Why is mortgage insurance a good thing?

/in /by

Question of the week:  Why is mortgage insurance a good thing?

Answer:  Last week in the Weekly Rate & Mortgage Update we discussed if home buyers should wait until they have 20% for down payment before purchasing (you can read the WR&MU, and I encourage you to, but the short answer is “No.”).  The primary reason many clients give us for wanting to wait until they have 20% down is to avoid paying mortgage insurance.

To which I always counter, mortgage insurance is a good a thing and not something you may want to avoid.

Which leads to the question of the week, why is mortgage insurance a good thing?

The quick and simple answer is because it can enable you to purchase your home a lot faster.

As discussed last week, the number one cause of delay for families purchasing homes, according to a California Association of Realtors survey, is waiting to save for down payment and closing costs. A significant number of these delayed purchases are due to wanting to have 20% down to avoid mortgage insurance. But is the delay worth it? We covered the potential cost and missed opportunity last week of waiting, what is the cost of not waiting and buying when you can?

Before we begin the conversation of why mortgage insurance is good, let’s examine what mortgage insurance is. For those new to the conversation, mortgage insurance is not insurance that pays off the loan if you pass away or become disabled—there are life insurance and/or disability insurance policies you can get to cover the mortgage to protect your home and family should something happen.

The purpose of mortgage insurance is not to insure you, but to insure your lender should you default and go into foreclosure. Between the missed payments, legal fees, professional fees, loss of value due to foreclosure sale and other costs, a lender will average about 35% of the value of the property. Because of this if you have less than 20% down the lender will require mortgage insurance that covers the difference between your initial down payment and 35% of the purchase price.

For example, if you are purchasing a home with 5% down the lender will require 30% coverage from a mortgage insurance company, if you put 10% down coverage of 25% will be required, and if you put 15% down coverage will be 20%.

Even with this protection, should a home go into foreclosure there will likely be losses to the lender. Consider the process and losses. It typically takes about eight to nine months for a home in California to be foreclosed on after the first missed payment. Once you miss a payment by more than 30 days, i.e. you do not make your March 1st payment by April 1st, you are in default of the note. To cure the default, you need to make all payments due plus late payments. So, if you miss the March payment you have until April 30th to make the March payment plus the late fee and the April payment plus the late fee, if applicable.

If you are unable to cure the default at some point the lender must make a foreclosure avoidance assessment to discuss with you the circumstances that led to your default and if there is any way to avoid foreclosure. If there is no agreement between you and the lender to continue with the mortgage, i.e. a modification, the lender can then record a Notice of Default (NOD) with the county recorder in which the property is located no sooner than 30 days after the initial contact for the assessment. After 90 days or more have passed since the filing of the NOD the lender can then record a Notice of Sale informing you that the lender intends to sell the property at auction in 21 days or more. At auction, the lender will sell to the highest bidder who must have cash or a cashier’s check, it is very likely that the first bid will be placed by the lender for the outstanding balance due plus foreclosure costs. At the fastest a foreclosure can occur within about 200 days of the first missed payment, however they generally take about 60 to 90 days longer—or depending on circumstances can take much, much longer.

If you purchased a home for 5% down and a $400,000 mortgage with mortgage insurance and are foreclosed on the lender will be reimbursed for losses up to 30% of the loan amount, $120,000, by the mortgage insurance company.

There are different methods of paying for mortgage insurance. You can pay monthly, a full premium upfront, or fund a “no PMI” mortgage that is a loan that is self-insured by the lender due to a higher interest rate on the mortgage. Of the different types of payments, the most popular is the monthly payment, primarily for two reasons. First and foremost, it is able to be removed from the mortgage for most transactions after you have made 24 consecutive on-time payments and can show evidence (lender approved appraiser’s valuation) that you have at least 20% equity in the property you can request the PMI and its payments be removed from you loan—caution, do not just engage an appraiser, contact your lender with your request and get a list of approved appraisal management companies to contact for an appraisal. When your loan balance become 78% of the original purchase price, or appraised value, of the property when the loan funded the lender must drop the mortgage insurance without a new appraisal. The second reason payments are popular is that for the past several years mortgage insurance has been deductible for federal income taxes depending on your income.

That is the purpose of the mortgage insurance, what is your benefit.

That you can purchase a home with as little as 3% down, or 5%, 10%… In California, and most real estate markets, being able to purchase a home without having to save 20% of the payment is tremendous benefit. Doing the math, for a $500,000 home you can purchase a home with only 3% down payment (higher sales prices qualify for 3.5% down payments using FHA, or no down payment if you are an eligible Veteran).

What is the advantage to purchasing a home with less than 20% down? Not having to wait to save the 20% down payment and missing the opportunity of home ownership for perhaps several years—or ever. Consider how long it will take you to save a 20% down payment on your current income, even if you are able to eliminate all your debts—which delays your ability to save. Two years? Three? Five? Ten? During this period will housing prices be stagnant, or increasing faster than your income increases? As you try to save the amount you need to save will continue to increase creating a longer delay in your ability to purchase.

If you know you are going to receive a large financial windfall in the very near term, which I define as less than six months, from a lawsuit settlement, sale of a major asset such as a company, boat or other property, or an inheritance, you may be able to shorten your ability to gather the 20% down. But for most families this is not the case and they should be open and favorable to purchasing a home using a lower down payment and mortgage insurance.

The monthly cost of mortgage insurance is a lot less than most potential homebuyers think it will be, and MI is cheaper today than for non-government loans than in the past (MI for government loans is higher today than it was several years ago).

For a $400,000 here are the monthly costs for a borrower with 740 credit score in California purchasing a home with a 30 year fixed rate mortgage for different down payment amounts:

  • 5% down has a monthly PMI payment of $177
  • 10% down has a monthly PMI payment of $127
  • 15% down has a monthly PMI payment of $67

If this loan has a 4.125% interest rate having a monthly payment of $1939, the 10% PMI payments effectively add one-half of one percent (0.50%) to the payment rate, lifting it effectively to 4.625%.

Consider purchasing a $445,000 house. To purchase with 20% down you will need a down payment of $89,000 and will have a payment, at 4.125%, of $1725 per month.

Purchase the same home with 10% down and you need $44,500 for down payment, easy math tells us you need $44,500 less. The monthly payment including mortgage insurance will be $2068, or $343 more per month. You are spending $343 more per month as long as you have the mortgage insurance, but saving $44,500 in funds needed to close.

Let’s assume the scenario above is a brand-new home and there are two that are identical at the same price next door to each other. James and Monica purchase one of the homes with the 20% down scenario and Jeffrey and Maria purchase next door with the 10% down scenario and they close on the same day. Every month on the they meet for cocktails on one of their porches, and before the mixing begins James and Monica put the $343 savings they have from not purchasing with 10% into a safe. The couples will have to have 129 evening cocktail gatherings before James and Monica have save the $44,500 in cash that Jeffrey and Maria did not put into the down payment for their home. That’s over ten years, but which time statistics show one of the homes will likely be sold due to job transfer, purchasing a bigger home or divorce.

The obvious drawback to the additional payment is the ability to qualify, with a higher monthly payment you will qualify for a lower loan amount and purchase price. Taking a look at this using the above scenario of an additional $343 added to your payment putting 10% down instead of 20% down and assuming that based on other debt obligations our borrower can qualify with 32% of their gross income can support the monthly loan, or monthly loan and PMI payment.

For the 20% down scenario with a cost for the loan payment of $1725 income of about $5400 per month will be needed to qualify.

For the 10% down scenario with the cost of the loan payment plus the PMI payment of $2068 income of about $6460 will be needed to qualify, about 20% more income for the same property.

That said, what is more likely for the average family, that a family making $5400 per month can save $89,000 at the same rate that a family making $6460 can save $44,500 or vice-versa?

Not waiting to save 20% down and using PMI to purchase a home may reduce the amount of home and mortgage you may qualify for, but it can greatly reduce the amount of time it will take for you to purchase your new home.

The best time to contact me about your ability to qualify for purchasing a new home is as soon as you decide you would like to purchase a new home. The sooner we discuss your financial situation the sooner we can work on a plan to homeownership that encompasses your available funds, if any, your income, debts, credit rating and what will need to happen, if anything, so you are able to purchase your new home. Perhaps it is a savings plan, or a debt reduction plan, or a credit rehabilitation plan, whatever may be holding you back from purchasing a new home the sooner we discuss your options the sooner you will be able to purchase your new home. Call me and let’s set up an appointment!

Have a question? Ask me!

 An interesting report today from the Labor Department. The February employment report was released today and it overwhelmingly missed expectations, with 20,000 new jobs created in the month versus the expectation of 175,000 new jobs. While interesting, the very interesting parts of the data was despite only 20,000 jobs being created the headline unemployment rate dropped from 4.0% to 3.8%, indicating a saturated job market higher creating fewer jobs, but fewer people looking for jobs. This rate of unemployment counts only those who indicate they have been looking for a job, the data geeks like myself like what is labelled the U-4 rate which includes those too discouraged to look for work, plus part time workers who would like to work full time. The U4 rate fell from 8.1% to 7.3%, a solid indicator of a very strong labor market. Adding more interestingness (sidebar: this is weird, I thought I made that word up but spell-check didn’t flag it) to the report, total hiring for December and January were both revised substantially higher. At first blush, the sharp decline in new hires should be good for mortgage rates as the data may signal a slowing of the labor market, however the other data in the report shows a very strong labor market that should put upward pressure on mortgage rates.

The report had good news for existing workers as wages climbed again month over month and are up 3.4% from last February, the biggest annual gain since the end of the recession in 2009. The concern with higher wages is that the costs trickle into the economy as employers raise prices to pay the wages, as we have seen in recent inflation data this has not been the case. Labor is a key factor for the Fed when considering increases to interest rates, it appears more of a factor than inflation, and rising wages should put upward pressure on rates, but with an absence of inflation investors reactions today to the Labor Department report were to maintain the status quo and rates did not pop today as might be expected.

Rates for Friday March 8, 2019: For the week investors looked to move money into fixed rate markets such as Treasury bills and mortgages, as a result the conforming rate ticks back down after its bump last week and high-balance rates remain flat.

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

30 year conforming                                            4.125       Down 0.125%

30 year high-balance conforming                     4.375%    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.

Ten years ago, I started working out of the house on most Fridays. My routine at home is to write some, most, or all of the Weekly Rate & Market Update and try to schedule some meetings for prospecting and networking, and of course communicate with the office and clients. Today as I sat working I heard and saw a large SCE truck in our alley and a few guys went up in a cherry picker to do whatever they do on the pole across from our home. As I was typing “The quick and simple answer…” I heard of loud noise and the house shook. “Oh, ‘goodness’,” I thought, did they hit the house? I looked up and saw the cherry picker halfway down and still in the alley. Which led to my going outside to see what the heck happened.

In lowering their bucket, they came down on a communication line and pulled the facia board the line was attached to off the house. Yippee! One of the workers went up on the roof and nailed it somewhat back into place and we completed a report and I received information about making a claim.

You can imagine my excitement in knowing my future will get to include interacting with a major utility company and tradesmen to get the repair completed and paid for by SCE. I hope you are not too jealous of this wonderful opportunity I have and you, likely do not.

Have a great week,

Dennis

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

What do you need to pre-qualify us for our new home purchase?

/in /by

Question of the week:  What do you need to pre-qualify us for our new home purchase?

Answer:  There are three legs to the pre-qualification stool: Money, Credit, Income. To get pre-qualified, or pre-approved which takes the same amount of time and information, I need information on each of the three legs. 

Money How much money do you have for down payment and closing costs? Is all the money your money and in your bank account right now? Are you getting a gift from a family member to cover some, or all, of the funds needed? Copies of your most recent bank, investment accounts and retirement account statements will let us know how much money you will have for your purchase and any reserves your particular loan program may require. I have had clients in the past who have not shown me all their asset statements because, as one client put it, “If I show it to you then you will spend it.” Not true and not possible. I cannot spend any of your money, but I can show you different options for sales prices, loan amounts and monthly payments if I know about all your asset accounts and in what manner they are held.

Credit This category covers not only your current outstanding credit obligations, such as auto loans, student loans and credit cards; but also, if you have any spousal or child support payments or other court ordered payments. We need to know how much you owe, how much you have to pay on a monthly basis and your history of making payments. The quickest and easiest way for us to get this information is from a credit report (which will not show spousal or child support payments). “Is it necessary?” is a very common question when we request the authorization to run a credit report. The answer is, yes if you want to make sure you are getting an accurate pre-qualification for how much of a house you can buy. We can put in the information you provide us and provide some price and loan options, however unless we are viewing a recent credit report the information is not fully reliable for the basis of being pre-qualified. “If you run a credit report you will hurt my credit score,” is a common objection we hear. Running a credit report for the purposes of obtaining a mortgage, or getting pre-qualified, will very likely not have any impact on your credit score—if you have had several (by which I mean more than four or five) such reports run in the last few months one more inquiry may take a few points off your score. If you have had no inquiries run in the last few months for mortgages then our obtaining a report will not have an impact.

Income How are you paid? Are you self-employed? Do you have investment property? Do you have multiple streams of income? How long have you been receiving your income from its current source? Do you have overtime or bonuses? For most clients, this is a fairly easy question to answer. Most people are salaried employees who receive a W2 at the end of the year and we can easily and quickly calculate income. If this is the case then we need recent paystubs and most recent W2. If this is not the case then we will want to see at minimum the most recent federal income tax return that has been filed, and very likely returns for the past two years.

With all of this information we can usually pre-qualify, or pre-approve, you very quickly for a sales price and mortgage amount—by very quickly I mean less than fifteen minutes. If your income is a bit more complicated then we may need a bit more time and information.

What is most typical however, is a conversation that will take more than a few minutes, ideally in person but over the phone is also effective, so I can learn what you are looking for, your tolerances for payments and funds to spend, and making sure you have a full understanding of the transaction you are about to enter into, how the process works and most importantly that you are comfortable with the figures I am providing for price, loan amount, cash to close and monthly payment.

If you, or someone you know, if considering purchasing a home in the future please contact me to go through your options. If the potential purchase is not schedule for several months I strongly recommend having the initial conversations about how to purchase your new home sooner rather than later so that if there are any areas that need to be worked on to ensure approval you can start right away and not delay your purchase in the future.

Have a question? Ask me!

It has been ten years since real estate sales in California were as low as they were in January. The California Association of Realtors released home sale data for January and total sales were the lowest statewide since April 2008, with volume dropping 3.9% from December and down 12.6% from January 2018. The median price is up from last January by 2.1% statewide, but off 3.4% from the prior month with a value of $538,690. In Southern California both the LA and Orange County markets so drops in sale volume month-to-month and year-to year; LA down 25.5% for the month and 14.2% for the year while the OC saw sales drop 17% monthly and 13.2%. The median price in LA County in January was $588,140, down 3.8% from December’s $566,010 and up 0.3% from last January’s $564,100. Across the border in Orange County the median price was $796,500, up 1.5% from the prior month’s median price of $785,000 and up 2.1% from last year’s $780,000. January is historically a slow closing month for real estate as not a lot of escrows are opened between Thanksgiving and Christmas, that said this January was particularly slow. Anecdotally, our office has seen an upswing in purchase business so far this month from prior months—we will see if that is a regional and/or a statewide trend as well.

Rates for Friday February 22, 2019: With not a lot of economic news this week rates are flat from last Friday. There is a bit of possible long-term softening as the Federal Reserve Open Market Committee (the FOMC, who sets the direction for the Fed on rates and monetary policy) minutes from their last meeting indicated they will be slowing down their sale of assets consisting of Mortgage Backed Securities and U.S. Treasuries, this will put less supply on the  market and less upward pressure on interest rates in the markets.

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

30 year conforming                                            4.125    Flat

30 year high-balance conforming                    4.25%   Flat        

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

This is a joyous and remembrance week in our family as on the 19th our youngest celebrates a birthday and on the 21st we remember my father who passed away on that date in 2014. Many people over the years have told me they may not read all of the WR&MU, but always ready this third section, the personal bit. This always causes me to smile as my dad did not like that I included this segment, “who wants to read that stuff? You have some good information and then put in that your daughter dances ballet.” I told him many times over the years, “Dad, this is the only section some people read and the only section almost everyone reads.”

Thank you for reading this and validating my stance with Dad.

Have a great week,

Dennis

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

Why are there different rates or costs for the same mortgage product?

/in /by

Question of the week:  Why are there different rates or costs for the same mortgage product?

Answer:  This is a question that is asked often, and one I typically answer every year to eighteen months in the Weekly Rate & Market Update.

Essentially why does a 30 year fixed rate mortgage of $400,000 have different costs for the family buying a condo versus a family purchasing a single family home versus a family refinancing and paying off an equity line versus….whatever other mortgage scenario is occurring?

Using the conforming mortgage as an example, defined as a loan that is eventually sold to Fannie Mae or Freddie Mac and that has been underwritten to their guidelines, the simple answer is “tiered pricing.”

If the most basic economic principle is supply and demand to determine prices, the second most basic investment principle is the greater the risk, the greater the return (the first most is fairly obvious, buy low and sell high); if there is little risk then you should not expect a very great return, conversely if there is greater risk then you should expect a greater return. If  you have a $10,000 deposit in a savings account at a federally insured bank that guarantees you will will get your money back if the bank collapses you should expect a very small return; if you invest your $10,000 in a start-up typewriter company you should expect a very high return should the venture become profitable.

Mortgages are investments. Your conventional mortgage is funded by a lender. The lender bundles your mortgage with others totaling tens of millions of dollars in mortgages. This bundle is then sold to Fannie Mae or Freddie Mac. Fannie or Freddie then puts the bundle with other bundles and issues investment vehicles called Mortgage Backed Securities (MBS). Investors across the country and around the world purchase MBS as part of their portfolios and investment strategies receiving regular payments, that are your interest payments, when you loan payoffs off investors receive a portion of the payoff in proportion to the investment.

The greater the risk the greater the return. Some mortgages are riskier than others, so investors in MBS will want a higher return on those mortgages.

What makes one mortgage more of a risk than other if they are being underwritten to the same guidelines? This is where tiered based pricing comes into play for mortgage consumers.

For different aspects of risk Fannie and Freddie charge more for the same rate. For example, a loan applicant for a loan with 5% with a very low credit score may pay up to two points (two percent of the loan amount) more for his mortgage than an applicant for a loan with 5% down who has an extremely high credit score. The lower credit score indicates a history of making credit payments on time, hence a higher risk, hence a higher cost for the loan than someone with outstanding credit.

Credit scores are just one of several risk factors that go into pricing a loan. Risk and risk pricing is determined by the historical defaults for mortgages with similar factors. Over the years, mortgagors with lower credit scores have defaulted on their mortgages more frequently than mortgagors with high credit scores, there for they are a greater risk, therefore their costs for the mortgage will be higher.

Here are the most common factors that result in tiered pricing:

  • Owner Occupancy: If you are living in the property being collateralized you will have lower pricing than someone purchasing for investment, an owner occupant is less likely to let a property go to foreclosure than an investor.
  • Number of Units: Most multi-unit properties purchased as primary residences eventually become investments, and multi-unit properties have a higher incidences of foreclosure as the mortgage payments are usually dependent ontenants making payments. Multi-unit properties have higher costs than single family units.
  • Condominium: Condominium owners are business partners with everyone else in their homeowners’ association, the quality of the complex is dependent on the HOA maintaining the property and a high degree of owner occupants living in the complex. Historically, condos have higher incidence of foreclosure. Because of these factors condos with greater than 75% loan-to-value (LTV) have higher costs than single family detached residences (i.e. a traditional house) or loans on condos with less than 75% LTV.
  • Loan-to-Value (LTV): The tiered pricing on LTV gets interesting. The common wisdom would be that the less equity a homeowner has in their property the greater the risk he will walk away and let a property go to foreclosure. And this is true, therefore with one exception the higher the LTV the higher the cost of the loan. The exception is LTVs between 75.01-80.00%, which have a higher cost than loans less than 20% equity. The reason is because loans with LTVs greater than 80% have mortgage insurance which covers the investors should the property go through foreclosure, properties with LTVs of 80% or less do not. If a borrower with 10% equity and a borrower with 22% equity both go through foreclosure, the loss for the investor is greater for the latter due to the lost interest and costs of foreclosure not being insured, as opposed to the 10% equity borrower who would have had mortgage insurance covering the losses.
  • Credit Score: We covered this above but to add to the cost, there is a matrix that has loan-to-value down one axis and FICO credit scores across the other. The higher the LTV the more the cost as credit scores drop, conversely the lower the LTV the lower the impact of the lower FICO score. In the example above the difference in cost for very low FICO borrower was two points higher than a very high FICO borrower if both were putting 5% down. The same very low FICO borrower putting 40% or more down payment would have loan costs that are two and a quarter points (2.25% of the loan amount) lower than the very low FICO borrower putting just 5% down. Your credit score impacts your mortgage costs depending on the LTV of the mortgage.
  • Cash-Out Refinance: Like credit scores the impact of the cost of pulling cash out of your property is dependent on the LTV of the mortgage. The higher the LTV the higher the cost of the mortgage. It should be noted that purchase and rate and term refinances are treated the same and both have lower costs than cash-out refinances.
  • Term of the Rate Lock: After all the factors have been sifted through the final cost differential is how long will the loan rate be guaranteed, how long is the rate locked. The longer the lock period the more expensive the loan, which makes sense as the lender is guaranteeing the rate if all factors input for the rate lock are shown to be valid for a longer period of time, protecting against higher rates. Most rate lock periods are in 15 day increments and the vast majority of our locks are either 30 or 45 days depending on the transaction type, complexity of the transaction and volume of business in the mortgage industry pipelines.

The costs are not paid in cash by the borrower, for instance if someone with a lower FICO score is purchasing a three unit building to rent with 25% down for a mortgage of $500,000 and the costs added by Fannie Mae are 4.125 points the borrower will not, probably not, come in with $20,625 more to close, but rather the interest rate would increase to off-set those additional costs, today that would be close to 5.5%.

The lowest cost mortgage is going to be a low LTV, high FICO purchase or rate and term refinance of a primary single-family residence; among the highest would be a low FICO, maximum LTV, cash-out non-owner occupied refinance. The first is relatively low risk, the second is relatively high risk.

There are more factors that go deeper into the weeds than I have gone with my examples, but you can see that with so many factors in play rate quotes can be risky proposition unless all the details and factors of the borrower and property are known. This is why when someone asks, “what are interest rates?” my response is, “well that depends….”

My weekly rate chart is based on the purchase of a detached single-family home for a borrower with a 740 FICO score putting 20% down payment into the transaction and locked for 45 days; a fairly normal transaction. If you have any of the factors above that are different then your rate may be different.

Let me know what your mortgage need is and allow me to provide you an accurate rate and cost for your transaction.

Have a question? Ask me!

Rates for Friday February 8, 2019: Very little economic data of interest to rate markets released this week, as a result mortgage rates were fairly flat for the week. Had the Treasury not had three large sales of bonds rates likely would have dropped. Note that high-balance rates have drifted back closer to the conforming rate, which was flat from last Friday. Next week we get data on inflation, expectations are for very low increases in prices, should that not be the case and prices increased more than expected we may see a bounce in rates. Of greater impact on rates could be the negotiations with China on trade policies, if talks turn sour rates may react by climbing. For now the market is quiet and stable.

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

30 year conforming                                            4.125%     Flat

30 year high-balance conforming                   4.375%     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.

Did whomever had 3-3 in your office pool buy lunch for everyone? For those with those numbers in the Super Bowl pool, especially a forward and backward score pool, the final minutes of the fourth quarter resulted in a nice payday. In recent years, we have been fortunate to have very exciting Super Bowls with fantastic finishes; for much of the history of the big game this was not the case and unfortunately Sunday’s NFL finale reverted to history with a dull game. What really aggravated many more than the punting contest on the field was the lack of excitement in the commercials. The only one I liked was the NFL’s ad with the Hall of Famers and All-Pros playing a game through the fancy dining room. What I really liked was the follow up on the commercial, a piece on Sam Gordon, the young lady seen towards the end of the advertisement. Click on the links and check them both out.

Now that football is over we can turn to baseball. Pitchers and catchers report to their teams’ training camps this week, to be followed four to five days later by position players. I am looking forward to my prediction of a few years ago of the Phillies having completed their rebuilding process and competing for their division title and hopefully making the playoffs—it all starts this coming week!

Have a great week,

Dennis

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

1-25-19: What are the different types of mortgages available?

/in /by

Question of the week:  What are the different types of mortgages available?

Answer:  In the years immediately following the real estate and mortgage market meltdowns many mortgage products left the market. In the last few years many of the products that were available for home buyers and owners prior to 2008 have returned presenting more options for financing residential real estate, and enabling those who are unable to qualify for traditional mortgages.

In response to the collapse of the real estate markets the Dodd-Frank Act was put into law. Dodd-Frank has a regulation for mortgage lenders that created “qualified mortgages,” or QM loans. There are several factors that go into a mortgage being eligible for the QM designation, the primary being that borrowers must show income and the ability to make the monthly mortgage payments. Having funds available to pay off the mortgage is not evidence of ability to repay the mortgage, unless using a certain formula income from the asset account(s) generate income that would enable qualification.

If a lender funds non-QM mortgages they must have “skin in the game,” this is had by the mandate that lenders must retain at least 5% of such mortgages. All conventional mortgages are sold in secondary markets, which is what Fannie Mae and Freddie Mac, where they become security for Mortgage Backed Securities (MBS). Most jumbo loans are sold by lenders to investors who create their own investment vehicles backed by the mortgages. Government loans, VA and FHA, are sold by lenders to Ginnie Mae, who like Fannie and Freddie, bundle the mortgages and sell them to investors.

Conventional mortgages and most “jumbo” mortgages meet the QM criteria as they are underwritten to the guidelines established by Fannie Mae and Freddie Mac. Also meeting the QM standards are VA and FHA mortgages using underwriting guidelines established by the VA and HUD respectively. One of the reasoning behind the QM policy is that investors in mortgage backed securities of conventional or government mortgages investors know the quality of the investment. The primary reason for the mortgage market collapse was the tremendous percentage of mortgages in the Fannie and Freddie MBS pools were funded without income verification, nor asset verification and for many no appraisal of the property used as collateral. With the QM rule investors have reasonable certainty that all the borrowers of the mortgages in their MBS investments have shown ability to repay their mortgages.

Here is a quick comparison of the mortgage options available in today’s markets:

Conventional mortgages can have relatively high loan to values, depending on loan amount and ability to qualify as high as 97% of the property value with several options for mortgage insurance.

FHA mortgages have a minimum down payment of 3.5% and have mandatory mortgage insurance regardless of the loan-to-value. The underwriting guidelines for FHA mortgages are a bit more lenient for qualifying than conventional mortgages.

VA mortgages are for eligible veterans, either active duty or discharged from the service (unless discharge was dishonorable). Veterans who qualify can purchase their home with no money down and the loan limit for purchases can far exceed the limits for conventional or FHA mortgages. The mortgages have a “funding fee” added to the loan amount, which is VA’s version of mortgage insurance.

Non-conforming, or jumbo, mortgages mirror conventional mortgages in many respects, however most will not fund mortgages above 90% of the value of the property and have tighter underwriting guidelines for qualifying.

Non-QM, or Alternative, mortgages have many variations to provide mortgages for borrowers with poor credit scores, borrowers with high debt-to-income ratios, self-employed borrowers with low income on their tax returns are some of the most common applicants for Alternative mortgages. Lenders in this section of the market have products that use deposits into business or personal accounts to calculate income, statements from accountants to accompany tax returns to explain losses or other criteria. Because of the more relaxed underwriting standards, and the retention rules for non-QM products, rates on these mortgages are higher than those on QM mortgages.

It is estimated that $5-6 billion of non-QM mortgages were funded in 2018 for residential borrowers and predicted that the total volume will increase considerably in 2019.

Too often we meet with clients who are able to purchase, or refinance, their home using alternative mortgage products but the bank or mortgage professional they were working with did not have such products available, encouraging them to obtain a co-signer, obtain more funds or otherwise try to fit into the products they have available. Because we work with many lenders, in the QM and non-QM spaces, we often have the ability to help them with their purchase or refinance.

If you, or someone you know, is in need of a mortgage to purchase or refinance their home please contact me to go through all their mortgage options to help them find the best financing for their ability to qualify.

Have a question? Ask me!

Home sales are cooling off. The California Association of Realtors have released sales data for December and every major market in the state except San Francisco had a drop in sales from December 2017. Locally, Los Angeles County saw a drop in sales from November of 3% and from last December of 16.3%; the median sales price in December was $588,140 in the county up 6.2% from the prior month and 1.8% for the year. In Orange County sales tumbled 15.5% for the month and 18.3% for the year with the median price in December of $785,000, off 1.3% from November and 0.1% from the prior year. Nationwide real estate sales are at a three year low. Historically December is a slower month for home sales so a dip from November is not surprising. Are these numbers a “dip” or are they foreshadowing a decline in the market that will last for….how long? Next week I will compare the current real estate market to that leading up to the 2007-8 start to the collapse that led to the Great Recession.

Rates for Friday January 25, 2019: Rates are steady from last Friday, though some movement up and down during the short week. So far, the federal government shutdown has not impacted the economy. Unlike if 800,000 workers in the private sector were laid off, the furloughed federal employees will go back to work and cash flow shortages for federal workers and vendors will be back filled; because of this any negative impact on the overall economy is short termed. It appears that there is some movement in Washington to settle differences and re-open the government and I am optimistic the normal dysfunction in our nation’s capital will return.

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

30 year high-balance conforming                    4.375%     Flat     

30 year conforming                                            4.25%       Flat

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

Those who know me will not be surprised by this statement: I love pie. And cookies, but pie holds a bit of a higher place because it is usually not as readily available as a cache of thin mints in the freezer. Thankfully my oldest also loves pie and over the years she and I have made many runs to the best pie purveyor in Long Beach, Jongewaard’s Bake-N-Broil. For the past several years we have gone to Bake-N-Broil on January 23rd to celebrate National Pie Day.

With her attending university in Boston I knew I would be spending National Pie Day alone. Thankfully for this first year I was likely to be without my pie-buddy on 1/23 Winter Storm Harper hit the Northeast. Why thankful? Late Friday night JetBlue sent her an email that her flight to Boston on Sunday morning was cancelled. By the time we go through to get her a seat back to school the only available flight was a red-eye leaving Tuesday, January 22nd. So though it was a day early we were able to celebrate National Pie Day together—she had lemon lush and I had French apple. Thank you Harper for letting me continue a tradition. (She plays in the pep band for BU and let me know that at the basketball game on Pie Day they had free pie available—she got a slice of Boston Cream Pie. I’m so proud.)

Have a great week,

Dennis

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

1-18-19: Will the federal government shutdown impact the timing of my loan approval?

/in /by

Question of the week:  Will the federal government shutdown impact the timing of my loan approval?

Answer:  No, well very, extremely likely no.

Unless you are in a rural area and obtaining a USDA or perhaps waiting for FHA to approve a condominium complex in which you are purchasing or refinancing one of the units.

At the start of the shutdown there was some delay for borrowers with properties in areas that required flood insurance, which is available only through the National Flood Insurance Program, however Congress passed legislation and the President signed into law a bill authorizing the program to May 2019 so the policies could be written.

For the vast majority of mortgages for residential mortgages there is minimal interaction with the federal government during the loan process.

One requirement for many mortgages is verification of your income by a review of your tax transcripts as filed with the IRS (to see why we need this form here is the WR&MU from April 2018 on the subject. For this process, we use IRS Form 4506-T, during a government shutdown the requests for a copy of your returns are not processed. Having experienced such delays in the past, in recent years lenders have eased the burden by allowing some work arounds to the Form 4506-T requirement, typically a copy of the cancelled check or other proof you paid taxes owed on the tax returns provided, or a copy of a bank statement showing the deposit of your refund that matches the refund on your tax returns provided.

Government insured loans, such as VA or FHA, are not impacted by the shutdown as the processing and underwriting is performed by private companies and not government agencies. While Fannie Mae and Freddie Mac are quasi-government agencies they are operated as private companies and are unaffected by the shutdown.

The primary area of impact during government shutdowns, once flood insurance is authorized, are inquiries for loan issues in which a response is required from either VA or FHA. It is very rare that a situation arises in which a lender will require a response from either of the agencies in order to approve a loan, but they do arise from time to time and any such cases arising during the shutdown will likely face delays until someone is available to reply.

In a broader view, the impact of the shutdown on mortgages is the impact it may have on the economy and subsequent impact on interest rates. Fundamentally, if there is an impact on rates it would be for rates to decline. A very prolonged shutdown could result in negative economic impact and regular readers of the WR&MU know that poor economic performance usually leads to lower interest rates.

If you are concerned that the government shutdown will impact your current loan in process, or a home mortgage you are contemplate, do not be concerned.

Have a question? Ask me!

With the government shutdown some key economic data that could impact mortgage rates is not being release. This week we would have had retail sales data for December, a key piece of information for gauging economic activity since consumer spending comprises 65-70% of the nation’s economy. With no data on how the Christmas shopping season went for retailers investors are left to speculate whether the 4th quarter GDP data will show 2018 ended strong and total growth over 3% or slowed down with growth being under 3%. The lack of information had no impact on rates as investors looked to other bits of news to guide their decisions.

Rates for Friday January 18, 2019: Stocks and bonds are in their traditional relationship, if stocks go up so do rates, if stocks go down so do rates. Stocks climbed this week, much of the increase on speculation that the trade dispute with China is cooling down and on rumors the United States may lower some tariffs. Investors fled their prior “flight to safety” of bonds and invested their sales proceeds in stocks. After thirteen weeks of rates being flat or down from the previous Friday we see mortgage rates tick up this week—the first Friday to Friday increase in rates since October 19th.

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

30 year conforming                                            4.25%      Up 0.125%

30 year high-balance conforming                    4.375%     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.

After four weeks it is time for our daughter to return to Boston to finish her freshman year. Always a bit of a weather nut, looking at the national weather maps in the paper every day, something I got from my dad, I am much more so concerning weather in the Northeast these past five months. My weather-nerdness has us on somewhat of a concerned profile as a very big winter storm is on track to hit the Boston area late Saturday and into Sunday—include her 2:30 landing time at Logan Airport. Part of going to school back east, or anywhere that winter weather is not 50 degrees and some rain, is dealing with weather delays at the airport.

Not all lessons are learned in the classroom. Our plan tomorrow is to spend a bit of time at the bookstore to get some “old fashioned” books in case her Kindle runs out of juice.

Have a great week,

Dennis

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

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

/in /by

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

 

 Answer:  Yes, but…

 

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

 

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

 

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

 

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

 

My response is always, “No.”

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Have a question? Ask me!

 

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

 

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

 

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

 

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

 

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

30 year conforming                                                4.50%       Flat

30 year high-balance conforming                       4.625%     Down 0.125%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

Have a great week,

Dennis

 

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

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

/in , /by

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Have a question? Ask me!

 

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

 

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

 

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

 

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

30 year conforming                                            4.50%      Down 0.125%

30 year high-balance conforming                   4.75%     Down 0.125%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

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

 

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

 

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

 

Have a great week,

 

Dennis

 

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

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

/in /by

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Disclaimer on this very long-winded update:

 

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

 

Have a question? Ask me!

 

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

 

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

30 year conforming                                               4.625%       Down 0.125%

30 year high-balance conforming                       4.875%      Down 0.125%

 

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

 

 

 

 

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

 

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

 

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

 

Have a great week,

 

Dennis

 

Economic Jokes:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Yes.”

 

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

 

“Yes.”

 

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

 

“Yes.”

 

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

 

The economist got the job.

 

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

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

/in /by

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Have a question? Ask me!

 

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

 

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

30 year conforming                                               4.75%       Flat

30 year high-balance conforming                       5.00%      Flat

 

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

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

 

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

 

Have a great week,

 

Dennis

 

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

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

/in /by

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Have a question? Ask me!

 

 

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

 

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

 

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

 

 

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

30 year conforming                                            4.75%       Flat

30 year high-balance conforming                    5.00%      Flat

 

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

 

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

With gratitude,

 

Dennis

 

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