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Can we remove our loan contingency?

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

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

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

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

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

What is a contingency and why do is matter?

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

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

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

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

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

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

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

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

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

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

Can we release our loan contingency?

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

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

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

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

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

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

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

Have a question? Ask me!

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

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

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

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

30 year conforming                                            2.75%   Up 0.125%

30 year high-balance conforming                   3.00%    Flat

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

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

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

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

Have a great week,

Dennis

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

Why do we have to pay our property taxes now?

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Question of the week:  Why do we have to pay property taxes now?

Answer: This is a question many homeowners are currently asking. These are homeowners who are in the process of refinancing their current mortgages and will be closing between the middle of February and April. As part of their escrow closing the second-half property tax installment will have to be paid.

Property tax bills are sent to property owners in California in October of every year. Property owners are given the option of paying the entire amount owed, or pay the amount due in two installments. The first installment is due by December 10th and the second installment is due by April 10th.

One condition every lender has for funding mortgages is a title insurance policy that protects the lenders lien position and discloses any liens and claims against the title of the property. When a new loan is initiated a preliminary title report is provided for review that shows, among other items such as the legal description of the property, liens and obligations that are secured by the property. The report will show any current mortgage(s) the property owner is still obligated to pay, and what the annual taxes are and whether they have been paid or not.

Government liens take precedence over any other lien, because of this, lenders want to make sure that when they do fund a loan and record the mortgage, a trust deed in California, against the property that all property taxes are paid current as a delinquency can undermine the lender’s position. Unpaid taxes can result in a government foreclosure on a property, or if the borrower defaults on the mortgage and the lender forecloses and the property is sold at auction the taxes are paid before the lender, which results in the lender possibly not receiving the full amount owed on the delinquent mortgage.

The title company is also insuring an existing mortgage that is being refinanced, or paid off through a sale, is paid in full and no longer a lien on the property. The policy provided insures that all property tax obligations are current and the lender funding the refinance, or purchase, mortgage is in first position with no other non-government lien ahead of it on title.

This time of year, with the second half taxes due relatively soon, title companies will not issue their property unless they have proof the second tax installment has been paid. If you pay your taxes yourself then you will need to account for this amount as part of closing. You can either bring the funds to escrow, which I recommend since you have likely saved the funds to make the payment. The other option is to add the amount due to your new refinance mortgage, which I do not recommend as then you are financing and paying interest on a tax bill.

If your current mortgage has an impound, or escrow, account whereby you include a monthly pro-ration of the property taxes in your monthly mortgage payment, the issue gets a little more complicated. Most lenders pay the second half installment sometime from mid- to late March.

When we are closing refinances from early February to this period the borrower will still have to have the second half taxes paid as part of the closing. The lender will have the funds in the borrower’s impound account, but will not have paid them yet, so the borrower will need to bring the funds to closing, or add to the loan amount. When this happens, when the loan is paid off the lender will refund the amount in the impound account to the borrower after their existing loan is paid off—a process that usually takes up to two to three weeks.

As an example, the Clock’s are refinancing their existing mortgage and have an annual tax bill of $5000 per year. Every month they have included $416.67 in their mortgage payment and the lender paid their taxes when due by December 10th and April 10th.  We are closing their refinance next week, on March 6th. The lender has not yet made the tax payment and has $2913.19 in the borrowers’ impound account.

In order to close the Clock’s need to transfer funds to the escrow for $2500 to cover the second half tax installment. After the loan funds, the old loan is paid off they will receive a check from their existing lender for the $2913.19 that is in their impound account that was not paid for taxes.

When all the dust settles and the accounting is complete, the borrower has not paid any more or less than what is due to the tax collector; the process however has had them pay the amount twice with a refund after closing to ensure they have only paid once.

Note, for a purchase transaction the taxes must also be paid and the amount due is pro-rated between the buyer and seller. The pro-ration is from the date of closing until the end of the tax period. For sales closing between July 1st and December 31st taxes are pro-rated on a daily basis to December 31st; for sales closing January 1st to June 30th the taxes are pro-rated between buyer and seller from the date of closing to June 30th.  If you are selling a home the pro-rated taxes are deducted from your sales proceeds, if you are purchasing a home the pro-rated taxes are added to the funds you will need to bring to escrow to close the transaction.

Not paying property taxes and want to, or know someone who would like to pay property taxes? Contact me to discuss loan and home purchase options and get pre-approved for your new home.

Have a question? Ask me!

Home sales slid in California from December to January, but are up significantly from January 2019. According to the California Association of Realtors the statewide median home price was $575,160, which was down 7.7% from December and total single-family sales we down 0.7% from December. Year over year the statewide sales were up 10.3% and the median price climbed 7.4%. Drilling down to the two primary Southern California Counties, Los Angeles saw a 22.3% drop in closed sales from December to January, but overall sales were up 16.7% for the year. The LA County median home price, while down 3.7% from the prior month was up 9.1% from last January to $617,520. Next door, Orange County median single-family home price was $855,000, a gain of 1.8% from December and 7.3% for the year. Sales volume in the OC dropped 23.7% for the month and the year over year increase in sales was a very strong 22.1% gain.

Some national economic news, the second estimate for 4th quarter 2019 Gross Domestic Product was the same as the first estimate showing the economy grew at a mild 2.1% pace. The news is mortgage rate neutral. With the estimate came was the expectation that the 1st quarter 2020 GDP may not show as much growth, if any, due to possible, some say probable, economic slow down globally due to the coronavirus. This news is somewhat mortgage rate friendly.

On a more micro- level, today the U.S. Bureau of Economic Analysis released personal income and consumer spending for January. Both reports showed positive growth from December, with consumer spending rising a very modest 0.2% for the month and personal incomes increasing a very strong 0.6% for January.  With income outpacing spending it is no surprise that the personal savings rate was 7.9% for the month. A key inflation index, the Personal Consumer Expenditure, rose 0.1% for the month, and is up only 1.7% for the year. With consumer spending still positive, strong gains in income and tepid inflation the news should be mortgage rate unfriendly. However….the impact on the coronavirus news and messaging, as well as how, when, if, the virus will spread through the United States with greater impact than the traditional flu, is not known and many in the media are predicting it will slow down consumer spending in the coming months.

My two cents on the coronavirus. Our daughter is currently travelling through Italy as she is on mid-winter break from her studies this semester in Grenoble, France. As you may be aware, several towns in Northern Italy have been quarantined. She and her friend were scheduled to travel to Venice, they changed their itinerary to avoid the area. Are we concerned? Yes, as parents we are naturally concerned about our daughter travelling thousands of miles away in a foreign country with a virus known to be present. Are we worried? Not that much as we know she has as much of a chance of catching the normal flu as the coronavirus. And that goes for everyone in the country. The flu is under-reported every year, not the actual numbers being provided under the actual cases, but the reporting by the media. According to the Centers for Disease Control (CDC), since 2010 influenza has caused between 9 to 45 million illnesses, 140-810,000 hospitalizations and 12-61,000 deaths annually. Those numbers are just for the United States. Every year we have a flu epidemic that is either extreme or severe with tens of thousands losing their lives as a result. The coronavirus fear is that there is not currently a vaccine and because of its unique make-up specific incidents can be tracked and traced. Meanwhile the traditional flu, which some years is immune from that year’s vaccines, is rampaging across the country as it does every winter. The CDC estimates for the current flu season to date, from October 1st to February 22nd, there have been 32-45 million illnesses, 310-560,000 hospitalizations and 18-46,000 deaths. Am I concerned about the coronavirus? Yes, as much as I am concerned about the traditional flu virus. Am I worried? Not that much. Every year up to 14% of our population gets the flu, and 0.01% die from the illness. I cannot recall any news reports from the past about the flu pandemic impacting 14% of our nation and the major economic slowdown and other impacts it has. Off my soapbox.

Rates for Friday February 28, 2020:  While I am not concerned that the economy will fall apart because of coronavirus, investors are following the news and reacting in a way to not lose money, which creates a domino effect on the markets. The stock markets are down about 14.5% in the past two weeks as investors flee to safety—which means they are buying bonds and mortgages. As a result rates are down from last Friday, until (when, if) investors get a better gauge on the national and international economic impact of the coronavirus there is little to suggest rates will climb in the near future.

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

30 year conforming                                            3.125%    Down 0.125%

30 year high-balance conforming                   3.25%      Down 0.125%

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

In an effort to become relevant in the national election scene, California has moved its primary election date from June to March. In most counties in-person voting has already started, with the official election day being this coming Tuesday, March 3rd. I have always contended that local elections have a much greater impact on our lives than statewide and national elections. Local elections determine the public safety ability, the condition of the roads and sidewalks you use on a daily basis, and the types of businesses that are able to open and be successful in your community. Unfortunately, most people only vote in local elections when they are on the ballot with national candidates, i.e. Presidential election years.

One of the greatest, I venture to say the greatest, negative impact resulting from the decline in print media is the loss of local newspapers who used to report on local municipalities and elections. Many local reporters and editors would investigate candidates, elected officials, leaders at city halls and events that impacted their cities and communities, providing valuable information. Now many municipalities operate in media vacuums, which can lead to unscrupulous actions benefiting the few at the cost to the many.

It is my hope that more people pay attention to what is happening down the street at City Hall and less to across the country in the big white buildings in Washington. Examine those representing you locally and research those who are running to represent you who will decide how many members will be in your police force, how well funded is the fire department, will there be enough money to maintain and replace streets and sidewalks as needed.

Pay attention and vote accordingly.

I’m feeling pretty soap-boxy this Friday, thank you for indulging me!

Have a great week,

Dennis

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

What happened this year?

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Question of the week:  What happened this year?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have a question? Ask me!

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

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

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.75%      Flat

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

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

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

Have a great week,

Dennis

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

About that property tax bill…

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

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

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

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

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

…how much should we pay?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

…how much should we pay? 

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

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

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

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

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

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

Have a question? Ask me!

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

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

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

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

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.75%      Down 0.125%

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

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

Have a great week,

Dennis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have a question? Ask me!

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

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

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

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

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

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

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

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.75%      Down 0.125%

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

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

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

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

Have a great week,

Dennis

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

What is the difference between an appraisal and a home inspection?

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Question of the week:  What is the difference between an appraisal and a home inspection?

Answer:  This is a great question that comes up frequently with first time buyers, and some experienced homeowners purchasing for the first time in a long time.

The first difference is one is usually required and the other is optional.

Appraisal

If you are getting a mortgage to purchase the property the chances are very high the lender will require an appraisal. (In some instances, Fannie Mae or Freddie Mac may allow a “waiver” for the appraisal, this could happen for transactions with a low loan to value. Waivers are not rare, but are not common either.) The primary purpose of the appraisal is for an uninterested, licensed, professional to ascertain the value the property used as collateral for the mortgage on the date the offer from the buyer was accepted by the seller. The secondary purpose of the appraisal report is to notify the lender if there are any noticeable defects that could impact the value and/or salability of the property or present health and safety concerns for occupants.

Many people are surprised at how little time most appraisers spend at the actual property. They spend so little time because most of the work to prepare the appraisal report is done before the appraiser goes to the property for his/her inspection.

An appraiser will receive a copy of the purchase contract and any counter-offers for the transaction at the time the order is made. Before heading out to the property the appraiser, using the Multiple Listing Service and public records, will research the area looking for comparable properties. A comparable property is one that is similar to the subject property in type of dwelling, size, number of bedrooms and bathrooms and other amenities that impact value such as a pool. The appraiser will look at recent sales to determine prices for the closed sales, how long the properties were on the market, and the condition of the properties at time of sale. Properties that have been recently sold but have not yet closed escrow (called “pending sales”) will also be noted to determine if there is current activity for comparable properties to the subject. Finally, the appraiser will look at active listings on the market to determine what other options did the buyers have at the time they purchased the subject property and at what price and condition.

Once the appraiser knows the terms of the transaction and has an idea of the comparable properties in close proximity, s/he will inspect the subject property. The appraiser will measure the property’s interior room by room to make a sketch showing the overall size of the property and rooms. While measuring the appraiser will visually inspect the property to ascertain the overall condition, and not any noticeable issues that may impact value or the health and safety of inhabitants. Any noticeable water stains in the ceilings will be noted as they indicate a leak in the roof at some point, if there are missing window panes, flooring that is missing or has holes, missing sinks or toilets, anything that deters from the property being fully habitable or that could be evidence of a bigger issue is photographed and noted. In California the appraiser will also photograph and take note that the property meets state law by having smoke and carbon monoxide detectors properly installed and that the water heater has earthquake straps and is on a stand or platform so it is off the ground.

The appraiser will not test the plumbing or electrical systems, test windows for their ability to open, or otherwise perform a very close and detailed inspection.

The appraiser will drive by the comparable properties that are being used to establish value and take photos for them from the street.

After all the data is collected the appraiser will prepare the report. The report will compare the comparable properties and make adjustments to the sales price of those properties for size, condition of property, amenities, location (such as on a busy street), etc to arrive at an opinion of value.

Inspection

When you and the seller agree to a sales price one of the clauses you will likely agree upon is the opportunity for you, at your cost, to engage a professional to inspect the property, what the industry calls a “home inspection.” You may choose whomever you desire to perform the inspection, it is recommended that you choose someone certified by the California Real Estate Inspection Association (CREIA). In California there is not state licensing or regulations for real estate inspectors, CREIA a professional organization that has requirements for its members that include continuing education and following codes of ethics.

It is important to note that the inspector works for you. Not the seller or the real estate agents, but for you. The objective of the inspector is to perform as thorough and examination of the subject property as possible, the result of which will be a very detailed report.

The inspector will grade everything examined from needs replacing to estimated longevity to in fair-good-excellent condition. It is not the inspectors concern if the report “blows the sale” or “makes the sale” but to provide an objective, honest report of the property’s condition.

A thorough inspection will include inspecting the roof, and if possible the attic and/or crawl space below the roof. If on a raised foundation, crawling under the property. Inspecting the electrical panel and testing outlets and switches. Testing the plumbing by flushing toilets and turning on taps to gauge water pressure. Appliances that use gas  will be tested to determine if they are functioning properly with appropriate hook-ups and safety features. These are the major areas of concern and cost to repair or replace, but all aspects of the property will be inspected and put into the report for the buyer.

Not included in the report will be the cost to correct any defects noted, and it is not ethical for an inspector to quote, bid on or complete any repairs noted as needed on the report.

Once completed the report will provide the buyer with a very good indication as to the condition of the property. It should be noted that there is not “perfect” home in regard to condition; even brand-new homes can have faults and issues that need to be corrected. The important issues to consider on a home inspection report are the major, “big ticket” items that may need to be replaced or repaired in a short period of time. If there are any such items listed, say the electrical needs to be updated, it is encouraged for the buyer to obtain a bid from a licensed contractor for the cost to correct, and then make a decision how to move forward.

It is highly recommended that you accompany the inspector when s/he visits the property for the inspection. Note that this inspection is much more thorough, and therefore time consuming, than the visit from the appraiser, in some cases a few hours. By attending the inspection you can learn a lot about your new home, where is the gas shut off valve, education on the electrical panel, where are the clear-outs for plumbing, and most importantly get a verbal report and detail form the inspector that will shed more light on the condition than just reading a formatted report.

The primary difference between an appraisal and an inspection is their purpose. While the appraiser will note some condition items the primary purpose is to let the lender know if the sales price is supported by the market in the area, the purpose of the inspection is to inform the buyer of the condition of the property and its components. Both are very important because of their purpose.

Next week what happens when appraisal is low or inspection shows major issues?

Have a question? Ask me!

“Well, that’s surprising.”  This was the thought of many investors, analysts and watchers of the economy this morning when the government released the data for the Gross Domestic Product for the 1st quarter of 2019. Expectations at the end of the 4th quarter in 2018 was for growth this past quarter and as the quarter progressed and economic data was received for January, February and March the consensus expectation rose to 2.3%. Today, the first report for GDP growth in the 1st quarter was 3.2% growth, well above expectations. Besides strong economic growth in the quarter inflation eased from the prior quarter’s annualized rate of 1.9% to 1.4%. Of concern in the data was a slowing in consumer spending to 1.9% growth, the lowest in a year. The report should have no impact on the Federal Reserve’s decision to change its current policy to hold firm on rates through the year. Overall the report should be negative for rates as a growing economy leads to higher rates, however the tame inflation segment of the report and consumer spending data is positive for steady or lower rates.

Rates for Friday April 19, 2019: Will the GDP report cool the speculation about a recession later in 2019? That is the major question investors will be analyzing moving forward as investors react on what they feel may happen, or what others may feel will happen directing their actions. For now rates remain flat from last week.

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

30 year conforming                                            4.00%        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.

Earlier this week we began the Great College Search II with our youngest daughter. We spent a few days in Seattle seeing the sites with the primary site being University of Washington as a possible landing spot. A very successful trip on all accounts. I like Seattle a lot, similar in many respects to San Francisco, but a nicer, cleaner, seemingly safer place to visit the last several years, in my opinion.

Next week is back to regular schedule in the house as spring break ends and the grind to the last day of school begins. I like regular schedules…

Have a great week,

Dennis

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

Should we wait until we have a 20% down payment to purchase our new home?

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Question of the week:  Should we wait until we have 20% down payment to purchase our new home?

Answer:  No. 

I have covered this topic throughout the years answering various questions that invariably lead to down payment, be it my thoughts on mortgage insurance (I like it, I will reprise reasons in coming WR&MU), cost of waiting to buy (covered last November), or borrowing from your 401(k) to help with your purchase, and many other questions of the week. We will cover it again today.

In a survey conducted by the California Association of Realtors the number answer to the question “Why didn’t you purchase a home sooner?” was “Needed to save for a down payment.”

Anecdotally, within my own and my co-workers’ experience the past several years, this is also a prime barrier we see with many of our clients who wish to purchase homes. The want to save more money for a down payment.

A bigger down payment.

It takes a lot of money to purchase a home in California, especially Southern California. Combine that with the prevailing sentiment of avoiding mortgage insurance and we have many families who could purchase a home today but are delaying doing so in order to save more money for a larger down payment.

It has always been my opinion that if you are able to purchase a home with the funds you currently have available you should do so. As I covered last November  with a very detailed comparison of two families purchasing homes in September 2017 versus 2018 the cost of waiting for accumulating a higher down payment to avoid mortgage insurance can, and usually does, costs you more in the long run.

The counter-argument is that he housing market is slowing. Last week the WR&MU had the home sales statistics for California showing the number of sales declining and prices, while flat year to year, were down from the prior month. If the market is slowing and prices may come down, does it not make sense to wait to purchase and let prices fall further and while waiting save more money for a down payment?

Only if your crystal ball is correct, if interest rates stay near their current levels and do not increase, if you are able to correctly predict the market, if you are certain the home in the neighborhood you want will still be available when you determine the timing is right.

Perhaps the biggest shift in homebuyers’ attitudes from the pre-2008 real estate bubble burst to the post-20008 real estate bubble burst has been their reason for purchasing a house. Many in the period of the real estate price balloon expansion prior to 2008 were purchasing houses, they were looking to make money on a real estate investment, they were using the value increase to obtain equity to finance consumer consumption. They were not buying homes so much as investments, as such price was what mattered most.

I have found that the homebuyers we have been speaking to and working with the past decade have been more interested in purchasing a home. They are looking for a place to raise their families, spend their retirement and hold for a long term rather than hoping for prices to climb so they can cash in.

This shift in mentality negates, somewhat, market conditions. If you are in a home for a long period of time, ten, fifteen, twenty years, minor market corrections are not of as much importance as if you were looking to purchase and then sell in the next three or five years.

If you have three, five, ten percent of the purchase price of the home you want to purchase available, and you can afford the mortgage payment buy the home. Buy the home today with the funds you have available and begin creating the home for your family. Yes, there may be a dip in the future of your home’s value, but does it matter if you will not be selling?

Our nature is to get what we want for the lowest price possible, but often while looking for the lowest price we are missing out on the best quality, best service or best product for ourselves and our family. Have you ever been shopping different airlines for ticket prices for your family vacation and see a good price but then take five or ten minutes more to see if there is a better price, then gone back to the site with the lower price and find there are no more seats available? You lost out on a potential bargain by looking for a better one. This happens to homebuyers as well, even in a soft market.

If you have funds available for a down payment, but are wanting to save more, please call me so we can discuss all your options for today and tomorrow when you have the funds saved you feel you will need. Those who know me know that I am not a “hard-sell,” I merely present options for you to make the decision you feel is best for you and your family, I cannot make you purchase a home, but I would like to show you the options of how you can—or if you are not able to show you what you need to do so you will be able to purchase your new home.

Find out your home buying options today, even if you want to wait until tomorrow.

Next week I will again answer the why I like mortgage insurance question, the week after I will cover the second reason families give for delay their home purchase as it coincides with work we do with our clients.

Have a question? Ask me!

Due to the partial government shutdown several economic reports for December are being released along with January data. One of these is personal income and consumer spending for December. December was an interesting month, personal incomes rose a very strong 1% for the month, but consumer spending dropped 0.5%, the largest drop since 2009. As a result of the increase in income and decline in spending personal savings jumped to 7.6%. Overall the news is mixed for its impact on mortgage rates, higher incomes should lead to higher spending and inflation, but the decline in spending and increase in savings should lead to a slowing in the economy.

Despite the drop-off in spending in December the 4th quarter Gross Domestic Product still grew by 2.6%. The rate of increase was slower than the 2nd (4.2%) and 3rd (3.4%) quarters but not enough to prevent 2018 to be the fastest growing economy since 2005. Holding back 4th quarter growth were a myriad of factors including housing and the trade deficit—and late in the quarter spending by consumers. Inflation for the quarter was 1.7% and year over year right at the Fed’s target inflation rate of 2.0%. Overall the news is negative for mortgage rates, a strong economy usually portends higher interest rates. However despite the strong growth in the year we have seen rates from recent highs in the fall of 2018.

Looking ahead, consumer confidence surveys released this week saw a surge, increasing for the first time in four months as most surveyed see better conditions ahead for themselves and their families. Will this confidence lead to increased spending and continued GDP growth above 2% and possible 3%?

Rates for Friday March 1, 2019: After three weeks of steady rates we see a slight bump in interest rates from last Friday. There are many small reasons why this has occurred, mostly investors chasing higher yields elsewhere which puts a damper on prices and therefore higher returns, i.e. rates, in the market. I do not see this as a trend.

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.

Sometime during our first year of marriage I got a bad head cold and Leslie said, “My dad has always said it takes three days to get a cold, three days to have it and three days to get rid of it.” Over the years I have noticed Don is right about this. Today is day one of the three part series for me, which means the last three days have been the wonderful, sneezy, snuffling, achy, sleepy portion of the cycle. Blech. Despite Don’s wisdom that this too shall pass, I am one of those who takes everything available, DayQuil, Mucinex, Emergen-C, Afrin, NyQuil, Ibuprofen, water, soup, whiskey…some day I’ll learn that I should just stick to one and ride it out.

I hope your week was spent in better health and that you are able to have the three-three day cycle avoid you and your household this year!

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 should we shop for our new home in the rain?

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Question of the week:  Why should we shop for our new home in the rain?

Answer:  Unlike most of the country, Southern California—most of California, has rain only a few months of the year, usually between late October and early to mid-March. Rain can be extremely destructive to property over the long-term and the opportunity to see how a property is impacted by rain should be a major factor in your home buying decision.

Consider the home owner who looks at homes in early April and finds one they really like. The last substantial rain in the area was in late January and early February. The property had some issues in the prior rainy season. Some small leaks from the roof and a skylight resulted in water spots on the ceilings. Windows on the south side of the family room leaked and resulted in some damage to part of the molding. In the rear of the house the run-off from the gutters pools around the exterior walls as high as three to four inches and drains by seeping below the foundation.

The seller of the property painted the interior of the home, including the ceilings with the water spots. Took some putty and paint and patched the moldings on the windows. Washed the exterior walls and planted some flowers and large plants where the water pooled and showed evidence of water creep.

The couple purchases the home and after a very hot spring, summer and early fall an El Nino arrives and there is significant rain and wind from early January through February—not dissimilar to our weather this year. Early on they discover water dripping through the ceiling in the kitchen and dining room, water was coming in through the south side of the family room and the water was getting very high where the gutters drained so that they had to carve a trench into their back yard to release the pond that was developing.

In this case the seller knew about the issues and did not disclose them to their real estate agent nor the buyers. Their defense could be that it had not rained for some time as the prior winter was fairly dry so they are not liable for the problems with the rain and water damage.

Since the trouble spots were covered up the physical inspector hired by the buyers could not detect the issues as everything appeared normal and there is no way to adequately test for how a property will react when several inches of rain falls over a short period of time.

The buyers incur expenses to replace their roof, replace windows and install hardscape and drainage systems to ensure water is kept away from their home and drains properly. The good news is their home is in tip-top shape and ready for foul weather; the bad news of course is thousands, tens of thousands, of dollars needed to be spent right after they used their savings to purchase their new home.

Imagine if the buyers had been able to inspect that same home this weekend after the storms we have had come through in the past several weeks? Any water issues a home may have would be evident and potential buyers would have a very good idea of what corrective measures would need to be taken and have professionals estimate costs to cure the issues. Buyers could then have these costs in mind as they determine whether to make an offer or not and if they do so how the price may be impacted in consideration of future costs.

It is important for me to note that the scenario where a seller purposefully hides known defects is not the normal case of real estate transactions. The same couple could have purchased the same home and the home had no noticeable issues with rain water and weather, however after a long summer and possibly eight or nine months before the next rain the same issues could present themselves. Southern California weather takes its toll on buildings with the constant sun and dry weather.

While summer is the hot season for temperatures and also housing markets, looking at homes to purchase during the summer can be a detriment in the long term. I have always felt that in Southern California it is the wet and windy winters that are the best time to house hunt in order to see how your potential new home handles our worst weather.

If you are considering purchasing a new home please contact me so we can develop a strategy for your purchase and the best mortgage options and purchase price to acquire your new home.

Have a question? Ask me!

The economic data presented this week suggests rates should go lower. Long time readers of the WR&MU know that good economic news pushes rates up and not good news pushes rates down. News that puts upward pressure on rates are inflation over about 2%, strong retail sales, strong GDP growth and strong job market; the opposite of those actions on those factors generally leads to lower rates.

Prices were flat for consumers in January, literally with 0.0% increase in the Consumer Price Index. Held down by a drop in gasoline prices. Stripping out energy and food prices, called the core price index, prices increases 0.2% for the month and was up 2.2% year-over-year. The Producer Price Index did not fare as well, dropping 0.1% in January after a 0.2% drop in December. The news is positive for lower rates as higher inflation is healthier for the economy and growth.

Wages bucked the price trend, with “real” wages (adjusted for inflation) rose 0.2% in January and year over year are up 1.7%. Good news for the rank and file (excludes executives) whose wages are up over the past year by 2.1% . The stronger wage gains are not positive for rates as higher labor costs theoretically are passed on to consumers creating higher prices, known as wage inflation. Strong wage inflation puts upward pressure on rates.

With the government shutdown concluded we finally get retail sales data for December, and it is not positive. In fact, sales in December dropped 1.2%, the biggest decline since September 2009. There were numerous factors that could have contributed to the large decline, poor weather, the start of the shutdown, mummers of recession and a huge drop in gas station receipts (down 5.1%) due to lower prices. It appears, however, that the drop was attributed to other factors as well and it puts into question the strength of the economy in the 4th quarter. The biggest surprise in the report was a 3.9% drop in internet sales, but also dropping were sales across the board at restaurants, bars, apparel, home furnishings, virtually every consumer category. The news is very friendly for lower rates as consumer spending is 65-70% of our economy, a slow down in consumer spending opens the door for those mummers about recession.

Rates for Friday February 15, 2019: There is a lot of information influencing markets, and while rates have been stable week to week they are ready to break out higher or lower. The ongoing trade negotiations with China, political fighting continuing in Washington over budgets and expenditures and the not great economic news all are influencing investors. Looking ahead rates should go lower based on data, but as we have seen over the past six to twelve months, data is not the primary driver in investor decisions that influence rates and 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.

Continuing weather talk from above, I like the stormy winter (for California) weather. I can say that because I do not live in an area negatively impacted by mud-slides or blocked highways. It can interfere with weekend activities, but spending a Saturday or Sunday inside cozied up with sweatshirts, hot beverages and a good movie or book definitely has appeal.

Unfortunately, the rains are part of the California Trilogy of Tragedy which occurs when we have years of deluge and not drought. The rains cause tremendous abundance of undergrowth and grasses that die off in the summer dry weather and become tinder for the fall to start and spread wildfires which burn off all the ground cover and create barren landscapes that become mudslides the next rainy season. Rain, fire, mud, repeat.

Fires and mudslides in the middle of the wilderness are not tragedies, they are part of nature over the eons and millennia; when homes and developments are permitted in and immediately adjacent to wilderness areas the trilogy results in tragedy for towns and families. We will continue to see the cycles occur with loss of homes to fires or slides as long as local and state government issue permits for development collecting tax dollars in return.

Off my soap box.

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

Are we headed to another collapse in real estate?

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Question of the week:  Are we headed to another collapse in real estate?

Answer:  In last week’s Weekly rate & Market Update I wrote that this week I would compare the real estate market prior to the collapse in the industry that led to the Great Recession with the current market. The impetus for the comparison is the slowdown in real estate sales in number of units sold and in some areas decline in prices, this has many wondering if we are heading to another major market “correction,” i.e. large drop in values for homeowners.

It is a valid question for many who experienced the market collapse that started in 2007 and continued for more than a year. The anxiety and fear of the future and other negative emotions many experienced are easily brought forth when it appears that a similar lead up may be occurring in our current economy and real estate markets.

For those who do not wish to read through my reasoning (which in typical fashion is a bit extensive) I will give you my answer to the question of the week: No.

No, we are not headed to another collapse in real estate.

There are several reasons why I do not see a significant decline in real estate on the horizon, defining “significant” as a decline in prices of more than 10% year over year.

The California Association of Realtors report on December 2018 sales notes that units sold declined for the eighth straight month, while active listings increased statewide for the ninth straight month. Statewide there was drop from December in the median price, but the median price was higher from the prior year. The data statewide and regionally throughout the state certainly shows a slowing real estate market. The question is how long and severe will such a slowing be?

Prior to the market collapse a decade ago the market went from hot and steamy to slowing, similar to what we have experienced over the past several years statewide and in Southern California, with prices increases up to 10% or more year over year in most regional markets and increasing total sales. The difference as to why the next steps will not mirror the collapse a decade ago is the basis of the run up in prices—the expanding of the balloon that eventually popped. No, not popped. Exploded.

Most real estate market slowdowns occur when price increases outpace the ability for consumers to afford to purchase homes in the markets they desire, which led to decreased demand. Eventually demand decreases to the point that sellers must lower their prices if they want to sell their homes. The amount of decline in the overall market depends on how many sellers need to sell and how far they are willing to drop the price of their homes to attract buyers.

Factored into the demand feature is not only the cost of the product, a home, but also the costs to obtain the home in terms of financing. If there were not thirty-year fixed rate mortgages with low down payment requirements available to finance homes our prices would be up to 90% less than they are today. Because of the increase in rates over the past year to cost to finance a new home purchase has exacerbated the increase in home prices putting a bigger damper on ability to purchase, which decreases demand. So not only are rising prices dampening demand, but increasing rates also kept buyers out of the market.

Having to pay more to finance an asset that also costs more reduces the amount of qualified buyers. Fewer buyers leads to less demand leads to softening prices. Simple economics.

If this is similar to what occurred starting in 2007, why should the result not be the same?

Three major reasons: Ability to finance, purpose of purchase and refinances.

The first reason, ability to finance, is by far the primary factor in the market collapse and the biggest reason our current market slowdown is in no way similar to the collapse. Last week in the WR&MU I discussed QM and non-QM mortgages, a distinction created by the Consumer Financial Protection Bureau in reaction to the part the mortgage industry played in the creation of the housing bubble and ultimate explosion.

Starting around 2000 Fannie Mae and Freddie Mac developed and continually refined Automated Underwriting Systems for loan approvals. As more and more data was available to Fannie and Freddie their AUS became looser and looser—meaning it became easier and easier to obtain loan approval for residential mortgages. By around 2003 lenders were guaranteed to have their conventional mortgages purchased by Fannie or Freddie is there was an AUS approval in the mortgage application file as long as the required documentation as listed by the AUS approval was in the file. After around 2003 the required documentation became less and less. Eventually, Fannie Mae and Freddie Mac were enabling mortgage fundings on the vast majority of loans funded in the country that today would be labelled as “Alternative,” or non-QM mortgages.

Example of less and less. In 2001 Susan and James purchase a $350,000 home with 10% down and a 90% conventional fixed rate mortgage. We run their information, credit report, monthly income, employment history, liquid assets and the sales price through the AUS for Fannie Mae. We receive a result of “approve-eligible,” meaning the loan is approved and eligible for purchase from Fannie Mae provided the conditions listed in the approval are met. The conditions in 2001 would call for proof of income as exhibited by most recent two years’ W2s and recent paystubs covering 30 days showing year to date income. Proof of down payment showing at least two months bank statements with any deposits that are significant and not from employers sourced and explained. Debt obligations and history as shown on a tri-merge credit report (Equifax, TransUnion and Experian). Value of property supported by a licensed appraiser providing a complete report including inspection of the property.

In 2006 Susan and James what to purchase a $550,000 home with no money down, obtaining a loan covering 80% of the price with a Fannie Mae loan and 20% with a Home Equity Line of Credit from the same lender. The lender guidelines for the HELOC are that they will accept whatever documentation is required by Fannie Mae’s AUS system. We interview the clients and obtain their income and assets, pull a credit report and have the purchase price. We upload the information to the AUS and receive and “approve-eligible.” The approval conditions require we perform a verbal verification of employment to ensure the borrowers are employed. Require that the funds required for closing are brought to escrow. Since the purchase price of the property is consistent with the values in Fannie Mae’s property valuation software for the zip code no appraisal is required.

In 2001 Susan and James with 10% down had to prove their income, funds for closing and their source and the value of the property is market value with an appraisal.

In 2006 Susan and James with no money down did not have to verify their income, funds for closing or that the purchase price was market value.

By 2006, Susan and James were a declining part of the market, they wanted a 30-year fixed rate mortgage. By 2006 a large portion of the market consisted of borrowers looking for adjustable rate mortgages so they could buy very expensive homes with very low mortgage payments—in the first year(s) of ownership. In the years of the bubble expansion more and more borrowers were purchasing and refinancing using adjustable rate mortgages.

In the run-up to the housing bubble explosion most borrowers did not go through any type of even quasi-rigorous approval process. Fannie and Freddie, and therefore lenders, were funding stated income, stated asset, stated value loans. Anyone with decent credit could buy a home. Many purchased homes with adjustable rate mortgages ignoring that in the future their payments would be higher.

The CFPB’s Quality Residential Mortgage (or QM) guidelines created the primary reason a future major real estate collapse is less likely because in the past ten years borrowers have had to prove income, verify assets and have the value confirmed by a licensed appraiser.* As well, many adjustable rate products are no longer available, and those that are available are very rarely used by home buyers. When you have a real estate market where the buyers are fully qualified to show they have the ability to make their mortgage payments your incidence of foreclosure will decline astronomically compared to a market where a significant portion of buyers were not adequately qualified to show they could make monthly mortgage payments.

*In recent years “property valuation waivers” have once again been issued by Fannie and Freddie through their AUS approvals. As well, as discussed last week, alternative mortgages are a growing sector of the market which depend more on assets than verifiable income for approvals. While growing, this segment of the market is a very small percentage of the total market.

Reason number one the current market is not mirroring the exploded market: Almost everyone who has purchased a home in the last ten years has the ability to make the mortgage payments as long as they are employed.

A not insignificant portion of the market were not buying “homes,” they were buying investments and doing so with very little or no down payments.

Because financing was easy the market became crowded with home buyers. More demand leads to higher prices. As prices climbed and qualifying became easier, and cost to enter the market dropped, more buyers entered the market and many began chasing home purchases so they could cash in, buying a home then reselling in a short period of time and purchasing a more expensive home, and repeating the process.

Then the perfect storm hit. With prices rising demand began to slow. On Wall Street, investors discovered that the mortgages they were buying were not as high a quality as they were told; the mortgages were not underwritten to high standards to show borrowers’ ability to repay, but rather were very risky. Investors stopped buying mortgages. Lenders started going out of business. Inventory climbed. As inventory climbed prices started to decline and homeowners found themselves with property in which they owed more than the property was worth. They could barely make their mortgage payments. Why struggle to pay a loan for a property that is worth less than you owe? Homeowners walked away from their properties, creating a flood of foreclosures and banks putting homes on the market at lower and lower prices.

Boom.

Reason number two our current market will not continue to mirror the collapsed market, there is a strong emotional connection to the property, it is a home not an investment. If there is a decline in value, while concerning, it will not create a reason to sell because the homeowner has a long term plan and still have equity in their property.

The third reason, refinances, were no small contributor to the market collapse. As prices rose many homeowners took advantage of their increased equity by refinancing, under the same easy qualifying guidelines, to pull out their equity either with cash-out refinances with fixed or adjustable rate mortgages, and/or with Home Equity Lines of Credit. Some homeowners engaged in multiple cash-out transactions from the early 2000’s into 2007, pulling hundreds of thousands of dollars in cash from their properties. What happened when prices dropped and they owed a lot more than the value of their property? Yet more inventory on the market pushing prices down more and more.

The real estate market that has grown over the past decade has done so due to very solid fundamentals. Buyers have had down payments, a stake in the property. They have financed their purchases with mainly 30-year fixed rate mortgages that they have shown are within their ability to pay based on their income, debt obligations and history of making credit payments. They have purchased homes for their families for the long term, not short term investments intended to create profit.

As well, the underlying interest rates for most homeowners are very low. From 2005 to 2006 conventional fixed rates climbed as high as 6.5%. Since 2010 the highest the conforming fixed rate has been is 5.125% in the first week of January 2010, dropping to 3.125% in the last quarter of 2012 and reaching a high of 4.875% for two weeks in October 2018.

Our housing stock is owned by homeowners who can qualify for their mortgage payments, have mortgages with very low fixed rates, have equity in their property—in most cases significant equity, and are staying in their homes for the most part until a life changing event like having children, kids graduating from high school, change in jobs or retirement.

After price run-ups all markets will have periods of no to negative growth, i.e. prices flatten or drop. We are experiencing this in the current market. Will it lead to another collapse? Because of the very strong fundamentals of homeowners the answer is “No.”

The greatest risk to the real estate market is the overall economy and job and income loss. Should we experience very high amount of unemployment in the region, state and country that can, and will, impact the real estate markets. But even then I cannot foresee any type of collapse in prices near what we experienced a decade ago.

Have a question? Ask me!

No bump now or maybe later. This week the Federal Reserve Open Market Committee had a meeting, this is the group that raises and lowers the Fed’s rate charged to member banks to borrow money. It was not a big surprise that the FOMC did not raise rates. What did catch everyone off guard were statements by Fed Chair Jerome Powell at a press conference. Powell’s comments indicated that the Fed may not increase rates two or three times in 2019 as previously intimated. This alone would be enough have investors believe low/er rates are in store for 2019, add in his comments about the Fed’s balance sheets and belief becomes reality.

Looking to help stimulate economic growth after the Great Recession, the Fed purchased over three trillion dollars of fixed rate assets comprised of U.S. Treasury bonds and conventional mortgages from Fannie Mae and Freddie Mac. In 2018 the Fed announced that it would be selling these assets from its balance sheet in systematic, “automatic” as described by the Fed, way. This news, and subsequent going to market with billions of dollars of fixed rate assets to sell put upward pressure on rates. The news from the Fed that it would be looking to curtail sales in the future was welcomed by investors and resulted in stocks climbing and rates decreasing.

The direction was reversed on labor news released today. As reported by the Department of Labor payrolls increased by 304,000 workers in January and job growth continues to be very strong. The headline unemployment rate edged up to 4.0%, mainly due to filings by some federal workers during the shutdown, aided by more individuals entering the market looking for work. Wages and salaries continue to increase as well, not surprising as employers seek more employees—supply and demand works for wages as it does for home prices. Overall the news is mortgage rate unfriendly as higher labor costs should lead to higher inflation, which should lead to higher rates. For the time being inflation is within the range of 2%, the Fed’s target.

Rates for Friday February 1, 2019: Even with a bit of an uptick today following the jobs data the conforming rate is down slightly from last Friday with high balance rates remaining flat for the week.

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.

Anyone send any selfies playing golf, strolling on the beach or enjoying a beautiful sunset earlier this week to friends and family in the Midwest or East Coast? It is weeks like this that make the “weather tax” to live in Southern California worth the cost.

Once again, the New England Patriots are in the Super Bowl, entrenching themselves in the most reviled professional team in the country for those not living north of Connecticut. Love them or hate them an objective view must be that they are perhaps the greatest spots dynasty in American history during the Belichick-Brady era. Unlike the Yankees or Celtics of yore who controlled their players throughout their careers and contracts, the Patriots like other teams in the NFL must create a new team every year due to players leaving through free agency and looking for replacements through free agency and the draft. Despite all the roster change over, like many teams face, owner Robert Kraft has provided outstanding leadership to enable the team to be by far the most successful over the past seventeen plus years.

Perhaps the Rams can duplicate what my favorite team, the Eagles, did last year and beat the Patriots. I am of the opinion that they will not but that is why they play the game. Brady is 5-3 in Super Bowls, his only three losses coming to NFC East teams, the Giants twice and the Eagles last year. One thing about Patriot Super Bowl games, they are always close. Of their nine games with Brady at QB the largest point spread is eight points, last year and three games have been decided by only three.

Enjoy the game and 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?

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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