years the Fed purchased about $3.5 trillion in assets, pushing interest rates down and tremendously increasing the amount of cash in our economy.

When the Covid-19 pandemic resulted in shutting down many areas of our economy starting in March 2020, the Fed quickly began a new QE program (called QE-4 by some). It announced that its objective was to purchase of $80 billion in U.S. Treasuries and $40 billion in Mortgage Backed Securities with the objective of acquiring a total of $500 billion in Treasuries and $200 billion in MBS. Essentially, the idea was for QE-4 to last five to six months.

Twenty months later the Fed has purchased $1.6 trillion in Treasury debt and $800 billion in mortgage debt. As you may be aware, the economy is surging, inflation is over 5% (the Fed’s target for inflation is around 2%) and there are more job openings that applicants.

That is approximately $2.4 trillion of debt that the Fed has purchased, which has resulted in historically low rates.

It seems that the Fed’s objective of supporting and stimulating economic growth has been met. But now what?

If the Fed suddenly stopped purchasing $120 billion per month in debt there would be a tremendous drop in demand that would need to be quickly filled by investors to avoid an over supply of debt on the market and a huge and quick spike in interest rates.

The solution is for the Fed to “taper” its purchases under QE-4, slowly decreasing the amount of debt it purchases each month until the program is finished.

On Wednesday the Fed announced that it is ready to begin tapering its purchase of bonds, perhaps as soon as November. The announcement did not say how much or how fast the Fed would slow it purchases, however just the announcement that it would be slowing the amount of debt supply it would be absorbing was enough to put upward pressure on rates.

The expectation is that the tapering process will be slow and long, perhaps reducing purchases by 10% per month and take almost a year before the Fed exits the bond markets. If the taper process is too quick it can spike rates and stunt economic growth, if too slow it could result in inflation going higher and lasting longer.

Once the tapering process is complete and QE-4 is completed, the next question investors will ask is, “when will the Fed sell all the assets it accumulated as a result of quantitative easing?”

Using the results of QE’s 1-3 as an example, it is likely the Fed will not sell them, collect the interest payments and wait until the maturation of the bonds and mortgages they hold.

Prior to the Great Recession and QE-1 in 2008, the Fed had approximately $925 billion in assets on its books, in October 2014 with QE-3 was completed the Fed had almost $4.5 trillion in assets. In March 2020, before QE-4 was initiated the Fed’s assets had declined to approximately $4.2 trillion, evidence that the Fed did not actively sell off the bonds and mortgages accumulated from 2008 to 2014.

Why does this matter? If the Fed decides to reduce its balance sheet and sell the bonds and mortgages it holds it will increase supply in the market. Increased supply leads to lower prices, which results in higher interest rates.

For those wondering, the Fed currently has approximately $8.5 trillion in assets. As a comparison, the Biden Administration budget released earlier this year requests $6 trillion in spending in the 2022 fiscal year.

This will require more borrowing by the Federal government, which means more debt from the U.S. Treasury. If the Treasury is issuing more debt and the Fed is buying less debt, what impact will that have on interest rates…more supply, less demand.

For those who have stuck with this narrative, thank you. As I got started I got carried away, as I warned, into the weeds of bit.

Have a question? Ask me!

Rates for Friday September 24, 2021: After nine straight Fridays with the conforming rate not changing we see a bump in the rate, the last time the 30-year conforming was at 2.75% was all the way back in July, when I was just 58! Upward pressure on rates, as lengthily explained above.


30 year conforming                                         2.75%  Up 0.125%

30 year high-balance conforming                   3.00%  Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

I love this time of year, not just for the approaching fall weather, but also (or primarily?) as an all-round sports fan. I love baseball and as we approach the final week of the season many teams are under pressure to win to make the playoffs, and then…the playoffs and World Series! High school, college and professional football are underway, which comes with fans being overly optimistic, or overly pessimistic, because of how their teams have performed in the first few games. Finally, both hockey and basketball leagues are starting training camps, and every team is in first place until the pucks drop and the tip-offs are tossed.

For other golfers, we end the season with the Ryder Cup, one of favorite sporting events. I love playing match play competitions and the format of the Ryder Cup pitting the best players from the United States and Europe against each other with fans cheering is as good as it gets.

Have a great week,


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

Can we refinance to settle our divorce?

Question of the week:  Can we refinance to settle our divorce?

 Answer:  Yes. No. Maybe.

One area of life that has been impacted by the pandemic has been marriage. Whether it is because couples discovered they were incompatible after being secluded together for 24-hours a day, 7-days a week, for more than a year, or couples knew before the pandemic and quarantine that they were not compatible but did not want to go through a divorce proceeding during the pandemic, or because their shared home has increased significantly in value, the number of marriage separations and divorces appears to be increasing after falling in 2019.

While I do not have any empirical evidence of the increase in divorces in 2021, I do have anecdotal evidence from our applications so far this year. For many years I have had up to four or five transactions a year that were part of a divorce settlement. So far this year that number has already been surpassed, with more on the way.  

For most families, their home is their primary asset, containing most of their wealth in the form of equity. As with other assets, when a couple divorces there must be a plan for the equity and how it is divided, if at all.

In a divorce all the couples’ assets and liabilities are accounted for, to the extent that we have seen settlements that divided houseplants, floor coverings and details on which set of flatware will be awarded to which spouse. While the settlement can get very detailed on asset separation the primary focus is on the higher monetary assets; equity in property, balances in checking and savings accounts, funds in retirement and pension accounts.

Depending on a few factors, a refinance may be the financial instrument that can be used to equitably divide assets.

First, the amount of equity in the home has to be determined, this is done by taking a close estimate of value of the property and subtracting the outstanding loan balance(s).

For instance, if the estimated value of the property is $800,000 and there is a primary mortgage of $375,000 and a Home Equity Line of Credit with a balance of $125,000, the equity is:

 $800,000 – $375,000 – $125,000 = $300,000.

The simple answer to how much equity does each party get is half of $300,000 or $150,000 apiece.

But is that equitable?

Consider if the couple has to sell the property to split equity. The property sells for $800,000, but would they net $300,000 to split? No, they would not because it costs from 7-8% to sell a property in Southern California using a licensed real estate agent.

Besides the real estate commissions there are escrow and title fees, transfer taxes, prorated interest on the current mortgage, perhaps work to clear items listed on a termite report, all these fees add up.

Back to our $800,000, subtract 8% in costs of sale and the net sales price is now $736,000. Pay-off the $500,000 in mortgage and HELOC balances and the proceeds of the sale are $236,000. Or $118,000 for each spouse.

We have a situation where one spouse will keep the house, but in order to do so must “cash-out” the other spouse for their share of the equity. Is the share of equity $150,000 or $118,000?

This makes a big difference if we are refinancing the house to pull funds out to pay off the existing mortgages and also transfer funds to the other spouse.

Primarily, if the amount is $150,000, the total loan amount will need to be $650,000, which is 81.25% of the value of the property. This can create an issue of whether we need mortgage insurance or not, and depending on how the funds and loan is structured if a loan is available over 80% loan to value.

For many of these cases the agreed upon amount is closer to the “net” equity split than the “gross” equity split. In this case extracting $118,000 to be paid to the non-occupying spouse in exchange for a spousal quit claim deed that transfers the property from joint tenancy of the married couple to the occupying spouse as sole owner.

The mechanics of the transaction are important as they impact the rate and costs of the loan. While we are pulling equity out of the property, underwriting guidelines do not consider the transaction as a “cashout” refinance but “limited cashout” refinance IF none of the proceeds go to the occupying spouse. This is important because if any proceeds at closing are paid to the occupying spouse the transaction is a “cashout” transaction which has higher rates and costs than a “limited cashout” transaction.

For example, in the above transaction, Linda and David are getting divorced, Linda wishes to remain in the home with their two children. They agree to David receiving $118,000 from the property and he will sign a spousal quitclaim deed removing himself from ownership, in exchange for the receipt of the funds as well as being removed from any liens on the property.

Linda qualifies for a $618,000 mortgage and we proceed. At the end of the transaction, when the loan funds, escrow pays of the primary mortgage, the HELOC and sends a check for $118,000 directly to David. To close the escrow, Linda had to wire $1100 to escrow to cover pro-rated interest on the new loan. This meets the requirements for a limited cashout refinance.

If pre-funding estimates show Linda receiving $1100 at the close of escrow due to the loan balances being paid off being lower than initial estimates, the transaction is a cashout refinance, it could not proceed until either the loan amount is adjusted downward, say to $616,000, or the loan would be repriced as cashout, a higher interest rate and underwriting re-reviewing the loan to ensure she qualifies with the higher payment.

As mentioned above, the occupying spouse, Linda, must qualify for the refinance mortgage, which may include joint debts that have not yet been separated and paid in full; for example, a credit card with a $25,000 balance or auto loan with a $600 per month payment for the car which David is retaining possession to after the divorce.

Where we run into issues are underwriting guidelines if there is spousal support being paid and received as part of the divorce. The guidelines state that if there is spousal or child support being paid by our borrower as listed in the settlement agreement, it is counted against the borrower.

However, if our borrower is receiving the support payments, they cannot be accepted as income unless the amount is agreed upon in a recorded settlement agreement for the divorce or a separation agreement. As well, and this can be the sticking point, the borrower must show that the full amount of the payments have been received in a timely manner each month for the past six months.

For example, Linda is to receive $2000 per month for spousal and child support payments* from David. They have been separated for three months and through their attorneys have a separation agreement showing this amount to be paid. David began payments in July and has an automatic deposit into Linda’s account on the 1st of each month. For qualifying the income, we must wait to receive final approval and clearance to clear the loan until after the December payment has been made and received.

If David missed the August payment and doubled up the payment in September, we must wait for closing until after the February payment has been made and received, presuming all payments were made on time.

*All support payments must be shown in the agreement to continue for at least three years. If there is a child of the married couple that is generating a payment of $700 per month until she is 18-years old, and will turn 18 four months before our transaction is to close, the $700 per month support payment will not count as income.

Back to our question of the week, yes, you can refinance your property to settle your divorce as part of the division of assets.

Do to the more moving parts than the standard mortgage transaction, the sooner a couple getting divorced begins conversations with us as to options and strategies for one of the spouses to retain the property after the divorce is complete the better. In some cases we have worked with a couple and their attorneys for several months providing different scenarios and options as they created their settlement.

If you know of someone who is considering terminating their marriage, or other relationship with shared property, please have them contact me to go their particular scenario and possible options.

Have a question? Ask me!

Rates for Friday September 10, 2021: No major economic news was released this week that could impact mortgage rates. The 30-year conforming rate is pretty locked in remaining flat for the 9th straight week, the high-balance conforming is unchanged for the 4th week in a row.


30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  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.

As you are aware, tomorrow, 9/11, is the 20th anniversary of the terrorist attacks that changed our country and world in less than two hours. September 11, 2001 is one of the moments in our lives that seem so long ago, and so recent because the stark memories each of us holds.

The memory that seems to have faded the most for too many people is how close together our nation drew following the attacks. No red or blue, left or right, urban or rural, as we pondered what could be next. Not unpredictably, the further from 9/11 we moved, the more divisive the language, rhetoric and grandstanding became.

We are the most unique nation in world history. No country has, or has had, the vast spectrum of races, ethnicities, religions, and cultures united as on country. This naturally leads to conflicting ideals, values, and beliefs. It is these differences that enable us to explore other solutions, options and possibilities to improve our communities and country.

It is my hope that the respectful discourse and conversations that were prevalent following 9/11 once again return to our local, regional and national dialogues. My hope is the few on the extremes of parties and ideologies quit screaming and trying to whip up support for their positions by debasing those with whom they disagree and instead engage in respectful dialogues, to find common ground.

In the spirit of the almost 3,000 people who died as a result of the 9/11 attacks, work on respectful listening and speaking to understand those with whom you may not agree on certain issues and see if there are not one or two points you can agree upon. Shake hands, hug, smile, come together.

Have a great week,


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

Why is credit score in your report different than score I have from on-line report?

Question of the week:  Why is credit score in your report different than score I have from on-line report?

 Answer:  Many mortgage applicants are surprised when they receive a credit report from a lender and the score is lower than the score they received from a their credit card company or a free on-line service. Sometimes the score from the mortgage company is significantly lower than the free on-line score.

Why is this?

Credit scores are derived from models that use algorithms weighing five main factors:

  • Payment history, the most important factor, as missed payments, even one, will have a negative impact on a credit score. Payment history is approximately 35% of credit scoring.
  • Amounts owed, especially as a percentage of amount available, your credit utilization ratio, is the second biggest factor. Outstanding balances that are a high percentage of the amount of available credit have a negative impact on credit scores. This factor is approximately 30% of your score.
  • Length of credit history has about a 15% impact on your credit score. The credit history algorithm factors your oldest credit accounts as well as your newest, and the average age of the accounts. If you have a lot of very new accounts this can negatively impact your score.
  • Credit mix, having a mix of different types of credit can help your credit score. Having a mix of credit does not mean a Capital One Visa, a Delta Mastercard, an American Express card and a few department store cards. Credit mix is having credit in different categories such as auto, student loan, credit card, mortgage, installment loan accounts. The more categories of credit you have the better your credit score as credit mix is about 10% of scoring.
  • New credit, as mentioned above, can impact your credit score. One reason is because when you obtain new credit you typically have what are known as “hard inquiries” on your report. Too many hard inquiries, especially for revolving accounts, and new accounts has a negative impact on your credit score. This category is also about 10% of the scoring model.

The purpose of a credit score is to provide a credit provider with an assessment of potential risk. You can different scores from the report provided by your credit card company than from the report used for a mortgage application because the amount of risk to the credit card company compared to the mortgage company.

Using the scoring models above, a scoring model for a mortgage applicant will put a lot more weight on the missed payments and outstanding balances than the scoring model for a credit card.

Why? Because mortgage lenders have a lot more at risk than a credit card company, hundreds of thousands of dollars more at risk, higher monthly payments at risk, and considerably higher costs should a borrower default.

Regarding the latter, this is especially true in states, such as California, with non-recourse mortgages; states when mortgage lenders cannot sue borrowers for losses incurred when a loan goes into foreclosure. When a mortgage goes through the default and foreclosure process, the cost to the lender is about 25% of the balance. When a consumer defaults on a credit card balance the creditor often has recourse in small claims court to recover the balance. If the creditor does not choose to go to court to collect, the amount charged off remains on a credit report for up to seven years.

If you apply for a mortgage, an auto loan and a credit card on the same day, there is a good chance that your credit scores will be different for each application, likely going lowest to highest in the order listed above.

Not only do different categories of creditors have different scoring models, so do the different credit agencies, Experian, Trans Union and Equifax. Because of this the mortgage industry uses a “tri-merge” credit report, the report is a merging of information collected from all three of the major credit bureaus and their respective scores. It is not unusual for us to see a difference of up to 50 points between the lowest and the highest of the three scores.

For this reason, the industry uses the middle credit score for single applicants and the lowest middle score of multiple borrowers. For instance, if I have credit scores of 739, 719 and 745 and Leslie has scores of 775, 782 and 771, our file score will be 739, my middle score. This is the score that will be used for determining the rate and cost of the mortgage for which we are applying, which will be higher than if we could use Leslie’s middle score of 775.

A final note, many people with some challenging credit issues delay speaking to us about qualifying for a mortgage, “until we can get our credit cleared up.” When I hear this, I ask what needs to be cleared up and what is their intended process. My intention is to get the client to let me pull a credit report so I can analyze the report through the filter of mortgage underwriting guidelines. With a tri-merge report I can determine what steps can be taken and potentially shorten the path to homeownership. The analogy I use is that if you want to get in shape you can set your own exercise routine, but those who work with a trainer typically get into better shape faster than those doing it alone.

If you, or someone you know, would like to purchase a home but feel their current credit situation will prevent them from doing so, please contact me so we can obtain a credit report and determine the best steps to take to get their credit in shape.

Have a question? Ask me!

Maxwell Smart, that’s what is thought today when I read the August jobs data this morning. After over one million new jobs were added to the economy in July, the expectation was for approximately 720,000 new workers in July. Earlier today the Labor Department announced that 235,000 new jobs last month, even those not so great at math can see this is significantly lower than expectations. Also in the report was the unemployment rate, measured by those seeking employment, dropped from 5.4% to 5.2%, and that hourly earnings increased 0.6% in August and are up 4.3% from August 2020—keeping pace with inflation.

Now what? Last week in the economic section of the WR&MU, we discussed the Federal Reserve and the possibility it will taper its asset buying program (Quantitative Easing) before the end of the year. A primary factor in if the Fed will taper, thus putting more upward pressure on rates, is the strength of the labor market. Does today’s jobs report change the conversation as it shows slowing growth in jobs? Or…are there some extenuating circumstances to cause the August report to be somewhat discounted by the Fed? Two factors that may cause the jobs report to have less of an impact than expected. One, some experts feel the disappointing miss on the total number of new jobs is the result of many companies freezing new hires, especially for customer forward positions, due to the delta variant of Covid and the surge in late July and early August. While there are still hot-spots around the country with high positive test results and hospitalizations, many areas are showing these numbers plateauing and starting to decline, meaning hiring may resume in September. Another factor is the “August effect.” August is traditionally a vacation month and many small business owners, human resource directors, executives, and others who complete the government job surveys are not around to fill in the boxes. So not only is August a traditionally a vacation month, but it is also traditionally a bit of a squirrelly month when it comes to data collection. With many people not being able to vacation last summer, we have seen a tremendous jump in vacationers this summer.

Rates for Friday September 3, 2021: Ordinarily a big miss in a major economic report would have an impact on rates, in the case of the August employment numbers the miss to the down side would put downward pressure on rates. However, as we have seen over the past year, ordinary reactions to economic data have not impacted interest rates as expected in traditional economic models. Such is the case today at investors shrug off the data and speculation as to what the Fed may or may not due as a result. That said, our mortgage analysts are forecasting a potential bump in interest rates sometime next week based on the markets.


30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  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.

No more wearing white and the pool is closing soon. Those were the traditions due to Labor Day when I was growing in areas of the country that experience four distinct seasons.

Since 1994, Labor Day weekend has signified another year for Leslie and I as that year, we were married on Sunday of the three-day weekend. Tomorrow will mark twenty-seven years,  that have seen two kids, three dogs, two homes, tens of thousands of miles on drive trips, and countless laughs. I won the lottery, not from a ticket bought at a liquor store, but from meeting a young lady who was drawing a sign for a charity event while sitting on the floor of an escrow company with a great sense of humor.

She’s needed it often over the past two plus decades.

Have a great week,


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

What is a jumbo loan?

Question of the week:  What is a jumbo loan?

 Answer:  With real estate prices jumping up significantly over the past eighteen plus months in Southern California, and across the country, many homebuyers are hearing, “you will need a jumbo loan for financing.” What is a jumbo loan?

Jumbo is a generic term for a mortgage that is over the Fannie Mae/Freddie Mac maximum loan limit, or as listed below the high-balance conforming loan. In most of our region the maximum loan limit is $822,375, if you need to borrow $822,376 to purchase your new home or refinance your current home, you will need “jumbo” financing.

The primary factor that makes jumbo loans different than conforming loans is that there is not a secondary market where the mortgages are bought and sold. As long-time readers of the WR&MU know, conforming loans are funded by a lender, packaged with many other loans into a bundle and that bundle of mortgages is sold to either Fannie or Freddie. Fannie and Freddie then package the mortgages they purchase from lenders across the country into bigger bundles and sold on the open market as Mortgage Backed Securities (MBS). The MBS market is fairly stable and secure in that all the mortgages in the MBS packages are underwritten, approved and funded under the same guidelines as established by Fannie or Freddie. Investors know also know that at this time MBS are backed by the United States Treasury, making their investment one of extremely low risk.

Jumbo loans are funded through mortgage banks, and then retained by the bank that funded the mortgage, or sold to investors. Investors in jumbo mortgages can be other banks, credit unions, equity funds or insurance companies.

One of our lending partners may have two, three or even four different jumbo mortgage programs for us to choose from for our clients. Each of the programs have different guidelines for underwriting, and different rates, typically the stricter the guidelines the lower the rates.

Some jumbo programs have looser guidelines than Fannie or Freddie have with their high-balance programs, for instance refinancing a property that has an equity line that will be paid off as part of the transaction. If the equity line has not been used in the past 12-months, some jumbo investors will consider the refinance a “rate and term” transaction, whereas if the equity line was not part of the purchase of the property conforming guidelines consider the transaction a “cash-out refinance.” Since cash-out refinances typically have higher rates than rate and term refinances, it may make sense to apply for a jumbo mortgage than a conforming mortgage.

This type of underwriting guideline tradeoff is important as many jumbo programs have a minimum loan amount that is one-dollar higher than the conforming loan amount of $548,250.

During the pandemic many jumbo investors pulled out, or pulled back with higher interest rates. In the past several months many have re-entered the market and for many clients and situations a jumbo loan product may be a better value than a high-balance conforming mortgage.

We need to reiterate that jumbo underwriting guidelines are not the same as conforming. While many jumbo guidelines are very close to conforming guidelines for much of the underwriting, there are differences that need to be considered. Differences such as required reserves, qualifying income and what is known as continuity of obligation.

What is the best mortgage solution for you? Until we have a detailed conversation regarding your financial situation and what your mortgage need is there is not set answer.

Have a question? Ask me!

You are doing well, better even. That is the news from this week’s economic data for the generic American. Second quarter GDP was revised up slightly to 6.6% growth from the original 6.5% estimate. The revision was mostly due to an upward revision of consumer spending in the quarter, increasing 11.9% from the first quarter.

With your income growing, resulting in more spending, the current estimate for 3rd quarter GDP growth is 7%. Due in some part to the child tax credit funds being transferred from the federal government, incomes spiked up 1.1% in July from June. While incomes jumped, growth in consumer spending was a bit relaxed from June, but still rose 0.3% in July. Despite steady month-over-month increases in spending, Americans are maintaining high savings rates and balances.

“I was of the view…” In a speech earlier today, Federal Reserve Chair Jerome Powell did something that is very rare for Fed Chairs, he gave a personal opinion. In this case in recapping conversations at the last meeting of the Fed’s Open Market Committee (the FOMC that sets the Fed’s rates), in which he, and most of the other members of the committee, felt the Fed could begin to taper its purchase of U.S. Treasuries (currently buying $80 billion per month) and Mortgage Backed Securities ($40 billion per month). Investors and markets have been waiting to see when the Fed will begin to taper its purchase of the two main financial instruments that determine interest rates for consumers and corporations. It appears the slow down of buying will occur in the next four months.

Rates for Friday August 27, 2021: All the economic data this week, and Powell’s comments, point to higher rates—I know I sound like a broken record the past several months. The $120 billion per month the Fed is using to influence rate-based instruments is the primary factor in rates not being a lot higher than they have been. Rates are set to jump once the artificial cap on the market is lifted by the Fed by allowing more Treasuries and mortgages to hit the open market. All of that said and analyzed, rates are flat from last Friday.


30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  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.

Joy and pain this weekend for yours truly. The joy will be this evening as Leslie, our youngest and I travel up to Hollywood to see “Hamilton” at the Pantages Theater. The pain will be from 9:00 to 4:00 tomorrow as I sit in front of my computer to complete continuing education for my National Mortgage License.

The NMLS continuing education and testing is an annual event that I am actually glad to go through as the National Mortgage Licensing System that was the result of the SAFE Act that was enacted in 2008. For decades prior to that I was calling for more stringent license requirements for all mortgage lenders, whether they work for mortgage brokers, mortgage bankers or banks and credit unions. At this point those who originate mortgages for banks and credit unions are exempt from the licensing requirement, an exemption I hope will be eliminated in the future.

In the meantime, several hours of joy this evening, followed by a glassy-eyed eight hours tomorrow.

Have a great week,


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

Should we pay extra on our mortgage?

Question of the week:  Should we pay extra on our mortgage?

 Answer:  This is a question we answer every few years and it has come up recently from a few clients. The main reasons people say they want to pay down their mortgages are to get rid of the monthly payment, reduce the amount of interest they pay, and payoff the mortgage sooner.

But is paying off your mortgage early the best financial move for you? Here are several items to consider before you commit to paying off your mortgage ahead of schedule.

Are you maxing out your contributions to your retirement account? Most Americans are underfunded for their retirement, many of whom own homes. Instead of paying additional principal down on your mortgage I suggest putting those funds into your retirement account instead. Consider that the money you put into retirement is usually deducted from your taxes (an exception can be if you contribute to a Roth IRA account), whereas the money you pay down on your mortgage is not. Most homeowners in California will have combined state and federal tax rates around 33% of adjusted gross income. If you contribute the 19,500 maximum to a 401(k) ($26,000 if over 50) that is a tax savings of about $6400, pay the same amount down on your mortgage and there is zero tax savings—in fact you will have negative tax savings because…

The government pays for part of your mortgage due to the mortgage deduction allowed on state and federal income taxes. You can deduct the amount you pay on your mortgage interest directly from your income for both federal and California state income taxes (note depending on when you funded the loan your interest deduction may be capped on the interest up to a $750,000 balance). So, if you have a $500,000 mortgage with an interest rate of 3% you can deduct $15,000 from your income, saving approximately $5000 in taxes. If you pay down $15,000 on your mortgage you lose approximately $150 in tax savings since your interest payments are lower. Paying down $15,000 on your mortgage instead of putting it into your 401(k) can cost you over $5000 in tax savings.

If you are maxing out your retirement contributions, how are you on saving for your children’s college education? As the parent of college senior and a college freshman, and someone who has looked at thousands of clients financial statements, I can attest that college expenses have far outpaced most families abilities to save for those expenses. Putting additional money into a 529 College Savings account or other savings instead of paying down your mortgage might be a better allocation of funds. By doing this you are essentially “borrowing” at whatever your mortgage rate is today for use in the future instead of potentially borrowing in the future at what may/probably will be a higher rate. As well, with today’s very low mortgage rates, the rate to “borrow” by not paying down your mortgage will likely be lower than the return on the funds you are investing for future college costs over the long run.

Speaking of your mortgage’s interest rate, is it lower than other debt you have? Credit card debt, auto loans, your own student loans? If you are maxing out your retirement contributions, you do not have to worry about future college expenses but have consumer debt it makes more sense to pay off that higher interest, non-tax deductible debt before paying off your mortgage. It not only makes more sense but it is very good math.

Are you planning on selling your home in the future, before the current term of your mortgage is completed and before your over-payment plan would pay off the mortgage? If so, you should consider putting the additional funds into savings, investments, even cash. Your home is not worth more, or less, depending on your mortgage balance.

Your home’s value is determined by location, size, condition, etc, not by the amount of debt secured by the home. Paying $40,000 down on your mortgage over say five years and then selling it with a $400,000 mortgage balance was a loss of opportunity for those funds to work for you with compound interest and/or dividend reinvestment. There is no compound equity or equity reinvestment in your personal residence, it will be worth what the market dictates when it comes time to sell.

Yes, your net proceeds from the sale will be $40,000 more than if you have not paid down the mortgage. At a 4% return on the extra $666 per month you pay on the mortgage over five years would result in over $44,000, 10% more than your net proceeds gain from paying that money into the mortgage.

One final consideration, it costs money to get money back out of your home. If you have $100,000 equity and want to access some of it you will either need to refinance, obtain 2nd loan or HELOC, or sell the property, each of which has costs. What if you pay down your mortgage and need money in the future for home improvements, medical emergency or other unexpected life event?

All these are factors, and there are more, that you should consider before paying extra down on your mortgage. There are some factors that more strongly support paying off your mortgage early than other, primarily looking at your current income, your projected retirement date and your projected income during retirement. Or you have a property that is a rental with a low enough balance that you can use rental income to accelerate the payoff of the mortgage, again looking at some of the factors above, to have a free and clear investment that gives you more options in the future, such as selling and carrying a large mortgage to defer capital gains and continue to receive income.

As with most/all of our questions of the week, before we can answer the question we need answers to more questions—and this particularly the case this week. If you are considering accelerating the principal reduction on your mortgage, please do not hesitate to contact me to discuss your options.

Have a question? Ask me!

Retail sales are not leading economic growth. For the second time in three months retail sales dropped month over month, down 1.1% in July from June. While still up 16% from last July, the decline has many opinions coming forth as to why. Are consumers “spent out,” having gorged themselves at malls and Main Street shops when the local economies first opened back up? Did on-line retailers like Amazon, Walmart and Target create new buying habits that pulled even more shoppers out of stores and onto websites?

Pushing retail numbers down is the continuing stagnation of auto sales, or rather decline. Shortages in computer chips continue to slow production of new cars, pushing inventories down and prices up. Auto sales, which have already been sluggish, dropped 3.97% from June to July; removing auto sales from the overall retail sales data and the dip is .4% for the month instead of 1.1%.

What should concern retailers, besides the reduction in foot traffic and ringing registers, is that retail sales are calculated on dollars spent, not units moved. Those dollars spent are inflated around 4% from 2020, and up 0.5% from June. Sales dropped 0.4% while prices increased 0.5%.

Minutes released from the meeting of the Federal Reserve’s meeting in July show a shift in its view of inflation. Previously the Fed had maintained the stance that the spike in inflation is “transitional,” as the economy went from closed to open. The minutes show many feel that inflation will continue into 2022 due to shortages in labor and materials. It feels like the Fed is ready to announce in the near future a tapering of the Quantitative Easing policy to keep its rates near zero.

Rates for Friday August 20, 2021: The economic news is a bit choppy, higher prices, less consumption. The Fed seems poised to change course on rates. Uncertainty is typically not good for markets. This week we saw mortgages fairly flat, and conforming rates are flat Friday to Friday yet again. However, lenders are hedging a bit on high-balance rates and we see a bit of an uptick in those programs from last week.


30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

As many of you know I grew up moving around. When we moved from Tulsa to outside Philadelphia, my first friend became my best friend for our time there (leaving for New York after a little over five years). Greg and I spent a lot of time together, and thankfully for me his dad had season tickets to the Eagles and I was able to go to a few games each season.

Greg still lives in the same area and yesterday he contacted me that he is in San Diego visiting his daughter. “Come down, let’s see the Phillies play!” was the message I received.

Two tickets on the third baseline for the Phillies and Padres at PetCo Park for tomorrow night will get us together in person for the first time since sometime in the late 1970’s. Go Phillies! Ring the Bell!

Have a great week,


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

Are Seller rent-backs a good idea?

Question of the week: Are seller rent-backs a good idea?

Answer:  In March we wrote about different options buyers could use for their offers to increase the chance of getting their offers accepted.

One of the options was to put in your offer, or convey to the seller through your agent, your willingness to let the seller remain in the home after closing and rent the home from you until they purchased their next home.

In the past few months, almost every purchase transaction in which I was the lender has had a rent-back clause. On a recent transaction as we were nearing the close of escrow, the listing agent contacted the selling agent (represents the buyer) asking if the buyer would agree to let the seller rent back after the close of escrow as the home the seller was purchasing would not be closing soon after our escrow closed.

The buyer, who is an attorney, asked a very good question of her agent. “That creates a tenancy relationship. What if they do not leave after the rent-back period, then I would have to evict?”

She is correct. Once you own a home and someone else is living there you have created a tenancy relationship and the occupant has all the rights of a tenant. As many landlords can attest, since the pandemic local, state and the federal government have issued eviction moratoriums. Currently the State of California eviction moratorium goes to September 30th, and the federal moratorium was recently extended to October 3rd.

Looking for more information on the landlord-tenant relationship and the eviction moratoriums, I called my attorney friend (friend attorney?) and asked him for more information. What happens if you purchase a home, you and seller agree that the seller will rent back the home for a period of time and then does not vacate the property? Do the pandemic eviction moratoriums apply?

According to Matt, technically no, the moratorium does not apply as the purpose of the moratorium is to protect tenants who are experiencing financial difficulties due to the Covid-19 virus. In a rent-back situation, typically the seller agrees to pay the daily equivalent of the buyer’s housing payment (PITI – Principal, Interest on the loan, property Taxes, and Insurance).

There are a couple of different options for transferring the rent from the seller to the buyer. One, is at the close of escrow the amount of rent for the agreed upon period of time is credited from the seller to the buyer at close of escrow. Two, the escrow company withholds from the seller’s proceeds the amount of rent for the period of the rent-back, and perhaps more to cover extra days or damages. Three, the buyer and seller agree that the seller will pay the buyer outside of escrow the amount owed on a weekly, or monthly if that is the case, basis.

If the rent is pre-paid through escrow, or directly at time of closing, clearly the seller is not impacted financially by the Covid-19 virus and would be exempt from the eviction moratorium.

So, we are safe from having to go through an eviction, or waiting until the moratoriums are lifted and then can evict if the seller does not leave our new home.


Matt also told me that while the moratorium would not apply to the seller as a tenant, the courts in Southern California have tremendous backlogs of eviction cases, he mentioned Los Angeles County has a backlog of around 500,000 cases. Essentially, landlords with lawful eviction processes in place with tenants who are willing to be taken to court, will be waiting a very long time before the court can give them satisfaction and force an eviction.

Please note, the regulations and process also apply if you purchase a home with a tenant occupant. When you purchase the home the tenant’s lease becomes yours, as does collection of rent or termination of lease and eviction proceedings.

In almost thirty-five years I can recall only a few times where a tenant would not leave after a property has been sold, and once when a seller stayed beyond the agreed upon time limit. In the latter case the buyer was properly compensated, in the former the new owners resorted to trading cashier’s checks in the street for keys to the property.

If you are entering a rent-back situation you are entering a relationship that relies on a certain amount of trust that the seller will move out in the agreed upon time. But this is true when purchasing any home where the seller is still occupying the property on the date you obtain ownership. Many, most, purchase contracts for residential real estate have a possession clause where the buyer and seller agree that the buyer will get possession of the property at “close of escrow plus 3 days,” or some other short period of time. During those three days there is a tenancy relationship between buyer and seller. The buyer is trusting the seller that they will vacate as agreed. If not…there is a huge back up in the courts.

Have a question? Ask me!

Lower but still high is the short statement on July’s inflation numbers. The Consumer Price Indexed increased 0.5% in July, down from June’s 0.9% surge. Two big factors in the price increase were used car sales, up 0.2% for the month after rising 30% from March to June, and energy costs which were up 1.6% for the month. Year-over-year consumer prices are 5.4% higher from July 2020. The news was a bit mixed for rates, read on for why.

To ease or not to ease, that is the Fed’s question. Since last March the Fed has been purchasing $120 billion of U.S. Treasury securities and Mortgage-Backed Securities (MBS). This move is called “quantitative easing” and has kept mortgage rates very low. “Easing” is the term for the Fed to reduce the number of securities and MBS it purchases each month, which should result in interest rates slow increasing. There are some in the Fed who would like to announce in September that the Fed will begin easing in the near future, say by December or January and feel the year-over-year inflation numbers support such action. Others in the Fed feel the reduction in month-over-month price increases support the estimates made several months ago that current inflation is “transitory” and the current quantitative easing policy should continue. Which ever side wins the debate will determine where rates will move in the near future.

Rates for Friday August 13, 2021: Starting at the end of last week there was a slide in MBS prices (higher rates) until Wednesday of this week when prices rebounded. Historically when this happens lenders push rates higher and then are slow to lower them to hedge against another spike. This has not been the case in the recent changes in prices and rates remain stable from last Friday and the four before that.


30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.75%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Today is pretty unique. According to my intensive search, the most time Friday the 13th can occur in any calendar year is three. Today is the only Friday the 13th in 2021.

Paraskevidekatriaphobians* let out a sigh of relief…

While triskaidekaphobia is the fear of the number 13, paraskevidekatriaphobia (please don’t ask me to pronounce it)is the fear of Friday the 13th. It is called friggatriskaidekaphobia, which is easier to pronounce and I feel could have been named by a still inebriated, or hungover, student in a psych class early in the 20th Century when the term may have been coined.

Have a great week,


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

Do we have to show our appraisal to the seller or seller’s agent?

Question of the week: Do we have to show our appraisal to the seller or their agent?

Answer:  No.

One of our periodic questions of the week is what if the appraised value is less than the purchase price. That certainly is a very large concern and can cause issues, depending on how the buyer and seller decide to work to solve the problem.

However, what if the appraisal is higher than the purchase price? Can that be an issue? Potentially.

You are in escrow to purchase a home for $875,000. After your inspection (click here for difference between an inspection and an appraisal), you present the seller with a list of items that need to be repaired or replaced, estimated costs for the repairs is about $10,000.

It is fairly common that instead of making repairs sellers offer a credit towards the buyers’ closing costs so the buyer has the funds to make the repairs themselves after they purchase the property.

Before the seller makes the counter-offer to your request that repairs be made to the property, the appraisal report is delivered with a value of $910,000.

Before replying to your request for repairs, the seller, and the sellers’ agent (the listing agent), want to see the appraisal report. If the seller learns the appraisal come in with a value $35,000 above the sales price they may be less willing to make the repairs, or provide a credit.

To our question, do you need to show the appraisal to the seller, or the listing agent?

Because you paid for the appraisal, you own the appraisal and do not need to release the report to anyone other than the lender. From our standpoint, as the lender, we cannot release to report to anyone, including your agent, without your consent.

As a matter of practice, when we receive an appraisal report, we immediately notify you of the value and any comments in the report that may cause concern (such as “noticeable water stains on living room ceiling”). For a purchase we will communicate to the agents that we have receive the report with one of two notifications. Either, the report is in with “value sufficient for our transaction,” or “value lower than sales price.”

If the listing agent contacts us to reveal the value, we inform her/him that we cannot give them the value, they must get permission from the buyer for us to do so. This is not always well received, however our client, and duty, is to you and not the seller or the agents.

Not all lenders follow similar protocols, it is important if you are working with another lender, and your appraised value is higher than your sales price that you tell the lender not to release the value or the report to the seller or listing agent. The statement, “value sufficient for our transaction” is sufficient.

There is always concern an appraisal may have a value lower than sales price, but sometimes a value that is higher can also create an issue for you if not handled properly.

Have a question? Ask me!

More paychecks are being issued, 943,000 more in July than June as new hiring soared nationally. With over 700,000 of the new jobs created in the private sector, mostly in the hospitality, leisure and entertainment sectors, the summer has seen Americans making up for last year’s lost summer by travelling, dining out and going to concerts. The only sector that shrank in July was retail, losing 5500 jobs. The total number of new hires is somewhat skewed by the addition of 240,000 government jobs, mostly in the seasonal education sector, which has seen up and down employment through the pandemic. Reflecting more hires, and fewer people actively looking for work, the unemployment rate dropped from 5.9% to 5.4%. Year over year wages are rising at about 4%, keeping up with inflation. Overall, the news is not positive for interest rates.

Rates for Friday August 6, 2021: Prices for Mortgage Backed Securities (MBS) peaked early in the week (higher prices = lower rates) and have been falling since, putting upward pressure on rates. The lower MBS prices have not transferred to rate sheets, yet, but it would not be a surprise if next Friday rates are higher after five weeks of stable rates and prices.


30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.75%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

I like that the number of sports with competitions in the Olympics has expanded from the number competing when I was a kid. It enables more athletes to compete in the premier international sports event and spend time in the Olympic Village meeting athletes, coaches, judges from other nations.

Every day there is a great story of an inspiring competitor, whose story and performance we would never know about except for the Olympics. Seeing a competition where someone misses the medal podium by an instant, yet had their personal best time in the event—sad for not medaling but proud of doing their absolute best at the exact moment it needed to be done. Competitors helping each other, such as when two runners fall, lift each other up and run to the finish line together to complete their Olympic experience.

For as long as I can remember I have loved sports, participating (not that well) and watching. The unscripted outcomes and chances of seeing some incredible displays of athleticism are what draw me to sports the most. The Olympics, with so many sports and athletes who are at the pinnacles of their sports is a wonderful buffet for hard-core and casual sports fans.

I hope you have enjoyed the games!

Have a great week,


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