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Our parents have left their home, it has a reverse mortgage, what are our options?

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Question of the week:  Our parents have left their home, it has a reverse mortgage, what are our options?

Answer:  Reverse mortgages are one of the most misunderstood financial instruments available to consumers and inappropriately maligned because they are misunderstood. The latter primarily because of their history, we’ll explain this history a bit further in the WR&MU.

A very quick and broad overview of what a reverse mortgage is and how it works.

A standard mortgage is a loan secured by property, the borrower pays a monthly payment to the lender that is either only the interest owed for the amount outstanding on the loan and/or an amount that is the amount owed in interest for the loan plus a certain amount of principal. The overwhelming majority of mortgages are “amortized,” meaning that each month the payment on the mortgage is calculated so that the interest owed for the month plus a certain amount of principal is calculated so the mortgage is paid off at a known date in the future. If you take out a $300,000 30-year fixed rate mortgage with the first payment due July 1st 2019 and a $1500 payment per month, and make that $1500 payment every month on time for 360 months, on June 1, 2049 your last payment of $1500 will payoff the loan.

With each payment you make on a conventional mortgage the balance of your loan decreases, the decrease accelerates as the loan ages as you pay a smaller amount of interest with each successive payment since the balance is decreasing.

A reverse mortgage is the reverse of a conventional mortgage. There are several options for reverse mortgages, for simplification we will use the option where a lump sum is funded at closing on a reverse mortgage.

The primary benefit of a reverse mortgage is that there is no required monthly payment. If you obtain a $300,000 reverse mortgage you do not have to make any payments for interest, or principal, as long as you own and live in the home. When you “leave” the home the original principal, plus all the accumulated interest that was not paid, is due—in other words, the loan must be paid off.

The longer you own the home and have the reverse mortgage the higher the balance will be that needs to be paid to the lender to close the mortgage. Unlike a traditional mortgage where the balance due declines over time, the reverse is true as the balance increases.

I will not go into the benefits and detriments of reverse mortgages in this week’s WR&MU, but get back to our question of the week, and the clause in reverse mortgages that when the borrower(s) leave the property the loan must be paid off.

Several decades ago saw some major companies in the reverse mortgage market funding mortgages to seniors that were very lender friendly and often ended up in the family losing the home to the lenders when the borrowers passed away or needed to leave their homes for whatever reason. This is no longer the case. Federal regulations changed the rules governing reverse mortgages, enabling families the opportunity to either retain properties with reverse mortgages or sell the properties and retain the resulting equity.

Several times a year we have clients whose parents had a reverse mortgage on their primary mortgage and the parents have either passed away, or moved into assisted living or some other residence, perhaps with one of their children. Reverse mortgages have a clause that when the last borrower, assuming a husband and wife co-signed the mortgage, no longer has the subject property as their primary residence the mortgage must be paid off.

Let’s assume that Nancy, mother to Kyle and Susan, took out a reverse mortgage ten years ago that enabled her to payoff a conventional mortgage with payments she could no longer afford after her husband George passed away so she could remain in the home they shared and raised their children in for forty years. Nancy has passed away and the reverse mortgage has a balance of $300,000 and the home is valued at $500,000. Nancy and George were smart and put their home and other assets into a trust they created many years ago. When George passed away Nancy became the sole trustee and the children were the sole beneficiaries of the assets in the trust when she passed away.

Kyle and Susan, following the advice of the family attorney administering the trust, contact us as they are not sure what to do with the family home. They are fearful that the lender will foreclose on the property and they will lose not only the family home, but also the equity in the home. What are their options? Will they lose the home and equity? We ease their concerns and communicate the standard rules for most reverse mortgages upon the death, or leaving of the property by the borrower(s), is the lender needs to be notified within 30 days of the intention of whoever controls the property as to what will happen with the property and plans to payoff the mortgage. The person in control can be the borrower who has vacated the property, individual with power of attorney and legal guardian, executor of the estate, or if no estate the heirs and/or probate attorney. Typically, the plan communicated to the lender must be executed within six months.

Kyle and Susan have four options, nothing, sell, refinance, buy-out. Susan is the executor of her mother’s estate and will need to communicate to the lender which of these options will be taken to payoff the lender.

Doing nothing is always an option. Generally, not the best option, but an option nonetheless. In this case doing nothing will result in the lender going through the foreclosure process, which will result in more interest accumulating on the mortgage, fees and costs of foreclosure being added to the amount owed to the lender and the lender then auctioning the property at a foreclosure sale with the minimum bid being the total amount owed. Bidders will see a property worth $500,000 and perhaps $375,000 owed to the lender to clear the loan balance, principal owed and costs. Any amount over what is owed the lender will be paid to Nancy’s estate and available for Kyle and Nancy to split. For instance, if the winning bid is $425,000 then $50,000 will be paid to the estate. If there are no bidders then the lender will take possession of the property and the estate will lose the asset. It should be noted, if the amount owed on the reverse mortgage is at or above the value of the property then giving the property to the lender is not necessarily a bad option. Susan does not communicate this option to the lender.

Kyle and Nancy do not want to do nothing and risk the loss of equity and/or the property.

We are down to three options, sell, refinance or buy-out.

Kyle and Nancy must decide what they want. Does one, or both, wish to retain the property? If not then the obvious option is to contract with a real estate agent to list the property. Once the property is on the market Susan, as executor, should communicate the status of the property to the reverse lender, this will almost always put any action by the lender on hold. Continue to communicate. When an offer is made and accepted, Susan, again contacts the reverse mortgage lender; lets them know the property is in escrow and the scheduled close of escrow. She also provides the lender with the contact information for the escrow company and tris to get the name and contact information for an individual at the lender for escrow so they can communicate status and timing as closing nears. When the sale is concluded the net proceeds of the sale will be sent to Nancy’s estate to be disbursed according to the trust, typically evenly between Kyle and Susan.

Before deciding to sell the property, Kyle and Susan should discuss if they wish to retain the home. We discuss this option which will entail refinancing the reverse mortgage with a new loan to Kyle and Susan, and perhaps their spouses, and when the transaction is concluded they will jointly own the property. Typically, when this is the scenario the property is then held as an investment property and rented; providing income and appreciation of value for Kyle and Susan. If this is the option Kyle and Susan choose, then Susan, as executor, contacts the reverse mortgage lender, informs them of the intent to retain the property provides my contact information and escrow’s so everyone is communicating status and timing to ensure the lender does not file a notice of default or initiate a foreclosure process.

In discussing retaining the property, Kyle, who lives in Denver, does not wish to be a landlord, especially for a property so far away. He would rather receive his portion of the equity in cash as the part of the division of the estate. Susan, who has been renting her home sees an opportunity to become a home owner and wants to retain the property as her primary residence. Running the numbers, Susan qualifies for a mortgage needed for her to obtain title to the property after paying off the reverse mortgage and sufficient proceeds to buy-out Kyle.

Now our math can get a bit complicated as we must fund a mortgage to pay off the reverse mortgage, and extract enough equity to buy-out Kyle’s share of the property. If there are no other assets the simple math is the property is worth $500,000 and $300,000 is owed, leaving $200,000 equity to be split, therefore Kyle needs to receive $100,000. Our new loan would need to be $400,000 to cover paying off the reverse mortgage and Kyle. At this point we typically discuss “fairness,” as if the property were to be sold on the open market costs can range from 7-8%, or $35-40,000, for real estate commissions, transfer taxes, escrow, title, potential costs for repairs or other items. So, if the property were sold for $500,000 the net proceeds after paying off the reverse mortgage and costs can be around $160,000, or $80,000 each for Kyle and Susan.

Kyle and Susan get along very well, Kyle sees the math if the property were sold and agrees to accept $80,000 from the refinance that will transfer title to Susan. We will therefore fund a loan of $380,000 to clear the mortgage and Kyle.

Unless….when Nancy passed away there was approximately $120,000 in cash and investments. This would be split $60,000 each to Kyle and Susan. However, they agree that Kyle will get $80,000 of the liquid assets in exchange for any proceeds from the sale of the home. Nancy will get $40,000 from the liquid assets in the estate and the title to the property. We fund a mortgage of $300,000 to payoff the reverse mortgage, the other assets are distributed accordingly and everyone is happy.

If your parents, or a client, or you, have a reverse mortgage, there are several options available to heirs and estates when the time comes to payoff the reverse mortgage. Too often we hear from clients, attorneys, accountants, or financial advisors, stories of families panicking and selling a home because there was a reverse mortgage and they were misinformed that the loan had to be paid off and selling the property was to the way to pay it off without risking foreclosure. This is not the case!

If you, or someone you know, is in this situation a steady and calm approach reviewing all the options, the benefits and costs of each, will enable a sound decision to be made as to how to payoff the amount due to the reverse mortgage lender. The amount of equity in the property, other assets in the estate, desire of the heirs and their abilities to finance a new mortgage if that is the preferred option, will determine the best option for the property and paying off the reverse mortgage.

We handle many such situations every year, not just properties with reverse mortgages that need to be paid off but also properties in family estates that one, or multiple, heirs wish to retain. If you, or someone you know, is in this situation, please call me to go through all the options available.

Have a question? Ask me!

Like Mark Twain, the economy is saying, “The reports of my death are greatly exaggerated.” Twain made this comment in a cable to the press in the United States upon reading of his death in the papers while in London. The economy is making this comment with data on retail sales, industrial production and capacity utilization (how much is being produced compared to what could be produced) showing an economy that is not faltering as many reports and commentators have indicated, but rather continues to show steady growth and economic activity. Much of the reports are due to inflation remaining very low, typically an indicator of a slow economy, and slowing growth in the labor markets, due to scarcity of labor more than scarcity of job openings.

Retail sales are good and better. The Commerce Department’s report on retail sales for May showed a strong 0.5% increase from April, which would be discounted by many since last month the report showed April sales decreased 0.2% from March. However, the discount is voided when the report also shows April sales revised from the 0.2 decrease to a 0.3% increase in April, thus showing May to continue a string of months with American consumers consuming in solid numbers. This is important as consumer spending is 65-70% of our nation’s economy. The news is somewhat interest rate unfriendly.

Balancing the sales data were the releases for producer and consumer prices. Both indices showed growth of 0.1% in May, essentially indicating a lack of any substantial inflation in the market place. This data seems to support speculation that the Fed will lower rates at the July meeting of its Federal Open Market Committee, as for many it portends a slowing economy that will need a drop in rates to promote investment and growth.

Rates for Friday June 14, 2019: Reports, commentary, speculation, these are what drive a lot of decisions for investors as they try to stay ahead of downturns and get in before upswings. The tariff issues with China, Mexico and other nations, lack of inflation, slowing job growth, the Fed lowering rates, all have investors anticipating lower rates—which creates lower rates as they influence the markets. Mortgage rates reflect this anticipation, a Fed rate drop is already priced into our market, as rates continue to sit at lows last seen in January 2018. If the Fed surprises the markets and lowers rates at its meeting next week instead of waiting for July, my expectation is that mortgage rates will bump up as investors move to stocks in anticipation of rising prices in the equity markets. Stay tuned, and lock in when you can.  

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

30 year conforming                                            3.75%        Flat

30 year high-balance conforming                   3.875%      Flat    

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

Happy Father’s Day to the dads out there. If you are a golf fan, here is hoping you have a chance in being celebrated to watch the conclusion of the U.S. Open, especially if it is an exciting finish. For many years we started our summer family trip on  Father’s Day and I watched many holes of golf in airports or rushing to get to our accommodations to catch the finishes.

One of the primary lessons I learned from my dad that I hope my children adhere to as well is he used to say, “I’d rather lose a friend telling the truth that to keep or make one telling a lie.”  Of course, this also means do not penalize your friends for telling you the truth.

Happy Father’s Day!

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 impact will the tariffs and trade with China have on mortgage rates?

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Question of the week:  What impact will the tariffs and trade war with China have on mortgage rates?

Answer:  Great question, with a variety of possible answers, only three of which concern us: will the tariff tiff lead to higher rates, lower rates, or have no impact.

To recap for newer readers of the WR&MU, I have a degree in economics and political studies and have studied both since I walked on campus in August of 1980. There are plenty of jokes about economists not being able to give a complete answer to any question without a “but…” or “on the other hand…” which his some of what I will provide today, but also my personal opinion.

To recap the issue, in July 2018 President Trump imposed tariffs on China for what many consider unfair trade practices. There had been negotiations between China and the United States on trade issues since Trump and China’s President Xi Jinping visited the U.S. in April 2017 to meet with Trump, this was followed by Trump’s visit to China in November 2017. Following the visit negotiations on a broad range of trade issues were more circular than linear and the Trump Administration began implementing actions to pressure China into working to resolution of issues in the trade talks, and starting in March 2018 tariffs began to be imposed on certain goods entering the United States from China and other nations. China, in response, began imposing tariffs on certain goods imported from the United States.

Primary to the United States negotiations for a trade deal with China is the Chinese government doing nothing to stem, or preferably stop, the theft of intellectual property and the manufacturing of forged goods for sale into American and other international markets. The estimated costs of these actions by Chinese businesses, many of which are government controlled is from $250 to over $600 billion per year.

For more context, the trade imbalance with China in 2018 was $419.2 billion in China’s favor, in other words the United States imported $419.2 billion more from China than exported to China. From the numbers, the Chinese business and labor markets benefit more from trade between the nations than do American businesses and labor markets; on the other side American consumers benefit more from the imported goods from China than Chinese consumers from American imports.

Back to our question, what impact can this issue have on mortgage rates?

The issue can have the impact on increasing interest rates if the trade war is resolved in such a manner that results in loss of income to American businesses due to piracy and forgery of American intellectual property and products and a much wider opening to Chinese markets for United States goods. The result would be economic growth and expansion for the United States economy, which results in higher rates as strong economic expansion and growth tend to lead to inflation and higher rates. Rates or usually tied to stocks, if stock prices rise so do rates, besides higher prices and wages putting upward pressure, so will corporate earnings and profits sending stock prices higher pulling money out of fixed rate investments, like mortgages, creating more upward rate movement.

The issue can have the impact of lower interest rates if the trade wars continue beyond the United States and China to include other nations resulting in economic slowing in both nations and around the globe. This could create a recession, which is economic contraction instead of growth, which results in lower interest rates. Corporate earnings would drop, as would stock prices, which would have investors purchasing more fixed rate assets, leading to more downward rate movement.

The issue can have no impact on rates if either no new trade deal is put into place and the tariffs remain where they currently are or even increase some more.

Looking at the data, the last option is what I think will happen. It is important to separate the politics from the data of the trade between the United States and China. This is challenging since almost all of the information we receive is political in nature—just read all the adjectives, and the “could happen if…” “might happen if…” “may happen if…” in stories on any subject and in particular the trade issue, these statements color a story and ultimately inject politics. The impact of the issue so far has seen the stock market drop and climb and drop and climb, much of which I, and others, feel is unfounded as the impact of the tariffs on the overall economy and the amount of trade with China are both overstated.

Tariffs are taxes on imported goods that go to the federal government. From the beginning of our country until into the 20th Century, tariffs were the primary source of funding for our federal government. In 2018 Americans paid a total of $5.51 trillion in taxes (with a t-) to federal, state and local governments, of which $3.6 trillion when to Washington D.C. The most recent tariff hike on $200 billion in imports from China raised $30 billion a year in taxes for the United States, or about 0.8% (zero-point eight percent, or less than one percent) of total tax revenue last year. Certainly, a lot of money, but an additional $30 billion in tax revenue has zero impact on the government.

This also means that American consumers will pay $30 billion more for Chinese goods, absent inflation, due to the tariffs. In the first quarter of 2019 consumers in the United States spent $14.25 trillion, about 68% of our total Gross Domestic Product (GDP). If consumer spending drops 2% per quarter for the remainder of the year, a big if, total spending in the United States for the year would be over $55 trillion. The higher costs to consumers for the tariff costs are about one-half of one percent of their total spending (0.5%). Because iPhones and chargers are made in China, if we add 0.5% to the current cost of a high-end iPhone that is $1000, the price with tariff would be $1005.

Consumers are benefiting from the current situation in the grocery stores as food prices are down since China is importing less wheat, soybeans and other farm products. American farmers have crops ready to ship and while looking for other markets to take up the slack from the drop in exports to China an over-supply has led to lower prices at home. China importing less from the United States does not mean that China has stopped consuming wheat and soybeans, it means they are importing from other nations, which leads to higher prices in those countries, and also a vacancy in markets where they were exporting before selling to China.

In summation, the amount of trade between the United States and China is a very small percentage of our national economy, all exports to China amount to about 0.6% of our GDP so if all exports to China were to cease, while it would have a negative impact on some industries it would have a negligible impact across the whole economy. As well, the negative impact can, over time, be reversed with exports previously sent to China sent to other nations due to supply and demand in international markets.

Of greater impact to our domestic economy then the potential loss of trade is the historically higher tariffs on U.S. imports to China than Chinese imports to the United States, which has limited the Chinese markets to American companies while providing almost unlimited access to American markets by the Chinese. Combined with the loss of revenues due to theft of intellectual property and manufacture of forged goods, the trade situation with China is more costly to our GDP than the costs of the tariffs being imposed and loss of exports to China and higher prices for Chinese goods in the United States. Should an agreement be reached in which the Chinese government agrees to lower tariffs so they are somewhat in balance between the two nations and to crack down on forgeries and piracy the U.S. economy would see a very positive benefit due to an expanded marketplace for U.S. goods and retention of lost revenue.

Tariffs can be extremely harmful to both importers and exporters resulting in higher costs and/or lack of production. This is the case if the amount of trade and GDP impacted by the tariffs is a significant portion of either, or both, nation’s total trade and economy. While there is a lot of trade between the United States and China, the amount is not a significant portion of the American economy. Because of this the overall impact of the current tariffs, and potentially higher tariffs in the future, should not have a large impact on our economy nor interest rates.

Have a question? Ask me!

Speaking of American consumers, retail sales in April dropped 0.2% from March. Ordinarily this would be of some concern since consumer spending is 65-70% of our GDP, however since retail sales jumped 1.7% from February to March a slow down in April was expected following the torrid buying in March. Investors reacted to the news with a yawn and rates were not impacted.

Rates for Friday May 17, 2019: As stated, rather lengthily, above the perception of the impact of the trade dispute with China is worse than the actual economic impact. Perception however, is what moves markets and the markets will continue to be somewhat unstable until some sort of resolution occurs. After several weeks of rates being flat Friday-to-Friday we see a dip this week due to the instability in the markets and investors moving from stocks to bonds and mortgages.

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

30 year conforming                                            3.875%      Down 0.125%

30 year high-balance conforming                   4.125%       Down 0.125%

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

If there are any fans of Boston teams reading this you may want to give me a call. The purpose of the call will be to ascertain your devotion to those teams and if it is enough to enable your Lucky Charm to remain in Boston for three more years. What Lucky Charm?

Last night the Boston Bruins advanced to the Stanley Cup Finals, where they will be the overwhelming favorite to beat either St. Louis or San Jose. If/when they do win the Stanley Cup, the Bruins will be the third team to win a championship for Boston since August 2018.

In August of last year our daughter showed up in Boston to begin her freshman year at Boston University. Her arrival was followed a few months later by the Red Sox winning the World Series and a few months after that the Patriots won the Super Bowl, and now the Bruins are four wins away from the Stanley Cup. Coincidence? Maybe. But if you are a Boston fan why take the chance? Why not make a donation to keep her in Boston as your Lucky Charm and bring more championships to your city?

For those who do not like Boston teams we may be able to negotiate what it would cost to get her to leave Boston and attend university where your favorite teams play. For your information, this Phillies, Eagles, Flyers, Sixers fan has struck out on her moving south….

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

Do we have to pay closing costs?

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Question of the week:  Do we have to pay closing costs?

Answer:  Frequent readers of the WR&MU know the standard answer to the majority of questions of the week: Yes. No. Maybe.

 All real estate and mortgage transactions have costs, the question being asked is does the borrower have to pay them or can someone else?

Everyone has heard the ads, “no closing costs…” This is semi-truth in advertising. There are always closing costs, and someone is paying them, who and how?

Before we dig into who and how the closing costs can be paid we need a look at what closing costs are present in mortgage transactions.

Closing costs is usually a general term for any funds collected during the transaction. In reality, there are actual costs and recurring payments that combine to be called closing costs, we define these as non-recurring and recurring costs.

Non-recurring costs are fees you are paying only because you are in this transaction, fees for the appraisal, escrow, title, lender, county recorder are paid once, i.e. they do not happen again until the next time you enter into a transaction to purchase or refinance real property.

Recurring costs are funds that are collected to pro-rate mortgage interest, homeowner’s insurance and property taxes. These are costs that you pay because you own a home and have a mortgage. The funds to cover these costs will depend on three primary factors: whether you will have an impound or escrow account set up for the lender to collect and pay your property insurance and taxes, what day of the month your transaction closes, and what month of the year your transaction closes.

Closing costs are different for purchase transactions and refinance transactions, typically costs for purchases are higher due to the escrow and title fees being higher than for a refinance. If your transaction is a refinance there are two options for closing costs to be paid, if you are purchasing a new home you have those two options plus one more.

The first option is the most obvious one, you pay the closing costs. In refinance, you usually can add them to the new loan, which means you will be paying the costs over the life of the loan. If you are purchasing a home it does not make sense to add them to the loan amount as it would change your down payment, and that would change your loan to value, and that could change your rate. For example, you are purchasing a property for $450,000 with 10% down and your closing costs total $10,000, you add the costs to your loan increasing the loan amount from $405,000 to $415,000, this increases your loan to value from 90% to 92.2% which can impact your interest rate and mortgage insurance. For most refinance transactions, we encourage clients not to add the recurring costs for interest, insurance and taxes to their loan balance so they are not paying interest on those fees they would be paying whether they refinanced or not.

The second option is for the lender to pay the costs. This option occurs very frequently in refinance transactions where we close “no points” transaction and the other costs are either paid by the borrower or added to the loan. The lender can pay part or all of the closing costs for borrowers in a refinance or purchase transaction, on paper. In reality, the borrower is paying for the closing costs through a higher interest rate. Long-term readers of the WR&MU know the teeter-totter relationship between costs to close and monthly payments. The higher the interest rate, and therefore your payment, the lower the costs to close. This is because the higher rate a lender has on a mortgage the more money it can sell that loan for in the secondary market. If you are an investor with $100,000 looking for a relatively safe long term fixed rate investment and you have the choice for either a 4% return or a 4.5% return which would you want? If the cost for both is $100,000 you would obviously take the 4.5% return, but because of the way the market works the 4% investment would be offered to you for less than $100,000 because you will receive $500 less per year, conversely you would pay more for the 4.5% option because the return is higher. Here is the simple way to understand the relationship between costs and interest rates:

Higher Rate
Lower Costs

When locking in a loan for either a purchase or a refinance we will give a range of interest rates and their corresponding payments and what the total costs for each of those options will be. Some borrowers prefer spending more money for a lower rate and others are looking to minimize costs to them out of pocket and opt for the higher rate and payment. As a rule the breakeven point for having lender paid fees due to a higher interest rate is between five to seven years depending on the loan amount and costs; i.e. if you are saving $3500 out of pocket on a refinance by taking a rate that is 0.25% higher costing you about $45 more per month, it will take you about six and a half years to pay for the costs due to the higher payment (3500 divided by 45 = 77.78 months); or the other way if you pay the $3500 up front and reduce your payment by $45 per month you save the $3500 in 77.78 months. Long term you pay more for the costs being added to your rate, short term you do not have to pay the $3500.

The third option, available for those purchasing a property, is to have someone else involved in the transaction pay some or all of your costs for you—most typically the seller. I have always thought this a great option for homebuyers, but it is more popular during periods when the home sales market is slower. Here is how it works. You find a home you like for $525,000. We go through the numbers and with 10% down all your costs for the transaction including points to buy down the loan, escrow, title, etc total $13,000. You have a total of $56,000 in your accounts, so not enough for the down payment and closing costs. You write your offer to the seller for $538,000 with the seller to credit you $13,000 at closing for costs. The seller is going to net almost the same amount at closing—a bit less since if typically costs sellers about 8% to sell their home on the open market using real estate agents. Yes, you pay more for the property, but you save $13,000. Instead of $52,5000 down payment and a much higher rate to cover the $13,000 you do not have, your down payment is $53,800 and your loan amount goes from $472,500 to $484,200; at a 4% rate your payment is $56 more per month. Your “payback” for the $13,000 you did not pay at closing is almost twenty years; if you purchased the home for $525,000 and pay the closing costs of $13,000 and put $56 every month into a coffee can in the kitchen it will take you twenty years to save the $13,000 you could have saved when you purchased the home. I really like this option for home buyers even if they have the funds to pay their own closing costs, unfortunately not many agents encourage their clients to write such offers, or if they are representing sellers to accept such offers.

Like most mortgage questions there is no simple answer to whether you should pay the closing costs of your transaction, it depends on your situation and what makes you the most comfortable in trading off costs and payments. Not being a cookie-cutter lender, I always run through all the options with my clients for their purchase and refinance transactions so they can choose the option that works best for them and their families. Call me to explore the options for your transaction.

Have a question? Ask me!

Playing catch-up from the shutdown, the federal government economic data releases are giving us a picture of the economy in January as well as February. Combining the first and second revisions to the Gross Domestic Product for the 4th quarter of 2018, the initial 2.6% growth in the quarter was revised down to 2.2% and the overall growth in 2018 was 2.86% for the economy. This news is somewhat neutral for rates as the growth is of moderate strength, which should put upward pressure on rates, but with the revision being lower than the initial announcement showing slowing growth that is positive for rates to remain stable.

Consumers still in good shape, per the reports on income, spending and inflation. We will get the February data in the future, but for January consumer spending rebounded 0.1% to the positive after the surprising decline, and very surprising amount of decline, in December. The Price of Consumer Expenditures (PCE), the primary guage of inflation for the Fed, also should 0.1% growth for the month. The annual PCE increase dropped from 1.8% in December to 1.4% in January. The large drop in prices year over year from the prior month is positive for rates as it is well below the target 2% inflation rate. Overall this news is positive for rates as it portends a slowing economy and supports the Fed’s announcement at it most recent meeting that it is backing off on the number of rate increases in 2019.

Possibly putting upward pressure on rates, personal incomes continue to grow as they rose 0.2% in the month of February. Higher personal income reflects a strong labor market, which combined with low inflation should lead to higher consumer spending and economic growth. Overall the news is somewhat mixed for the economy with labor markets signaling a stronger economy than inflation and spending have shown.

Rates for Friday March 29, 2019: Rates tried to break a bit lower early in the week but are flat today from last Friday and the conforming rate is below 4% for back to back weeks for the first time in fourteen months. Now is a great time to explore your options for refinancing to lower your payment, consolidate a HELOC or other debt or purchase a new home—Call me!

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

30 year conforming                                            3.875%        Flat

30 year high-balance conforming                    4.00 %         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.

The great thing about yesterday was despite losing half of my Final Four in my bracket contest with my friends from college (we estimate the core group has been together in this pool since 1985 or 1986) was that it was Opening Day for baseball. That alone would have taken some of the tarnish off Michigan and Tennessee’s horrible shooting, but a shine was put on because the Phillies won convincingly and optimism abounds in the City of Brotherly Love—as much as any Philly fan can be optimistic.

The best $20 I spend every year is for my mlb.com subscription which gives me access to every radio broadcast of every major league game and playoffs for the year. If you call me between now and October, depending on the time of day, you will likely hear a baseball game in the background as I prefer that to music as the sound in the office. If the Phillies are not playing I will dial up whatever game is on the air, often looking for the smaller market broadcasts as I love the local advertising—for instance last summer listening to a Kansas City Royals broadcast during the weekend while crawling around pulling weeds I heard an ad for Popsicles. Popsicles! When was the last time you heard an ad for Popsicles!

Go Phillies, ring the bell!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have a question? Ask me!

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

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

30 year conforming                                            4.125%     Flat

30 year high-balance conforming                   4.375%     Up 0.125%      

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

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

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

Have a great week,

Dennis

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

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

1-11-19: What are our mortgage options for remodeling our home?

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Question of the week:  What are our mortgage options for remodeling our home?

Answer:  There are several options for paying for major home improvements or remodeling. Most commonly used for paying for major home projects are cash, a home equity line of credit or fixed rate second trust deed, new primary loan with cash out, new renovation loan, or possibly tap other resources. Here are some basic guidelines for the various financing options.

Cash: Depending on the scope of your project you may have enough money saved to pay for your construction project. The obvious advantage is lack of any interest costs and monthly payments. Keep in mind that many remodel/renovation projects can end up costing more in time and money so make sure you have enough to cover cost over-runs as well as whatever post-project expenses you may have—such as new furniture, floor coverings, etc. If you are using cash for your remodel you may want to obtain a home equity line of credit for a small amount to cover over runs to ensure you do not run out of funds during the project and then may be unable to obtain financing because part of your house is torn apart and not yet put back together. If you do not need to access the available funds that is great, but if you do you will be prepared and seamlessly be able to continue and finish your project.

Home Equity Line of Credit (HELOC): A HELOC is like a credit card, you are approved for a maximum amount of credit and then you can access as much of the funds as you need up to the credit limit, you make payments based on the amount of the outstanding balance. A big advantage of HELOCs and remodeling is you only pay for the amount of money you need when you need it. For instance, your project is estimated to be $50,000 with 20% paid upfront to get started and then other funds paid to the contractor at certain points of completion with the final amount due when all is complete. You sign the contract and access $10,000 and pay the contractor, you bill comes the next month and you owe the payment due based on $10,000. The next month you pay another $15,000 to the contractor and not having paid any principal on the first payment, you made an interest only payment, your next bill will be based on the $25,000 balance. This gives you flexibility based on how you use the funds available.

Another advantage of HELOCs is many lenders will provide lines of credit at a higher loan-to-value (LTV) than you may be able to obtain with a fixed rate loan or traditional mortgage. This enables you access to more funds than you would otherwise be able to obtain.

The disadvantages to HELOCs are the rates are variable, tied to the prime rate so over time it is hard to budget total costs; for example, since December 2016 the rate has increased 2%, while during this period the 30 year fixed conventional rate is only up 0.25% (after being higher by 0.75% a few months ago). The other disadvantage is self-imposed by the borrower—interest only. The minimum payment due on most HELOCs is an interest only payment, many borrowers fall into the habit of paying interest only which results in a large balance remaining on the loan which has to be paid at some point in the future either through a refinance or sale of the home.

Fixed rate Second Trust Deed: This financing instrument operates like a traditional fixed rate mortgage, however because it is in second position the rate is higher than available primary mortgages at the time of the transaction. The advantages of the fixed rate second are the ability to budget exactly what the payment will be for the period of the loan (generally available in fifteen or twenty year options) and if your current mortgage has a rate that is significantly lower than your current rate you can retain that rate and payment.

The disadvantages of the fixed rate second are many lenders restrict the LTV to 80% (same as most primary mortgages) and the higher interest rate.

Cash-out Refinance: This option is pretty straightforward, you refinance your existing mortgage and increase the amount borrowed to cover the funds you need up to the LTV allowed by the loan program. Most cash-out programs limit the loan balance to 80% of the appraised value of the home so if you are going with this option it is a good idea to have a good estimate of the value of the property.

The advantages of the cash-out refinance option are that you have a 30 year fixed rate mortgage. This provides you the lowest possible payment due to the long amortization, a fixed rate throughout the term of the mortgage which enables you to budget your monthly housing payment with certainty. Another benefit for many homeowners is depending on how long you have had your current mortgage and the increase in monthly payment may not be as high as you would expect; for instance we are closing a loan with a borrower accessing $75,000 and their payment is going up only about $275 per month, whereas their option on a fixed second increased their payment by almost $700.

Disadvantages of the fixed rate option are you are provided all the funds at closing and begin making payments on funds that may be sitting in the bank waiting for your project to begin and through the finish. Another is your interest rate may increase from your current mortgage rate.

It needs to be noted that when pricing mortgages a cash-out refinance are costlier than a rate and term refinance and a purchase transaction. The higher the LTV the more expensive the loan, conversely if you have a lot of equity in the property your costs would be lower if you LTV falls below certain price points based on the appraised value and how much your are borrowing.

Renovation Loan: This option is a combination of a traditional fixed rate mortgage and a HELOC and can be used to purchase a home you wish to remodel or as a refinance of your existing home for major renovations. We will use as an example a refinance.

Your current home is worth $550,000 and you owe $325,000. You wish to add a bedroom, a full bathroom and remodel the kitchen. The total costs are $125,000 and after the work is completed the value of the property will be $645,000. We complete the loan application for a mortgage of $450,000, $325,000 to pay-off your existing mortgage and $125,000 for costs to remodel. With our loan package besides the standard information we would need to show you qualify we will also need plans and estimates of costs from your contractor. During the loan processing we will make sure your contractor is approved by the lender and have an appraisal completed that includes the current value and the value of the home after the project is complete.

All goes well and the loan is approved and we fund the mortgage, your existing mortgage is paid off and the excess funds are placed in an escrow account controlled by the lender. After certain parts of the project are completed you request a draw from the account, the completion of that part of the project is verified and funds are transferred and you can pay the contractor. At the end of the project you have used all the money on the mortgage and your contractor is paid.

Advantages of this option are that you have a 30-year fixed rate mortgage upon completion of the project and the rate is competitive with a traditional mortgage or cash-out transaction. Another advantage is your contractor is vetted by the lender—which in our experience has resulted in some borrowers needing to change contractors after issues arose regarding insurance, licensing or past issues with the contractor that the lender discovered the borrowers were unaware of when they selected the contractor. This may sound like a negative, however should something occur with the contractor during the project it is a nightmare; knowing a contractor had issues in the past decreases the opportunity for such nightmares to occur.

 A disadvantage for many borrowers is the process to get to loan approval, which is longer and significantly more thorough than the traditional approval process—it is a bit more time and effort but understandable due to the nature of the project. Another disadvantage for some is the draw process where the contractor is not paid until certain completion points in the construction. Many contractors want funds before they start the process, using the renovation process they may not get the funds until after the process; some borrowers mitigate this issue by fronting the funds to the contractor and then getting reimbursed through the draw process.

Piggy-back: Some homeowners do their own version of the renovation loan by maximizing their funds available with a traditional 30 year fixed rate mortgage and then add a HELOC onto the property for additional funds. For instance you need $80,000 for your project and a cash-out refinance will enable you to obtain $65,000, you obtain the additional $15,000 needed on a HELOC—what we call a piggy-back transaction as your HELOC piggy-backs on your first mortgage. The advantage of the fixed rate 30 year loan for the bulk of the funds needed combined with the higher LTV of the HELOC lets you complete your project with the best of both options.

Reverse mortgage: Yes, reverse mortgages can be used for home improvements if the borrower qualifies and enough equity is in the property.

Other options can include borrowing from the bank of mom and dad, possibly borrowing against your 401(k) or a margin account on an investment account.

One of my favorite books we used to read to the kids was If You Give A Pig A Pancake. I usually encourage any family looking to do an extensive remodel to read the book as it is a good metaphor for many such projects. A major pitfall for most homeowners is underestimating the amount of work and costs that will need to be done to accomplish their goal of another bedroom and bath and a remodeled kitchen. Once walls are open what will the contractor find? Out of date and code electrical? Inadequate framing? Foundation issues? A rotted out floor under the shower? The original choices for cabinets or fixtures are not available adding time, and/or costs, to the process? You forgot that with the newly remodeled home that you now need furnishing?

A high percentage of the time when I have clients undergoing a remodel they let me know that even though they thought they were being somewhat liberal in the costs they still were short of what was needed. Read the book and imaging instead of a pig going through your home in search of a pancake it is your remodeling project needing more and more done to ensure completion.

Be very thorough in your plans, go deep into your interviews with contractors as to typical issues that come up, and possible issues given the age of your home, location (for instance we are on expansive clay soil which causes foundation issues—not all contractors are aware of this) and scope of your project.

All that said, I usually counsel clients that are considering extensive home improvements that before they commit to explore the options of what homes are on the market that would achieve the same objective. If you are looking to add a bedroom, bathroom, modernize your kitchen or other work that entails a lot of time and money, evaluate the current value of your home, what your net proceeds would be if you were to sell, what loan amount and sales price you will be able to qualify for and feel comfortable paying and then look at the local market to see if it makes sense for you to purchase what you want.

You may find that you prefer to remain in your current home and endure the remodel process, or you may find that you would benefit by purchasing a home that meets your needs.

Whichever route you choose to take please contact me to go through all your options and the advantages and disadvantages of each.

Have a question? Ask me!

Words matter, especially when they are the words of the Federal Reserve Open Market Committee (FOMC)—the group that sets the Federal Reserve borrowing rates which impact other rates such as the prime rate. The minutes from the last FOMC meeting were released this week and they showed that while all the voting members say “yes” to increasing rates at the last meeting there was some discussion by some to not raise rates. As well the minutes showed that future rate increases are not guaranteed. This is positive news for mortgage rates.

More positive rate news today as the Consumer Price Index dropped in December for the first time in nine months, primarily due to lower gasoline prices. Also declining was the year over year cost of living, dropping to 1.9% growth from the annualized growth of 2.2% in November. The 1.9% price increase was the first time since August 2017 the important data point was below 2%. The news is very mortgage rate friendly as the Fed uses the data for their gauge of inflation and the desired price increase for the Fed is 2% per year. If the price decrease remains below 2% moving forward it puts pressure on the Fed to not increase rates.

Rates for Friday January 11, 2019: For the first time in six weeks rates have not declined, and prior to today’s CPI data we might have seen them bump up a little bit. Upward pressure on rates this week was caused by gains in stock markets as investors felt confident about the on-going trade talks with China. At this point the government shutdown is not have much, if any, impact on financial 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.

Since the end of the last football season my ring tone has been the Philadelphia Eagles fight song, “Fly Eagles Fly.” Starting in March of last year our youngest has asked me, “how long are you going to have that as your ring tone?”

“As long as they are the reigning champions.”

On Sunday I thought I would have to change my ringtone, thankfully the left-hand of the Eagles defensive tackle deflected the Bears’ kicker’s field goal attempt just enough to cause it to hit the upright and the cross bar so I retain the ringtone at least for one more week.

Not overly positive with this week’s game against Drew Brees and the Saints, but hopeful that next week at this time when you call I will still hear, “Fly Eagles fly, on the road to victory….”

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

1-4-19: What is 2019 looking like for Stratis Financial?

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Question of the week:  What is 2019 looking like for Stratis Financial?

 

Answer:  Exciting! We spent the last quarter of 2018 adding some new lender partners to expand our portfolio of mortgage products well beyond our foundational products of conventional and jumbo 30-year fixed rate mortgages. Our new lenders bring alternative products that can benefit self-employed borrowers, borrowers with extremely high-net worth and borrowers looking to secure housing through retirement. With our growth in lending options we can cover pretty much any mortgage need for residential homeowners or home buyers in the state of California.

 

Personally, I am excited to add a new relationship referral source that will enable me to be assist more families with their mortgage needs as well as strengthen my connections with past clients and referral sources.

 

From you I am looking for inquiries for your mortgage needs and plenty of questions to answer for you in 2019, please ask and I will answer and help you with solutions and options!

 

Have a question? Ask me!

 

Job growth and economic growth seem to be going in different directions. In the last revision for 3rd quarter 2018 Gross Domestic Product output the rate of growth was 3.4%, down from the prior quarter’s growth of 4.2%, current forecasts for the 1st quarter of 2019 are economic growth in the U.S. economy growing less than 3%. The data shows economic growth is slowing. In a seeming anomaly, during this slowing growth period employers have not been slowing their hiring practices, as evidence by today’s report on December employment from the Department of Labor. Blowing away forecasts, employers added 312,000 new jobs in December, the consensus forecast of economists surveyed by MarketWatch was an addition of 182,000 jobs. Also included in the report were upward revisions to the job growth data for October and November. The most reported employment number is always the unemployment rate, in December it rose from 3.7% to 3.9%, not due to layoffs but due to more people entering the job market seeking work.

 

This is very positive data, but the most important data in the report was that average hourly earnings for workers increased 0.4% for the month and year over year the increase was 3.2% in wages, matching the post-recession high of earlier this year. With wages growing over 3% and inflation growing right around 2% workers have more residual income to either spend on goods and services or put into savings, or both.

 

Today’s data has created confusion amongst the “experts” as to the short and long-term future for rates and the economy. Will the increase in hiring and wages spur economic growth? Will it push back, or push off, an expected recession in late 2019 to early 2020 or not at all? Will the job markets create inflation that will cause the Fed to react with more rate increases? Or is the labor market surge, a final movement before international markets seep into domestic markets causing economic slowing to accelerate to the point that the economy shrinks into recession? The economic data the past several months has been inconsistent with the employment showing growing strength while growth has been losing strength.

 

What does it all mean for interest rates? The hundred-billion-dollar question, literally. Quick recap: good economic news means higher interest rates; bad economic news means lower interest rates. What we see from our economic data is a combination. Good news: more workers working earning more income allowing them to spend more and sustain economic growth. Bad, or less than good, news: Economic growth has been slowing, international markets are slowing and in turmoil due to the ongoing tensions due to tariffs and negotiations between major trade partners, home sales slowing down nationwide. Rates have been dropping consistently for six weeks and are well down from their seven-year high in October. Last month the Fed indicated instead of three rate hikes in 2019 it would probably initiate two rates hikes, and the common wisdom has become that the Fed may not raise rates at all in 2019. What it means for rates in the short-term is likely continued volatility in equity markets, i.e. stock markets, which typically results in investors putting their money in the “safe havens” of fixed rate assets, such as bonds and mortgages. More money invested in fixed rate assets leads to lower returns on those assets, in other words lower rates, or lack of rising rates.

 

Rates for Friday January 4, 2019: Interest rates and stock markets continue their intra- and inter-day surges and falls, with the trend being lower rates through the volatility. Should there be resolution to the tariff/trade disputes, an agreement to open the closed portions of the federal government and positive news for the 4th quarter GDP the turmoil will subside and rates will rebound higher. If the confusion continues and the GDP news shows continued decline in growth rates will stabilize at current or lower levels. Take advantage of the current rate market while you are able to do so. Rates are down again this Friday from last.

 

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                     4.25%        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.

 

 

 

 

The Smith family is on its annual post-Christmas/pre-back-to-school trip to a desert, this year returning to our favorite p-C/p-b-t-s location of Scottsdale, Arizona where the temperatures have been very cool, the skies clear and the relaxing fantastic.

 

We return to our familial abode tomorrow and back to mostly normal schedules on Monday (exception being our college freshman who is wondering what to do for the two more weeks before she returns).

 

Looking forward to a wonderful 2019 and helping you, your family, friends, neighbors and co-workers with your mortgage needs!

 

Have a great week,

 

Dennis

 

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

12-28-18: Happy New Year! Rates Drop Continues

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Question of the week:  Are you having a nice holiday?

 

Answer:  We are, and I hope your family is as well. It is nice having our oldest home and the family all together for a while.

 

A break this week from the Weekly Rate & Market Update, should have a regular missive next week.

 

Have a wonderful New Year!

 

Have a question? Ask me!

 

Rates for Friday December 28, 2018: You may have noticed the markets have been a bit schizophrenic this week, continuing the ups and downs from last week but with much bigger swings. The volatility in the equity markets (stock markets) has created a flight to safety for investors, which means they are leaving the uncertainty of equities and purchasing fixed rate investments to lock in returns—i.e. bonds and mortgages. As a result rates continue to drop, the fourth Friday to Friday drop out of the past five weeks for conforming and the fifth Friday in a row for high-balance rates. The 30 year conforming rate is the same as it was on April 13th and down five-eighths of a percent (0.625%) from its high of the year in October. If you have an equity line with a large balance now may be a good time to start doing the math and looking to lock in that variable rate.

 

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

30 year conforming                                            4.25%      Down 0.125%

30 year high-balance conforming                   4.375%     Down 0.125%

 

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

 

 

 

 

A year and a half in age and one grade apart, we spent a lot of time together as we moved five times growing up through three states and a foreign country. A handful for our mom, and many neighbors as we were prone to create a bit of havoc, we stood by and behind each other and took what we deserved in terms of discipline. Happy birthday to my big brother Michael as he spends it on another road trip through the state—though this time in a car with his lovely (and tolerant) wife instead of on his beloved motorcycle. Safe travels on your trip and through 2019. Cheers!

 

Have a wonderful New Year’s celebration, and if you have a lot of fun please use Lyft or Uber (a tip I received a few years ago from my friend and millennial Jerry, rates jump very high for ride-shares on New Years. Before ordering a car go to a nearby hotel and see if you can work out a cash deal with a driver dropping someone off to take you to your destination; you save money and the driver makes more than if they were getting the ride through their car service. And you can probably get a car faster.)

 

Happy New Year and thank you for your support in 2018!

 

Dennis

 

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