Weekly Rate & Update 10-27-17: Should I use a “piggy-back” to buy my new home?

 

Question of the week:  Should I use a “piggy-back” to buy my new home?

 

Answer:  We start our answer to the question with a question many of you may be asking, “what is a ‘piggy-back’?”

 

Last week we discussed mortgage insurance and how conventional mortgages require mortgage insurance for loans that are over 80% loan-to-value. If you are buying a home for $600,000 (the median price for a home in LA County) and getting a mortgage for more than $480,000 then you need mortgage insurance.

 

Using a piggy-back enables you to put less than 20% down and avoid mortgage insurance, because the piggy-back is a second loan that bridges the amount between your down payment and your mortgage of 80% of the purchase price.

 

For example, you want to purchase a home for $600,000 but you only have $60,000 down. Traditionally you would get a mortgage for $540,000 and pay mortgage insurance. Using a piggy-back you would put down $60,000 and get a 2nd loan for $60,000 and have your primary loan be $480,000, which is 80% of the purchase price and therefore you do not need mortgage insurance.

 

Not all, but almost all, piggy-back mortgages are Home Equity Lines of Credit (HELOC). What is a HELOC? It is very similar to a credit card, you have a maximum credit limit and you only make payments on the balance you have outstanding. The interest rate on a HELOC is an adjustable tied to the prime rate goes up and down so will the rate on your HELOC.

 

Another feature of many HELOCs is that the minimum payment is interest only, which makes them very enticing as the interest payment can be very low, however you are not paying down any of the outstanding principal which becomes an issue in later years when you have a very large balance that has to be paid off.

 

Since the HELOC is used to purchase the home the interest paid on the loan is tax deductible under the current tax code. This is a positive for many families, especially those who are unable to deduct mortgage insurance premiums.

 

As you can see there are some positive aspects to using a HELOC to purchase your new home, but back to our question of the week: should you use a HELOC to buy your home?

 

Let’s compare getting a HELOC with using mortgage insurance to purchase the median priced home in LA County of $600,000 with 10% down and you have a credit score of 740.

 

Let’s start with purchasing with a HELOC. You will have a primary mortgage of $480,000 (80% of purchase price) and a HELOC of $60,000.  The rate on the primary mortgage this morning is 4.00%, the average rate on a HELOC up to 90% total loan to value (combined 80% primary plus 10% HELOC) is Prime Rate plus 2%, today prime is 4.25% so the rate would be 6.25%.

 

Payment on the primary mortgage is $2292 per month.

The minimum payment on the HELOC is interest only which would be $313 per month*.

 

The minimum payment you must make is $2605 per month, until the prime rate increases and then your payment will increase as well.

 

Last year the prime rate was 3.5%, your rate would have been 5.5% for a minimum payment of $275 per month, if the rate increases another three-quarters of a percent in the next year your rate will increase to 8.00% for a payment of $400 per month.

 

*Most HELOCs are for twenty years, if you want to amortize the payment and include principal the payment at 6.25% would be $439 until the rate changes.

 

If you purchase using mortgage insurance your primary mortgage will be $540,000 at a rate of 3.875%** and your mortgage insurance premium will be 0.41% of the loan amount.

 

Primary mortgage payment is $2539 per month.

Your mortgage insurance premium is $185 per month.

 

Your total payment is $2724 per month as long as you have mortgage insurance, $119 more per month than if you used a HELOC to purchase the home and paid the minimum payment. If you pay additional payments on the HELOC to pay down the principal then you payment purchasing with a HELOC would be higher. As well when the prime rate increases in the future your “savings” with the HELOC will decline.

 

** It seems counter-intuitive that putting 20% down has a higher rate than putting 10%, however rates are lower for mortgages with mortgage insurance than those without as the lenders are insured for losses should you default. If you default on a mortgage that is 80% of the value of the property the lender will lose 10-20% of the loan amount. If you have mortgage insurance on a 90% loan the lender is covered on losses up to 25% of the value of the mortgage. Even though the risk of loss may be higher with 10% down, the amount of loss to the lender should you go to foreclosure is less than if you had mortgage insurance.

 

Note the statement above, “as long as you have mortgage insurance…” Those who read last week’s WR&MU will recall that after you make 24 consecutive payments on time and can show you have 20% equity in the property then you can have your mortgage insurance premium released. So between your mortgage principal declining through your payments and the market increasing you let’s assume you will have that 20% in four years (had you purchased the median priced home in LA County in 2015 you would be able to remove your MI this year) after purchasing your property. At that time you go through the process and have your MI payment removed, saving $185 per month, or $2220 per year.

 

The only way to remove your HELOC payment is to pay it off, and unless you have the ability to make very large payments over the years it will likely take you quite some time to pay off the loan.

 

Depending on your financial situation, and ability to pay down/off the HELOC rather quickly through sale of another property, large bonuses, etc, for most families the long term best option is to purchase their home using mortgage insurance that will have fixed payments, and the ability to remove the MI premium payments in the future, as opposed to a large equity line tied to a rate, the prime rate, that will be going up over the next few years.

 

Please call me to discuss your situation and determine the best way for you to purchase your new home. And if you have a HELOC, or mortgage insurance, from a  previous transaction call me to see what your options are to possibly lower your monthly payments, or keep them the same and fix your total monthly payment.

 

Have a question? Ask me!

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

Economic data released this week for September shows strength building. Durable goods orders in September showed a nice gain, even trying to account for Hurricane Harvey. Showing even more strength was the initial Gross Domestic Product numbers for the 3rd Quarter, increasing 3.0%, a strong following from the 2nd Quarter’s 3.1% growth. Inside the numbers we saw strong growth in consumer spending and durable goods purchases-led by vehicle replacement post hurricane. The soft spot was residential real estate, which has been supporting economic growth for the past several years. Inflation was at 2.2% annualized with is within the Fed’s target range. Overall the report is fairly rate unfriendly and puts upward pressure on rates for the long term.

 

Rates for Friday October 27, 2017: We see the conforming and high-balance conforming rates un-linked this week. For the first time in almost a year the separation between the two rates is greater than one-eighth of one percent (0.125%) as the high-balance rate increased an eighth of a percent this week and the conforming rate remains flat. The last time we saw the one-quarter percent gap between the two mortgages was the week ending November 11, 2016 when we saw rates increase three-quarters of a percent in six weeks following the election. There is upward pressure on rates, the advice is to lock when you can.

 

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

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                   4.00%          Up 0.125%

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

 

 

Well baseball fans are getting a treat, at least two treats so far with the first two games of the World Series, I am hoping we get five more similarly exciting games.

 

I will go out on a limb and presume that many (most? all?) of your households are like ours and the Halloween candy purchased in preparation for Tuesday evening has been thoroughly tested and perhaps the testing has gone so well as to require another purchase of candy for the witches, princesses, firefighter and bumble-bees on Tuesday night. Halloween candy, the official start to the end of the year belt-tolerance limit as we flow from the candy to Thanksgiving to Christmas and the non-stop treats, pies, cakes, etc for the next sixty plus days.

 

Stay strong, say no to yourself and Think Blue,

 

Dennis

 

 

 

 

Weekly Rate & Market Update 11-3-17: Should we be worried about the new tax plan that will cut the mortgage deduction?

 Question of the week:  Should we be worried about the new tax plan that will cut the mortgage deduction?

 

Answer:  With the biggest tax reform plan working its way through the House of Representatives and the Senate it is no surprise that various aspects of what have been released and talked about so far have been a hot conversation topic. Last week at meeting with a group of professionals from family law attorneys to CPAs to business owners we discussed various parts of what had been floated through the media for almost an hour. The only consensus was that we were debating what we don’t know since until both houses in Congress agree on a bill, pass it and present it to the President everything is negotiable.

 

That said….the two features of the plan presented to the House of Representatives that impacts the housing markets are deductions for mortgage interest and property taxes; under the plan released this week both would be reduced from the current tax code allowable deductions.

 

Currently if you own a home with a mortgage you have the opportunity to deduct the interest paid on the mortgage and property taxes. “Opportunity” basically means there are limitations on the deductions. First, in order to claim deductions for property taxes and mortgage interest on your primary (and possible second/vacation home) residence you must itemize your deductions and they must exceed the standard deduction given to tax filers (for married couples $12,700 in 2017). If you meet these criteria then you can deduct all property taxes paid to the local tax authority. Second, a married couple can deduct interest paid on a mortgage used to acquire, build or substantially improve the property up to one million dollars of mortgage liens. For example if you own a home with a $1.3 million mortgage at 4% interest you can deduct $40,000 in interest paid, not the full $52,000 you actually paid in interest.

 

The current plan that will be debated in the House and put through many separate committees before a final bill is presented for a vote increases the standard deduction to $24,000 for married couples and limits the mortgage interest deduction to interest paid on mortgages up to $500,000 and the property tax deduction to a total of $10,000.

 

What does this mean in plain English and simple math?

 

Before we do some math, let’s answer the question: What is a tax deduction? Many people confuse a tax deduction with a tax credit, the difference is that deduction is an amount that reduces your taxable income and a credit is an amount that reduces your tax obligation.

 

Note I am not a tax professional, all examples are very fundamental calculations and used for comparative purposes only.

 

For example if you and your spouse make $80,000 and file your taxes with the standard deduction of $12,700 for 2017. Before the deduction your tax bracket is the 25% tier based on your $80,000 taxable income. After the tax bracket your taxable income drops to $67,300, and your top out at the 15% tax bracket. The deduction saves you approximately $2300 in federal income tax from about $11,500 without any deduction to approximately $9200 after the standard deduction is applied.

 

The deduction lowers your income, which can change your upper tax bracket and lowers your tax liability.

 

A tax credit is applied to your income tax liability directly after your taxes are calculated. Using the same couple above, during the year they installed energy efficient rated windows for a total of $4000. The federal tax code allows a credit of 10% of qualified windows installed on a primary residence, up to a maximum of $200. This lowers the tax obligation from about $9200 to $9000—the credit results in a direct reduction of taxes owed.

 

Back to the tax proposal.

 

Currently if you have a mortgage used to purchase your home with a balance of $600,000 and a rate of 4% you will pay approximately $24,000 in mortgage interest. Since this exceed the standard deduction for a married couple, is a mortgage on your primary residence and the mortgage is under $1 million you can deduct the $24,000 from your income when you file your taxes.

 

To qualify for the $600,000 you may make around $140,000 as a couple. Taking the interest deduction you taxable income drops from $140,000 to $116,000. You are still in the 25% tax bracket, absent any other deductions, so you save 25% of $24,000 in taxes, or $6,000.

 

Under the new proposal you will only be able to deduct the interest on the first $500,000 of the mortgage, $20,000, so you lose $4000 in deductions from your income. In this scenario your tax obligation will drop $5000 instead of $6000 so the tax proposal as written costs you $1000 more in taxes for the year.

 

Similar calculations can be made for property taxes if your annual tax bill exceeds the proposed $10,000 limit.

 

A couple of points regarding this discussion. First, tax reform is constant in our nation’s history. Every President and Congress from 1789 has passed changes to the tax code, some small and some quite major. Any changes in the tax code made by the current 115th Congress and signed into law by President Trump will be subject to future changes as a result of elections changing members of Congress and residents of the White House.

 

Second, at this stage in the process everything is negotiable. What is in the tax plan today may not be in the tax plan tomorrow. What items in the plan are in there for purposes of negotiation? If some members of Congress want the mortgage interest and property tax deductions levels to increase what are they willing to give up to get their way? Increase the proposed corporate tax rate? Change the elimination of the estate tax to a higher level of tax exemption?

 

Third, in California we look at taxes in a whole different light than most of the country for a couple of reasons. Our property values are significantly higher than most of the country so our mortgages are higher and our property taxes are higher in dollars paid (several states have higher percentage of property taxes) so limiting those deduction will impact Californians more than those who own homes in Oklahoma, Utah or Kentucky. So, while collectively we may be against the reduction in the deduction limits for interest and property taxes in California, through much of the country the limitations have little to no impact and is more than offset by the increase in the standard deduction. We are represented by 53 Representatives (12% of the total) and two Senators (2% of the total), and while it is the largest state contingent in Congress it still represents just 12% of the population and many Representatives and Senators representing the 88% of the population see more advantages to their constituents than detriments.

 

Taxes are the ultimate political tool and tax reform is only political. As the plan works through Congress I am going to assume that the mortgage interest and property taxes proposals will be amended—maybe trade a higher mortgage deduction for eliminating the property tax deduction, or raise both limits and trade for something else, or…..the Republican majority cannot keep the party members together and the plan collapses completely and we see no changes to the tax code.

 

At this point it is all speculation, I hope I have been able to present a fairly clear and understandable example of the potential impact of the proposed changes to the tax plan that could impact California homeowners that you can use to sort out future proposals and potential personal impact.

 

Have a question? Ask me!

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

The first week of the month means labor data. October saw Americans earning more and spending more—both good news for the economy—but prices are stagnant—which is not great news. Workers saw income increase 0.4% for the month and led by a surge in durable good spending due to hurricanes increased spending by 1% from September. Prices were flat going up only 0.1% for the month and 1.3% from last October, well below the Fed’s inflation rate. The news is mixed for mortgage rates as the stronger earnings and spending would tend to push rates up but the low prices keep rates down.

 

More workers, a lot more, is the news from the Labor Department’s October report. Total payrolls increased by 261,000 workers, 252,000 in the private sector. This is a very large increase, however much of it is the result of those displaced by hurricanes going back to work. For example, restaurants lost 98,000 workers in September and gained 89,000 in October. There was a dark cloud in the report and that is wages not increasing for the month. Overall the report is mortgage rate neutral.

 

Big news for the Federal Reserve yesterday when Trump nominated Jerome Powell to replace Fed chief Janet Yellen when her term expires in February. Powell is considered a moderate and unlikely to change any current policies of the Federal Reserve is confirmed for the post by the Senate.

 

Rates for Friday November 3, 2017: Rates are flat for conforming and dip back down on high balance loans after ticking up last week. All eyes, ears and noses are focused on Congress and the debates, negotiations and horse-trading over the tax bill. Depending on what moves through the process investors may react by fleeing to safety, rates drop, or loading up on equities in private companies, rates increase. Stay tuned, there should be plenty for office water cooler and weekend barbecue discussions.

 

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

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                   3.875%        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.

 

What was more depressing for you, the outcome of the Game 7 or the amount of candy left over in your bowl for Trick-or-Treaters on Tuesday night? My disappointment was less in the outcome of the game on Tuesday than the lack of a great game that kept us on the edge of our seats all night. Congratulations to the Astros. Two things for baseball fans, right now every team is tied for first place, including my Phillies, and its only 102 until pitchers and catchers begin to report for Spring Training!

 

Have a great week,

 

Dennis

 

 

 

Weekly Rate & Market Update 11-10-17: Do you know someone who can help me with…?

Question of the week:  Do you know someone who can help me with…?

Answer:  This is a question I am asked not infrequently from people looking for some type of professional advice or representation, and the answer is, Yes. Yes, I do know someone who can help you with…

One of the benefits of being in this industry for thirty years is the number of different types of transactions I have been involved in.  As well I am, and have been, active in several organizations that gives me the opportunity to meet and work with professionals in several different disciplines, and within those specific specialties.

Have you created your trust yet to protect your assets and family? I know several attorneys who specialize in this type of work.

Do you have an issue with real estate you own that requires some legal advice? I know specialists in real estate law.

Own your own company and becoming less satisfied with your accounting and tax preparation? I know CPAs who specialize in small, medium or large businesses who can help you get back on track.

You are the executor of an estate and need valuations for settlement and taxes? From real estate appraisers to professional evaluation experts I can provide you with someone to speak to.

Having HR problems at your work, either as employer or employee? I know several people with different focuses on human relations and employment that may be able to assist you.

You were involved in an accident, or someone broke a bone climbing your fence, or you have had some other incident occur in which you need legal representation? Whether as defendant or plaintiff you may find one of the attorneys I know that specialize in civil or criminal law able to help you with your incident.

You have received that very unwelcome communication from the IRS or State Franchise Tax board notifying you of an audit and your accountant is not an audit specialist? I can provide you with recommendations for someone who is and can represent you to the tax agency.

Unfortunately, all relationships do not work out, if this is the case and you need to speak to someone about a divorce or legal separation, and possibly represent you, I know several attorneys in this area as well.

And of course, through the years I have come to know, trust and respect several real estate professionals who can represent you if you are thinking about buying or selling real estate.

You know a guy, me, who knows several guys and gals from a wide range of professions and specialties. If I do not have personal knowledge of someone and their capabilities I definitely know someone who does and can provide a very good recommendation.

From financial to legal advice and assistance if you are in need of a quality professional please do not hesitate to contact me and ask for a referral to someone who may be able to assist you. After all, you know a guy so use him!

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Rates for Friday November 10, 2017: Regular readers of the WR&MU will note a lack of economic news impacting mortgage rates this week, the dearth of data this week will be more than made up for next week as we have important data released on inflation and spending. With the lack of major news this week rates are flat, with the conforming rate having no change for four weeks. Next week’s data however could put upward pressure on rates so if you are in a position to lock I suggest you lock.

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

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                    3.875%        Flat

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

 

Gratitude and respect for the Veterans out there who have served, or are serving, our nation. While we recognize our Veterans in N

ovember every year, it is important that those in need get assistance throughout the year. One organization that has done exceptional work helping those Veterans in need is the Paralyzed Veterans of American. PVA has been in existence for over seventy years and has a wide range of services they provide to not only help those currently in need but to fund research and advocate for future needs of our Veterans.

If you are able and willing you can click here to make a donation to the Paralyzed Veterans of America, there is also an option to make your gift in someone’s honor, a nice way to let a Veteran you know and respect that you are thinking of them and their service.

Have a great week,

Dennis

Weekly Rate & Market Update 7-14-17

Question of the week:  Do you write your update every Friday?

Answer: Yes. Well almost every Friday, I have been known to not compile a Weekly Rate &Market Update Thanksgiving week or if Christmas and New Year’s fall on a Friday or if on vacation and it is not possible to compile and distribute, otherwise it goes out every Friday.

This Friday it is coming to you from our quaint cabin-room at an old fashioned motor court in Three Rivers, California just a few miles from Sequoia National Park. Leslie and I are on the middle leg of a trip to Yosemite, Sequoia and San Luis Obispo. With the preamble written the night before and the economic and rate update plugged in this morning I am able to quickly get you the vital information you need, absolutely need and wait for every week, before we go wandering in the wilderness.

One reason I write every Friday is that several years ago I missed an update due to major computer issues and several people contacted me to see if I am okay—so here is the update and I am okay!

Thank you for reading and next week we will have a more traditional question of the week involving mortgages and real estate.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

The data on prices and consumer spending this week were bleak. The Producer Price Index was up only 0.1% in June and up 2.0% from last June. Stripping out volatile food and energy to arrive at the “core” price index the monthly growth was the same and year over year wholesale prices managed only 1.9% gain. Following the almost flat growth in PPI, the Consumer Price Index was flat in June and as reported by the Wall Street Journal one of the “very weakest 4-month stretch in 60 years of records.” Year over year consumer prices rose only 1.6%, well below the Fed’s targeted inflation rate, with core prices up only 0.1% for the month and 1.7% for the year. Housing which has driven much of CPI the past year and more was up only 0.1% for the month, offset by dropping prices in apparel and vehicle prices.

Despite soft prices consumers have not taken advantage by increasing their purchases. Retail sales in June were down 0.2% following May’s drop in sales (revised from down 0.3% to down0.1%). The decline in consumer’s buying will have a negative impact on second quarter GDP, which is due to be released the last Friday of the month.

The third and final major data that influences the Gross Domestic Product for the nation was consumer sentiment. The sentiment for current conditions remains high, however the component of future economic expectations has fallen to its lowest since before the election in November.

Individually and combined the data points to economic slowdown in the second quarter. How much of a slowdown we shall see at the end of the month. Investors see the inflation numbers, consumer purchasing habits and sentiment and will anticipate smaller growth than the 1.4% in the 1st Quarter growth, and a negative number is not out of the question. This news, while negative for the economy is positive for lower interest rates.

Rates for Friday July 14, 2017: Rates were edging up this week as investors anticipated stronger numbers on prices and consumer purchasing. The data coming in below expectations has caused a run on mortgages this morning putting downward pressure on rates, enough to reverse the increase we saw last Friday. With lower GDP expectations in the market we can expect a soft rate environment ahead.

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

30 year conforming                                            3.75%             Down 0.125%

30 year high-balance conforming                        3.875%           Down 0.125%

30 year FHA                                                      3.25%             Down 0.125%

30 year FHA high-balance                                  3.75%             Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

We are off to walk through the giant Sequoias!

Have a great week,

Dennis

 

 

 

Weekly Rate & Market Update 7-7-17

Question of the week:  I have an owner-occupied loan, can I rent my house out later or do I have to get a new loan for investors when/if I want to do that?

Answer: Now that we are about seven to eight years away from the bottom of the real estate market his is a question that has become more frequent, especially from those living in the first home they purchased and from first time refinancers. With a low mortgage balance on their home, money saved for a down payment on a new home and ability to qualify, many families are wondering if they can retain their current primary residence and convert it to a rental property and purchase a new home for their residence. The question is whether in doing so they are violating their original loan contract, the note, in which they agreed to occupy the home as their primary residence.

When you sign loan documents for your primary residence there is a certification of occupancy form whereby you affirm that the property will be your primary residence.  It includes rather strong language regarding loan fraud, loan may be called due and payable, etc, if you affirm your intention to occupy and do not occupy the property.  The key wording is your pledge that it is your intent to occupy.

If you have lived in your home for several years then you have fulfilled the intent to occupy the home and yes, you can move out of your home at a later time and use it as a rental/income property and you do not need to refinance from your current mortgage into a new non-owner occupied loan.

If you are refinancing your current residence and fully intend to purchase a new home in the near future then it is strongly advised that your refinance be with a non-owner occupied loan.  We have had applicants who wish to refinance their current property and make application for an owner occupied loan.  While the refinance is going they present us with an offer to purchase a new property that will be their primary residence.  We cannot have two owner occupied loans going simultaneously, or one on top of the other, with the same client—obviously one is an investment property and must be declared as such.  The only exception to this would be if it is evident and a case can be made the new home will be a second or vacation home (in vacation destination location such as desert or mountains or geographically distant).

We have had scenarios where a client is declaring their current residence will become a rental and are purchasing a new home that will be their primary residence and underwriters have denied the occupancy of the new property and required non-owner occupied financing be used.  Typically this scenario arises if the new home is considerably smaller than the current home, the new home is geographically distant from the current home and the clients’ employment or if new home is extremely similar to current home and in same neighborhood or area.  Often we can overturn this if we can make a very good case for the occupancy.

Must you live in your home for the duration of your owner-occupied mortgage? No.  Must you intend and fulfill the intent to live in your home with an owner-occupied mortgage?  Yes.

For how long?  There is no exact answer to that question other than, lenders, Fannie Mae and Freddie Mac have become more diligent in post-closing audits and investigation of loan files to ensure accuracy of all documentation and guidelines are followed.  This includes occupancy.  If you have moved out of your primary residence with a recently funded owner-occupied mortgage you must be able to show you fulfilled the occupancy intent to the strictest aspect of the definition to prove yourself innocent—generally speaking staying for a few months after closing would be a hard case to present for intent to occupy being satisfied.

If you are considering converting your current property to a rental and purchase a new primary residence please give me a call to discuss not only your purchasing and financing options for your new home but the logistics and scenarios of maximizing the financial opportunities that present themselves.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

We found out what members of the Fed whispered about last month when the minutes from the Federal Reserve Open Market Committee (FOMC) meeting were released. The FOMC are the members of the Federal Reserve Board of Governors who set the Fed’s interest rates and policy. The minutes of the FOMC meetings are important as they give some insight as to what may happen next, enabling investors to plan ahead and not be caught by surprise if the Fed makes a move with interest rates or their buying or selling of assets. The minutes from June indicate that the FOMC members are not overly concerned with the lack of inflation in the economy, feeling that a strengthening labor market will lead to increased consumer spending and demand. And the split on the discussion as to when to start selling off the $4.5 trillion in United States Treasury bonds and mortgages from Fannie Mae and Freddie Mac that were purchased starting at the end of 2008 to stabilize the economy and push interest rates down. The purchasing continued well until late 2014 under a policy called “quantitative easing.” Now the Fed is going to undergo a sale of these assets, not all at once as that could crash our economy, but slowly over the next several years. The questions are when and how much should the reverse easing occur and the minutes from the FOMC show more members are wanting to start sooner than later.

What happens? When the Fed begins to sell the bonds and mortgages the impact should be for long term rates to increase—just as they decreased when the Fed bought the assets rates should go the opposite way when they sell them. How much rates are impacted will depend on the overall state of the economy when the assets are sold and how much are sold at various periods. Put too many assets on the market at once and prices tank causing rates to jump creating unstable environment for labor markets and inflation, put too few on the market and they may not be purchased among other competing investments and the Fed does not fulfill its desire to rid itself of the bonds and mortgages. As the year progresses this future sale by the Fed is an underlying issue for investors and the economy. Overall the news and whispers of the unwinding by the Fed is negative for interest rates.

Today is Labor Department Day as it on the First Friday of every month when data for the prior month’s employment markets are released. Very mixed news in the June jobs report as on the one hand it was positive with 222,000 new jobs were created, and prior month’s data on new hires were revised upward by 47,000 to reverse what had been slow hire months to strong hire months. Also positive was the incremental increase in the labor participation rate after a dip in the prior two months. Somewhat positive is an slight increase in the unemployment rate to 4.4% as more people left the sidelines to look for work due to the increase in hiring by employers. On the negative side is that wages and salaries are not showing any significant growth despite the increase in hiring. Essentially employers are able to fill positions without increasing wages to attract workers. Wages increased only 0.2% in June and are up 2.5% from a year ago, barely ahead of inflation. In a strong economy if wages are stagnant then hours worked will increase to show employers paying for more hours to increase productivity from current workers before hiring new workers. That is not the case as the average hours worked has remained steady at around 34.5 hours per week for several months. Over all I see the report as positive for rates as it does not suggest a real strong labor market, more people are working but there is not a significant strength in earnings which would translate into spending.

Rates for Friday July 7, 2017: Well the rates have broken their flatness, but to the upside. Following the FOMC minutes release investors sold off bonds causing rates to bump up, after six Fridays in a row of flat rates we are up 0.125% this Friday from last. I feel the sell off was somewhat technical and then not wanting to be caught and investors should come back to market pressuring rates back down sometime in the next week to two weeks. “Should” being the critical word in the sentence.

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

30 year conforming                                            3.875%           Up 0.125%

30 year high-balance conforming                        4.0%               Up 0.125%

30 year FHA                                                      3.375%           Up 0.125%

30 year FHA high-balance                                  3.875%           Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

I hope everyone had a fun celebratory day on Tuesday, we were pretty low key most of the day and went to friend’s home in the evening as they have very good view of fireworks from local country club—I have always loved fireworks, probably because my mom went to the hospital not long after a fireworks display at the club in Tulsa to deliver her third child and second son the next day, Wednesday marked my fifty-fifth trip around the big fireball and I am looking forward to the fifty-sixth trip!

Have a great week,

Dennis

This evening we will be having our Annual Flag Collection and Retirement Ceremony in Bixby Knolls as part of the monthly First Friday event. If you have a flag that needs retiring please bring it and we will collect and give to the Boy Scouts for proper disposal. We will be at Georgie’s Place, 3850 Atlantic Avenue, Long Beach at 6:00 and at 7:30 the Boy Scouts will conduct an official retirement ceremony of a flag. A great event if you have never witnessed a retirement ceremony.

 

Weekly Rate & Market Update 6-30-17

Question of the week:  Should I refinance to pay-off debt, like my car and credit cards?

Answer: This question came in after last week’s question (should I refinance to pay-off my equity line?), and the short answer is the same as last week’s: Yes. No. Maybe.

As a rule it is not wise to use your home’s equity to pay-off consumer debt. Using home equity for consumer debt hurt a lot of people during the housing bubble. Families were increasing the mortgages on their homes to buy boats and/or to pay off credit cards that were run up to pay for extravagant or excessive consumer goods or vacations. Our term for this is “eating equity.”

The primary issue with eating equity is too often after clearing off their debt with a newer, larger mortgage, there was no alteration in spending habits so in a year or so they would look for another mortgage, increasing their balance to pay-off another round of consumer debt racked up in restaurants, sporting goods stores and local malls. And a cycle started where by the time real estate values crashed families that had bought a house in 2002 for $300,000 with a $240,000 lost it in 2009 with $450,000 mortgage they could not, or would not, pay.

That said, there can be an argument made to refinance and use proceeds to lower other debt.

For instance you have incurred one-time extraordinary expenses for emergency home repair, college expenses, helping out a family member or medical expenses. Or perhaps you did have a period of excessive spending on consumer goods and services, but have curtailed the spending habits and after trying for a few years to reduce the debts have found you not making a very good dent in the balances. If one of these is the case then using a new mortgage for debt relief may be a sound financial decision.

When going through a debt consolidation refinance consultation it is important to discuss the reasons for the debt accumulation, and also make certain that there is a very strong commitment to ensure that once the debt is paid off it is not temporary; i.e. that the accounts that were paid off will not have large balances again in the near, middle or long term.

As with most mortgage questions the answer then becomes a math problem that involves current home value, amount of mortgage the value will support, current debt outstanding and total monthly payments. We then look at expected net equity that can be used to pay-off debt, if this is enough to pay-off all the outstanding debt, and if not targeting which accounts to pay-off that will provide us the greatest payment relief. Note my approach is to eliminate the highest payments, not the highest rates or necessarily balances. If you have one card with a $14,000 balance and a $200 payment and two cards at $7000 each with $300 payments each I would suggest paying of the two cards saving $600 per month instead of one card and saving $200 per month.

Part of the consultation is what to do with the money saved every month, ideally the savings goes to pay-off remaining debt and then put the money into savings.

Here is an example of clients we have helped:

Due to business issues they had accumulated about $60,000 in revolving debt with payments of about $1500 per month, plus they had two auto loans totaling $1200 per month.  They were not late on any of their payments but had a hard time making more than the minimums and were unable to save. As well they have young children and were unable to put money away for college.

Because of the equity they had in their home we were able to refinance their mortgage of about $400,000 with a payment of about $2100 per month to a $475,000 mortgage with a payment of just under $2400 per month. We increased their mortgage payment almost $300 per month but were able to pay off all the credit cards and one of the cars, lowering their monthly consumer debt payments from $2700 per month to $575 for one car with just under two years remaining. Total savings for the family almost $2000 per month, which they divided into savings account and two 529 accounts for their kids. Since the refinance about a year ago they have been paying off their credit monthly and spending what they earn as well as building their savings.

Not everyone will have such dramatic savings by consolidating their debt, but the savings can still be pretty dramatic. The key however is to ensure that the use of your home’s equity to consolidate debt is not a recurring practice, that it is done to provide relief and enable a change in financial habits.

If you would like to run through your numbers to see if you may benefit from a debt consolidation please give me a call and we can discuss your situation. Often the conclusion that is reached is we do not need to refinance, but by restructuring your spending habits and how you are paying your debt you may be able to achieve debt relief without increasing your mortgage.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Continued mixed data on the economy. Reports for economic activity in May reflect the mixed data of prior months. Consumer confidence almost reached a sixteen year high in May, mostly on expectations for income and jobs. That should be reflected in increased spending and economic growth when 2nd Quarter GDP data is released next month. The final revisions to 1st Quarter GDP data however does not reflect strong consumer confidence. While the final growth number was revised up to 1.4% from 1.2%, the growth number is still considered not strong, bordering on weak. Within the GDP report consumer spending was upgraded, but only enough so that spending in the quarter went from the weakest in seven years to the weakest in four years.

Personal income and spending data in May did not reflect the consumer confidence data. Personal income for the month rose only 0.4%, but wages and salaries only increased 0.1% from April and transfers were the bulk of the general increase in income. Spending matched wages, increasing only 0.1% from April. One constant in the report over the past several months has been personal savings, which rose 0.4% in May and is at a very high 5.5% of personal income.

Overall the data is somewhat positive for rates. While the slight revision to GDP could push rates higher, the personal spending and wages are a drag on the economy and creates a soft rate environment. There will be a lot of attention on the 2nd Quarter GDP numbers to see if increasing consumer confidence pushed the economy higher—if so we can expect upward pressure on rates.

Rates for Friday June 30, 2017: Last week it appeared that rates would break down with any soft economic data. We got the soft data but rates did not break down, late in the week we saw rates strengthening on technical issues. The end result is another week with no change from the previous Friday.

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

30 year conforming                                            3.75%             Flat

30 year high-balance conforming                        3.875%           Flat

30 year FHA                                                      3.25%            Flat

30 year FHA high-balance                                  3.75%            Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

I hope everyone has a wonderful Independence Day celebration. My favorite holiday, not necessarily for the fireworks, hot dogs and get togethers, but for why we celebrate. Enjoy your freedoms and give thanks for those with the courage and resolve to declare the “united Colonies are, and of Right ought to be Free and Independent States…”

If you are replacing your flag as part of your celebration, or know someone who is, see below about our Annual Flag Collection and Retirement Ceremony next Friday July 7th.

Have a great week,

Dennis

Next week, on Friday July 7th, we will be having our Annual Flag Collection and Retirement Ceremony in Bixby Knolls as part of the monthly First Friday event. If you have a flag that needs retiring please bring it and we will collect and give to the Boy Scouts for proper disposal. We will be at Georgie’s Place, 3850 Atlantic Avenue, Long Beach at 6:00 and at 7:30 the Boy Scouts will conduct an official retirement ceremony of a flag. A great event if you have never witnessed a retirement ceremony.

 

Weekly Rate & Market Update 6-23-17

Question of the week:  Should I refinance to pay-off my home equity line and fix the interest rate?

Answer: Yes. No. Maybe.

The answer to this question, like for many Questions of the Week, is situational.

Everyone who has an outstanding Home Equity Line of Credit (HELOC) has seen their rate increase one percent (1.00%) since the Fed began raising interest rates in December 2015, and increase half a percent (0.50%) since December. Common wisdom is that the Fed plans on increasing its Federal Funds Rate as many as two more times this year and perhaps a few more times in 2018. Whenever the Fed raises or lowers rates banks follow and the result is an increase or decrease in the Prime Rate, which is the base rate for HELOCs.

Most HELOCs have a margin over Prime that sets your interest rate. For instance is your HELOC rate is Prime + 1.5% then your rate is the current Prime Rate of 4.25% + plus the 1.5% margin resulting in your interest rate of 5.75%.

Because the Prime Rate is near the 30 year rate, either below, at or above depending on many factors, many homeowners are deciding now is a great time to lock in the rate on their HELOC before the Prime Rate goes up further, or mortgage rates climb.

Should you refinance and lock in your interest rate on your HELOC?

There are several factors we look at when advising clients whether to refinance and consolidate their mortgages or not.

  • What are your balances on your primary mortgage and HELOC?
  • How much equity do you have in your home? (Estimated value less combined balances of your primary, or first, mortgage and your HELOC)
  • What are your current rates and payments on your primary mortgage and HELOC?
  • Are you in a position where you can pay off the HELOC in the near or medium future?
  • When is your HELOC due? When does it go from interest only minimum payments to fully amortized?

There are more questions that come into play once we get into the nitty-gritty details but these basic questions provide a lot of guidance.

If you have a very low rate on your primary mortgage and a small balance on your HELOC that you can pay off in a few years then it probably does not make sense to refinance.

If you balances on your mortgages are about equal and you have enough equity we might be able to refinance your HELOC and your payment is equal to or slightly less than your paying now on both loans, in this case it may make sense to refinance.

When considering the payment on the HELOC, if you have been paying interest only and have a large balance owing on the HELOC it may make sense to refinance, fix the rate and start paying down your principal.

There are several variables to consider if you have a HELOC as to whether you should refinance and pay it off, to go through your situation and determine options available regarding your HELOC please call me and we can go through the numbers and options.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Housing making headlines this week as existing home sales across the country surged in May after slowing down in March and April. Nationally sales are up 1.1% from April, with single family homes up 1% and condo sales up 1.6% for the month. Year over year existing home sales have grown by 2.7%. Prices jumped up in May as well with the national median price up 3.2% from April and 5.8% from May of 2016. After a strong start of the year and then a big slow-down in the Spring the May housing report is very positive.

Locally the California Association of Realtors reports that sales of existing homes jumped 5.4% in May from April and are up 2.6% from last May. The median price in California in May was $550,200 (more than double the national average of $252,800) which was 2.3% higher than April and 5.8% from a year ago. Southern California markets were very hot in May. Los Angeles County saw a 2.5% increase in the median price for the month (to $494,040) and 5.3% for the year while sales were almost 25% higher in May than April and up 7.3% from last May. In the OC the median price saw similar increase to LA County at 2.6% with the median price at $795,000, 8.6% higher than last May, sales in Orange County were up 8.6% from April and 22.6% for the year.

Rates for Friday June 23, 2017: Rates are ready to break to the down side, and have come close but so far the line is holding steady. Next week we get the final revision for the 1st Quarter GDP, if there is no surprise upward revision that could be the event to push rates through the current resistance. In the meantime we have our fifth week in a row with no change.

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

30 year conforming                                            3.75%             Flat

30 year high-balance conforming                        3.875%           Flat

30 year FHA                                                      3.25%            Flat

30 year FHA high-balance                                  3.75%            Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

This past week Mother Nature looked at the calendar and saw “Summer, June 21st” and decided to throw some real summer weather at the West, not much June gloom to keep us cool!

In two weeks, on Friday July 7th, we will be having our Annual Flag Collection and Retirement Ceremony in Bixby Knolls as part of the monthly First Friday event. If you have a flag that needs retiring please bring it and we will collect and give to the Boy Scouts for proper disposal. We will be at Georgie’s Place, 3850 Atlantic Avenue, Long Beach at 6:00 and at 7:30 the Boy Scouts will conduct an official retirement ceremony of a flag. A great event if you have never witnessed a retirement ceremony.

Have a great week,

Dennis

Weekly Rate & Market Update 6-16-17

Question of the week:  Should I refinance to pay-off my home equity line and fix the interest rate?

Answer: Yes. No. Maybe.

The answer to this question, like for many Questions of the Week, is situational.

Everyone who has an outstanding Home Equity Line of Credit (HELOC) has seen their rate increase one percent (1.00%) since the Fed began raising interest rates in December 2015, and increase half a percent (0.50%) since December. Common wisdom is that the Fed plans on increasing its Federal Funds Rate as many as two more times this year and perhaps a few more times in 2018. Whenever the Fed raises or lowers rates banks follow and the result is an increase or decrease in the Prime Rate, which is the base rate for HELOCs.

Most HELOCs have a margin over Prime that sets your interest rate. For instance is your HELOC rate is Prime + 1.5% then your rate is the current Prime Rate of 4.25% + plus the 1.5% margin resulting in your interest rate of 5.75%.

Because the Prime Rate is near the 30 year rate, either below, at or above depending on many factors, many homeowners are deciding now is a great time to lock in the rate on their HELOC before the Prime Rate goes up further, or mortgage rates climb.

Should you refinance and lock in your interest rate on your HELOC?

There are several factors we look at when advising clients whether to refinance and consolidate their mortgages or not.

  • What are your balances on your primary mortgage and HELOC?
  • How much equity do you have in your home? (Estimated value less combined balances of your primary, or first, mortgage and your HELOC)
  • What are your current rates and payments on your primary mortgage and HELOC?
  • Are you in a position where you can pay off the HELOC in the near or medium future?
  • When is your HELOC due? When does it go from interest only minimum payments to fully amortized?

There are more questions that come into play once we get into the nitty-gritty details but these basic questions provide a lot of guidance.

If you have a very low rate on your primary mortgage and a small balance on your HELOC that you can pay off in a few years then it probably does not make sense to refinance.

If you balances on your mortgages are about equal and you have enough equity we might be able to refinance your HELOC and your payment is equal to or slightly less than your paying now on both loans, in this case it may make sense to refinance.

When considering the payment on the HELOC, if you have been paying interest only and have a large balance owing on the HELOC it may make sense to refinance, fix the rate and start paying down your principal.

There are several variables to consider if you have a HELOC as to whether you should refinance and pay it off, to go through your situation and determine options available regarding your HELOC please call me and we can go through the numbers and options.

Have a question? Ask me!


Stretches hands over head, has a big yawn….
That was the markets on Wednesday after it was announced that the Federal Reserve Open Market Committee raised its benchmark discount interest rate by one-quarter of one percent to a rate of 1.75%, this is the rate the Fed charges member banks to borrow money. The rate increase by the Fed has been priced into the rate markets for a few months, as a result an action that should have seen mortgage rates increase resulted in no change in rates.

Impact on the Fed rate increase will be felt immediately by those with Home Equity Lines of Credit as the Prime Rate follows the Fed discount rate. As a result of the Fed’s increase the Prime Rate is now 4.25%.

That was the headline news but more importantly was the economic data released this week, and it wasn’t very good. Three big pieces of economic data for May, the Producer Price Index, the Consumer Price Index and Retail Sales, show an economy that appears to be slowing. Leading the way was PPI which was flat from April and is up 2.4% from May of 2016. As for consumers, the CPI dropped 0.1% in May from April and is up only 1.9% from a year ago. Pulling down CPI was an increase of 0.2% in home prices—which have been carrying the price index for the past several years—as well as a drop of 6.4% in gasoline prices. Of big concern is that prices are trending down. And following our economic lesson above supply and demand has led to the lower prices as retail sales in May were down 0.3% from April, retailers will likely drop prices in June to capture more sales. The reports on prices and sales are very mortgage market friendly.

Rates for Friday June 16, 2017: Given the sluggish economic growth and stagnant prices as a backdrop for the Fed increasing rates there has been a fundamental shift in what the Fed considers is important in determining rates. For decades the primary focus has been inflation as an indicator of economic activity and the primary gauge for the target rate for the Fed. For the past year plus the Fed has indicated that the labor markets will be a more important factor in determining rates and this was proved out on Wednesday when the Fed faced with slumping prices increase rates stating the primary reason is strengthening labor markets.  Looking ahead we will see investors begin to price in the next anticipated Fed rate increase in the next several weeks, as such in the medium term we should see an increase in mortgage rates. There should not be a tremendous increase but somewhat of an increase. Rates run their streak of flatness to their fourth week in a row.

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

30 year conforming                                            3.75%             Flat

30 year high-balance conforming                        3.875%           Flat

30 year FHA                                                      3.25%            Flat

30 year FHA high-balance                                  3.75%            Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

A lot of people have Alice Cooper’s classic song for summer running through their heads this week as School’s Out for Summer. I told the girls the other day that I won’t see them in the morning until early September with one or two exceptions given our different natural sleep habits.

At this point summer seems infinite to them and other K-12 kids, and in two and a half months they will be telling us how short summer seemed.

Have a great week,

Dennis

 

Weekly Rate & Market Update 6-9-17

Question of the week:  When should we release our loan and other contingencies from our purchase contract?

Answer: Never**

For new buyers, or those entering the market in the future, as part of your offer to purchase a new home you will ask the seller to provide you the opportunity to cancel the transaction and have your deposit returned if certain contingencies are not met. The big three for most transactions are your offer is contingent upon your obtaining loan approval, contingent upon the appraisal report having sufficient value and conditions for the transaction, and contingent upon your having the property inspected by someone of your choice for defects and/or material issues with the structure(s) and property that will or may cause costs to repair, remediate or cure in the future. The boiler-plate purchase contract used in almost all residential purchase transactions from the California Association of Realtors has a default 17 days for these contingencies to be met, by which time the buyer is to either remove the contingencies or issue notice to cancel—at which point the seller may agree to re-negotiate the transaction to preserve the deal; this usually happens due to a low appraisal or items discovered by the professional home inspector that need repair, replacement, etc.

**Why “never?”

It is the policy of our company to never tell a buyer to release their contingencies, especially the contingency for receiving loan approval. This is sound legal advice we have received and follow based on the many factors that may happen after a contingency is released that may prevent complete and final loan approval thereby putting Stratis Financial is potential jeopardy for any deposits or other costs for our client if we indicated they could remove the contingency.

This is a bit of a sticky subject, especially with the several hundred real estate professionals who read the Weekly Rate & Market Update. For every transaction when we get to the seventeen day mark in the transaction we are contacted by the buyer’s agent, and not infrequently the seller’s, asking if the buyer can remove the loan contingency.  What is our response?

Our response depends on where we are in the process. First, let’s address the arbitrary seventeen day contingency period for loan contingencies. No one in the lending industry is quite sure how the seventeen day period was determined to be the standard for a buyer to have loan approval. The seventeen days is from the date the buyer and seller agree to purchase price and terms and includes weekends and holidays. It is not from the date the buyer makes a formal application, so if they are communicating with several lenders and take a week to submit and application that lender now has ten days by which time they are expected to deliver an approval for the buyer to receive loan approval. The seventeen days does not take into consideration the buyer’s specific lending requirements that may create some delays in obtaining approval, do they have foreign income or funds, are they self-employed with complex tax returns, have they switched jobs, transferred funds between several accounts, do they need to have their credit scores increased, or any one of many other factors that can require more time to process and prepare for underwriting.

Granted these are items the buyer should be aware of and could start working on with their lender prior to writing an offer to minimize risk of losing their deposit once in escrow. There are however other factors that can impact the seventeen day period that many agents either seem not to be aware of or disregard, primarily what is the nature of the market at that time? Is the market extremely hot with very high volumes impacting the flow of files from application, through processing, loan submission and approval? Are there issues with access to the property due to tenants or uncooperative seller or unavailable agent? Are there title issues which the seller may or may not be aware of? We have had all these issues and more pop up in transactions and agent representing the seller or the buyer maintaining the seventeen day period is sacrosanct and they must either release the contingency or cancel the transaction—on more than a few such circumstances I have advised the buyer to cancel the transaction due to delays beyond their control and inevitably the seller, read: the listing agent, has backed down on their demands for contingency removal and extended the contingency period.

What does Stratis Financial reply when asked if the loan contingency can be removed? We reply with the status of the loan at that time: we initiated they file in most cases with Automated Underwriting System (AUS) from Fannie Mae or Freddie Mac and have received all, most or none of the information requested to support the AUS approval. If we have submitted the loan to underwriting we indicate that and if we have not received the initial approval with conditions yet when we expect to receive the approval. If we have received the approval we indicate what the conditions are that are required for final approval and whether any of the conditions create concerns as to ability to complete the approval process. Based on the information we can inform the buyer that we consider the file able to be approved should there be no material change in any of the information we have received.

Are we not saying that they can remove the loan contingency with this information? We are not saying the loan contingency can be removed due to the statement, “no material change.” In the past I have had a buyer lose their job between loan docs being issued and signed, I have had a lender pull a back-up credit report that showed new credit that created an issue with the buyer’s ability to qualify, I have had a buyer presented with a summary judgement altering child support and alimony payments impacting ability to qualify, I have had a buyer have to delay the sale of their home due to his buyer losing half of her down payment in Las Vegas the weekend before closing (one of my favorite stories of all time—worth a beer or other beverage to hear this one).

This does not include the non-buyer related delays I have faced including a death in the property between loan docs and funding, a truck driving through the front door just before loan docs, earthquake delaying all closings until inspections could be made to satisfy lender the property is sound and flooding caused by El Nino.

There are many issues that can impact a real estate transaction any of which can occur between the removal of loan contingencies and closing, many of which are beyond the control of the buyer. In many cases, most actually, as long as the agents and seller are aware of what is happening on the file and the factors involved any delays needing an extension of the contingency period is understood and agreed upon. In most cases, almost all that I have been involved with, buyers have not lost deposits after removing loan contingencies due to cooperation between the parties involved to make the deal work and close. There have been a few cases however, usually because of an unprepared buyer, or one who did not provide all the necessary and material information needed for obtaining loan approval, where a deposit has been lost.

When should your remove your loan contingency? When you feel comfortable based on the information we have provided you as to the status of your loan in the approval process that we will be able to get through underwriting, obtain loan documents and fund your mortgage. Ideally this information can be provided to you during the standard seventeen day contingency period, but not always and if this is the case by keeping the agents informed as to our status through the process we can generally assist with an extension to protect your deposit until you feel secure in releasing your contingency

Have a question? Ask me!


Was there any economic, or other news this week? Yesterday’s Congressional testimony by former FBI Director James Comey has sucked all other news out of most of the national consciousness, not just yesterday and today but starting Monday as the media dedicating their resources waiting for the testimony. As it happens there was no economic news that had any significant impact on rates.

Rates for Friday June 9, 2017: There is plenty of non-economic news that could impact mortgage rates favorably, the circus in Washington, the election results in Great Britain, the ultimatums to Qatar from other Middle Eastern nations. However investors are not making any moves in any markets, as a result rates are flat once again this week from the week prior. There is little on the horizon that should snap rates out of their current range and stability.

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

30 year conforming                                            3.75%             Flat

30 year high-balance conforming                        3.875%           Flat

30 year FHA                                                      3.25%            Flat

30 year FHA high-balance                                  3.75%            Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

It looks like a wonderful late spring weekend in Southern California, perfect for gardening and outdoor chores as well as getting some practice in for the summer barbecue season!

Have a great week,

Dennis

Weekly Rate & Market Update 6-2-17

Question of the week:  Do you think home prices will fall in the near future; are we in another housing bubble?

Answer: Many of the “question of the week” inquiries come up several times in a short period of time from different areas of my life, this week’s question is no different. From a lunch meeting with a real estate agent, to conversation with client thinking about selling her current home and buying a new one, to breakfast conversation with my mom’s cousin, people are wondering with the increase in home prices the past several years if real estate prices will continue to increase, or are in danger of collapsing.

The root of the question is of course the housing bubble burst that caused real estate prices across the country to fall from their peak in 2006 to their lows in 2012. Prior to the price collapse prices rose at first steadily and then dramatically. Fueled by a combination of low interest rates and the availability of mortgages from all sources, especially Fannie Mae and Freddie Mac that required essentially no documentation of ability to repay the mortgages, home prices surged beyond sustainability. Once some borrowers began missing payments causing more scrutiny of outstanding mortgages the price increases slowed, stopped and then reversed. After dropping slowly at first starting in 2006, by 2008 markets saw prices drop at historic rates.

The current market is similar in many respects to the market from 2001 to 2006. During that six year run the national median home price increased from $170,000 to $250,000—a 47% climb in the median price. From 2012 to May 1, 2017 the national median sales price increased from $220,000 to $320,000—a 45% climb in median price.

Just looking at the very large and quick climb in median prices the supposition is that the market parallels are such that we should be ready to experience a sharp and prolonged decline in market prices. That might be true if the reason for the home price increases were the same. They are not.

Our current housing market also has very low interest rates making homeownership more affordable. Our current housing market is supported by low unemployment, just as the 2001 to 2006 market was for much of the price increase.

There are a couple of very strong factors to the current housing market supporting the increase in prices. First, people qualify for the mortgages they are using to finance their purchases. Long gone are the non-qualifying mortgages that were used to finance millions of homes across the country—especially those using conforming (Fannie Mae/Freddie Mac) financing which is approximately 65% of mortgage financing.  Because lending standards reverted to those used historically until the early 2000’s there is no price inflation caused by buyers purchasing more than they can afford.

Second, buyers have a financial stake in their home. Not only was the early 2000’s housing price bubble caused by low rates and no-qualifying loans, it was also fueled by the lack of need for down payment. A significant number of purchases across the country were completed with no-money down transactions where buyers would get a 1st and a 2nd mortgage to cover 100% of the purchase price. With none of their own money in the home and suddenly seeing their home is upside down with a large mortgage payment there was no financial risk in walking away.

Third, the housing crisis and subsequent loss of housing has had an impact on the mindset of the average American, to the extent we now have clients who were in high school or college when they parents lost their home and they do not want to have that happen to themselves.

Fourth, and very importantly, an overwhelming majority of the mortgages being financed in the past several years have been fixed rate mortgages at very low interest rates. This removes future uncertainty for housing costs if a homebuyer hits a rough patch.

I am not saying the current housing market will never undergo some type of a price correction at some point—all market do. When will there be a correction, how big of a correction and how long will the correction market last are the questions that are of interest.

If/when there is a correction I believe it will be driven mostly by employment, or rather unemployment. When our current economic cycle ends and we have our next recession the impact it will have on employment will determine when our real estate market will also have a correction, or reversal in price increases. The length and depth of the recession will determine the length and depth of any drop in market prices.

Because of the overall strength of the average homebuyer I do not feel that any market correction will be deep or long lasting. We may see a prolonged period with very little or no growth in prices, but as for sharp decline in prices I do not foresee a major correction occurring in the next cycle because of the down payment investment from homebuyers and the fixed rate financing on their home.

The statistics on the current market prices are very similar to the housing bubble that burst starting in 2006, however the underlying factors are extremely different. The strength of our housing market today is qualified well employed buyers purchasing a home for the long term as opposed to underqualified buyers leveraging into properties with the purpose of making money as prices climb.

Were I in the market for a new home I would not let the possibility of a contraction in home prices in the short or medium future deter me from pursuing the purchase of a new home. I would not know when that would occur, so prices can climb into the correction. I would not know how much of a correction may occur, it could be only enough to put prices where they are today. Nor would I know how long such a corrective market would last, so I may miss the next “bottom” and end up paying more. Finally, I do not know what rates will be when the market corrects.

In summary by trying to time a market correction I could end up paying more for my home in price and interest rate than if I purchased today.

Have a question? Ask me!


Confidence remains high for consumers across the country. For the sixth straight month the Conference  Board’s consumer confidence survey has a very strong reading. Although the index is lower than April and March, that is not a surprise since they were the two best months for the confidence index through the economic expansion which began in June 2009. As I have been writing recently, there has been a disconnect between consumer confidence and consumer spending and retail sales. Perhaps May will be the month to break out of the lackluster spending from the very confident consumers. A strong, especially a consistently strong, consumer confidence index should be negative for interest rates.

Jobs data for May is interesting. Today’s data from the Labor Department shows an incredibly low 4.3% unemployment rate, down from 4.4% in April and a gain of 138,000 jobs. The former number is well received, the latter is a disappointment to the expectations of 185,000 new jobs for the month. Also in the report was a downward revision of March and April job gains by 66,000 jobs. Drilling into the report we see that the participation rate declined from 62.9% of eligible workers to 62.7%. Wages continue to be stagnant, up only 0.2% in May and 2.5% from May of 2016, slightly ahead of inflation. Overall the report is not a bad employment report, in fact is shows a somewhat healthy but not strong job market, but missing expectations has many thinking the Fed may hold off on a rate hike this month. Overall the news is rate friendly due to the speculation that the lack of a strong job report gives strength to those on the Federal Reserve Open Market Committee who want to hold rates steady.

Rates for Friday June 2, 2017: Rates are softening a bit this week but hang onto last week’s numbers giving us three weeks in a row of flat rates, which is a good thing! Looking ahead we may see some movement with every little report as investors make bets as to whether the Fed will or won’t raise rates. For the most part a rate increase is priced into the market so there should not be any major change in rates.

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

30 year conforming                                            3.75%             Down 0.125%

30 year high-balance conforming                        3.875%           Down 0.125%

30 year FHA                                                      3.25%            Flat

30 year FHA high-balance                                  3.75%            Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

The calendar flips to June and our kids and their friends at school look at the longest two weeks of the year. As most parents know this is also the busiest time of year as every sport and activity wraps up with final games and performances. Tonight we will be doing something special with many other families. The music teacher at our middle school is retiring after over twenty years and past and present students and families are gathering for a good-bye/thank you party. We look forward to the alumni band playing as well as all stories about the success many have had in music through their lives, with a start from Ms. Norwick at Hughes Elementary.

To all the teachers, and the students, hang in there just nine days left!

Have a great week,

Dennis