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7-6-18: When should we have our credit report pulled when exploring the purchase of a new home?

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Question of the week:  When should we have our credit report pulled when exploring the purchase of a new home?

 

Answer: “We got a copy of our credit report on-line, can you just use that?” This is usually the question that precipitates our question of the week.

 

When should you have a credit report pulled? Our most common answer to the Question of the Week is, “that depends…” and it applies in this case as well.

 

Many people are fearful of having credit reports run because they are concerned the inquiry will hurt their credit score. As a result, when we ask them somewhat generically, how is your credit history, they often reply that they recently obtained a report on-line and would like us to use that for their pre-qualification and approval.

 

If we are in the very preliminary stages of the qualification process, using a generic report from one of the free on-line services can be helpful, but we will not issue a pre-approval or a strong prequalification recommendation unless we are able to obtain our own report.

 

Why?

 

Because. (I’m a dad so I get to answer “why” questions with “because.”

 

We need our own report for several reasons. First and foremost, our reports are what are known as “tri-merge” reports, meaning they include the data from the three main credit reporting bureaus, Equifax, TransUnion and Experian. This will provide us with a very complete credit history and with credit scores from the three bureaus so we know which score will be used for qualifying and rate pricing (we use the middle score, if two or more borrowers we use the lowest middle score).

 

Second, not all credit companies report to all bureaus. We have seen many “clean” reports over the years provided by one credit bureau and then when we pull our tri-merge items appear that were reported to one of the other bureaus. For instance, you obtain a report from Equifax and it shows your car and student loans, credit card balance and history with a late payment from Macys in 2013. That is pretty good. However, when we pull our report there is a collection from a medical bill in 2013 that showing unpaid that reported to both TransUnion and Experian. Suddenly we have an issue to deal with we did not know about. As well, the collection will give you a lower score on the bureaus reporting it than the one that did not, how much lower? Does it knock us out of the program we want to use? Does it change the rate significantly?

 

Back to our question of the week, when should we have the tri-merge report pulled?

 

It depends on where you are in the process. Are you just starting the process of purchasing your new home? You have really looked yet but have been talking about it and want to see where to begin, how to begin, what needs to be done to begin? If that is the case you are likely going to be some time away from actively engaging in the process, in which case we will probably speak in generalities, broad strokes, and begin prepping for the full on assault on the housing market.

 

 

If in our initial conversation you make some statements or provide some answers that leads me to believe we might have some issues creep onto the credit report I would suggest we pull a report to get a starting point and see if we have any work to do. What might come up that would lead us to want to pull a report? You are divorced—how did the credit separation go? Are you still linked to your ex-spouse on any open accounts? You mention you had a medical issue in the past that took some time to resolve—did any accounts go to collection? You are self-employed and had to change tax preparers as you were not satisfied with his/her performance—were there unpaid taxes that became a lien? There are several variables that thirty years’ experience can hear and suggest a credit report.

 

One thing we consider when strategizing the credit report is that after sixty days lenders will want a new report to make sure nothing has changed. If we pulled a report May 5th, and you are still looking for a home today, do we pull a new report them?

 

Probably not. Once we pull our initial report we tend to stick with that for as long as we can. In the current market it can, and does, take some buyers several months to find the home they want, and can, buy and have their offer accepted. If we did pull a report in May, or even April, and you write an offer this weekend, as part of my pre-approval package I would include the information form that May, or April, report and advise that we do not want to pull reports every sixty days to reduce inquiries with your credit bureaus and one of the conditions of the seller’s acceptance of your offer can be my providing updated information on your credit scores and ability to qualify within 24-48 hours using a fresh report.

 

On the one hand we do like to limit the number of reports we pull. On the other hand we have to have the tri-merge report to know exactly what we are going to be dealing with for qualifying and approval.

 

When is the best time to have your credit report pulled? Just before we are in “go mode” for a home purchase and will be writing offers, or if you think there may be some issue from the past that could have an impact or be an issue we need to deal with.

 

Next week we look at credit inquiries and their impact on your credit score.

 

Have a question? Ask me!

 

 

Words and numbers impact rates. Words released by the Federal Reserve Open Market Committee (FOMC) from their last meeting in June when it raised rates by 0.25% indicate Fed members see labor markets continuing to tighten and inflation should retain its 2% level in the near future. Concerns about the future were expressed as short-term rates are approaching long term rates, what is known as a flattening yield curve. This rate behavior often coincides with a recession—is the Fed predicting one? Not exactly but keeping an eye on data that often does. The minutes gave some relief to investors anticipating higher rates in the short term as the minutes were somewhat rate friendly.

 

The data supported the Fed’s assessment.  Our monthly First Friday Labor Department release of employment data happened this morning and most of the data supports the Fed’s course of two more rate increases this year. The economy added 213,000 jobs in June, over 202,000 in the private sector. As well the labor force grew by 601,000 in June. This increase in the job force caused the headline unemployment rate to increase for the first time in a long time from 3.8% in May to 4.0% in June. The increase is result of the growing work force, i.e. more people seeking employment, and the labor participation rate (percentage of individuals eligible for work who are working, or participating in the workforce) increasing from 62.7% to 62.9%. This news is rate neutral to the extent most people who follow this sort of thing anticipated numbers close to what was released. The number that caused some pause was the earnings portion of the report as wages grew 0.2% for the month and are up 2.7% from last June. This relative slack increase in earnings as employment grows indicates more workers are seeking work enabling employers to hold wages steady. This removes some concerns about inflation being driven by wages, and is rate friendly.

 

Rates for Friday July 8, 2018:  Our last recession ended in June 2009, it would certainly seem a course correction for the economy is long over-due as we start our tenth year of economic growth. That is just back drop for the political and economic issues that are impacting domestic and international economies that have more and more economists and investors starting to look at the horizon for signs of an economic downturn. When economies slow down or go into recession interest rates either lead in anticipation, or follow. The possibility now being brought up more and more of not whether but when the next recession will occur puts a bit of a parachute on rates trying to climb.

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             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.

 

How messed up is your internal calendar? Mine was out of whack all through June for whatever reason, I’m blaming school being let out and my routine being thrown off. Now starting the month with a holiday smack in the middle of the week has me really thrown off. Did we get two Mondays and two Fridays this week? I need a Tuesday and/or Thursday thrown in once in a while—but that does not mean I advocate for our Independence Day celebration and holiday to become a mandated Monday holiday with different dates every year a la Labor and Memorial Days.

 

I hope you enjoyed your celebrations on the 4th, our family did.

 

Have a great week,

 

Dennis

6-29-18: Why have I received a lot of solicitations for mortgages recently?

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Question of the week:  Why have I received a lot of solicitations for mortgages recently?

 

Answer: Because the credit companies sell your information to credit companies.

 

Data mining and selling has been in the news a lot in the past year, mostly centered on Facebook and other social media companies. But selling data is not new. It is a huge, and often sole, revenue source for many companies that do business on the internet. The major credit agencies are no different and have contracts with credit providers for many types of credit, mortgages, auto loans, credit cards, student loans, to provide the credit information for consumers who have credit reports run by companies within their industry. If you apply for a credit card from a department store you can expect to get credit card offers in the mail. If you apply for an auto loan you can expect to get offers for auto loans.

 

If you apply for a mortgage…here is what happens in our case.

 

When we run credit reports we use a company, Funding Suite, that provides us a detailed report with data from the three major agencies, Equifax, Experian and TransUnion. When these companies see that there was an inquiry on your account from a mortgage company processing an application for a residential mortgage that triggers their algorithms. Sifting through the data on location, balances, payments and most importantly your credit score, the agency sends you information to mortgage companies that have paid them for data that meets certain parameters.

 

The mortgage company purchasing the data processes the information and sends contact information to their marketing department and contact is initiated.

 

We have learned a loophole that works some, not all but some, of the time by masking your application on the initial inquiry as for a non-residential mortgage, but that dodge is being figured out by the programmers and data is still being sold.

 

There is good news. You can stop the solicitations by opting out of receiving offers from credit providers. Click on this link. At this site, OptOutPrescreen.com, you can choose to opt out of receiving offers for five years, or permanently, or if you want to receive offers for credit cards, auto loans, etc you can choose to opt-in to receive offers. As the site shows, there are some advantages to receiving offers that you may want to consider before opting out of all offers.

 

When you receive any type of unsolicited credit offer please keep in mind the primary purpose of the solicitation is to get you to reply, then it is a numbers game for the credit company to convert a certain percentage of responses into applications and then a percentage of those into new accounts. Because of this the initial marketing message is *certain conditions apply; meaning the rate/terms on the offer are usually not what will be offered.

 

Next week we will discuss when you should have a credit report pulled when exploring the purchase of a new home.

 

 

Have a question? Ask me!

 

 

There is no shortage of news that impacts mortgage rates. Consumer spending is approximately 60-70% of our economy, so data on consumer confidence impacts interest rates. In May the Consumer Confidence Index dipped slightly, mostly on the expectations component of the index (how consumers expect their future economic well-being to be), likely due to concern over how the tariff impositions around the globe in reaction to President Trump’s initiate new tariffs for products imported to the United States, most notably steel. The dip was very small so no impact on mortgage rates, but a warning that future confidence could slip further which would be positive for rates.

 

The third and final revision to 1st Quarter GDP revised economic growth from January through March was down from 2.2% to 2.0%. This news on its own would be positive for rates, however with the revision to economic growth was a revision to price data, i.e. inflation. The core price index (prices less food and energy) showed an increase from 1.9% to 2.2%. With prices increasing more than 2% the expectation is for rates to increase as well.

 

This morning we had what I consider the most important economic data release for the week: Personal Income and Spending. As mentioned above consumer behavior is by far the most important factor in our national economy, ergo what consumers earn and spend is vital information for investors and planners. In May wages increased 0.4%, a strong increase that was in line with expectations. With the increase in earnings it is no surprise that spending increased as well, which it did with consumers spending 0.2% more in May than in April. The increase in spending was modest, especially in light of the earning increase. With earnings growth outpacing spending growth it is follows that personal spending should increase and it did rise 0.2% to a rate of 3.2%. Are consumers spending for future large purchases or for future rainy day?

 

The number in the income and spending data that is very rate related was the price index in the report, showing core prices are up 2.0% in May, right at the Federal Reserve’s price target. It is a major moment for the Fed as it has been chasing 2% inflation for a decade and now it appears it has been reached. If this inflation rate holds it means the Fed does not need to worry about stimulating the economy but instead turns to focus on inflation and keeping it in check. This means higher interest rates.

 

Rates for Friday June 29, 2018: While economics and political science are two different fields they are intimately connected. Does government policy shape economic activity or does economic activity shape policy? The answer is yes. Each influences the other in the short, medium and long term. We are seeing this in our current markets as the economic data should lead to higher interest rates for consumers, but public policy has led to rates experiencing a slight dip in the past month and prevented rates from increasing. So despite positive economic news that should put upward pressure on rates, despite billions of dollars of U.S. Treasury debt on the market plus billions more being sold by the Fed from its Treasury and mortgage holdings we have seen rates behaving contrary to what fundamental economic principles dictate. Investors concerned with global economic slowing have been selling stocks and purchasing long term fixed rate investments, i.e. bonds and mortgages, which has countered current economic data. In this environment there is little stability for the future of rates and the advise remains to lock when you can. If public policy on tariffs changes rates will increase suddenly, and as we have seen in the past year and a half policy can change quickly and unexpectedly.

 

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.625%             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.

 

Throughout our nation’s history there have been deep disagreements on policy, which means solutions to problems. The arguments between factions when the Declaration of Independence was being written and voted upon by the Second Continental Congress were very personal and filled with rhetoric—these men were debating if they should vote to be considered traitors. After the Revolution there were intense debates, very nasty attacks via anonymous writings in pamphlets and papers centered on the Constitution and how, or whether, the states would come together with a federal government. Throughout our history there have been issues that have created deep philosophical and ideological differences, that these disagreements continue today should not be a surprise to anyone, and in fact are somewhat healthy for our Republic.

 

Next week is Independence Day and as I do every year I encourage everyone to read the Declaration of Independence. Most Americans know, or should know, the beginning of the document, “When in the course of human events…” and the most famous line, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among those are Life, Liberty and the pursuit of Happiness.” The latter is, in my opinion, perhaps the most important sentences every put forward for a vote by a governing body for it is the foundation of a nation and its laws.

 

Much less known, but very important is the final sentence in the Declaration, for it cemented the commitment of those in the Congress to not only the Declaration, but also each other. It is, again in my opinion, the same sentiments under which millions of Americans have volunteered to serve in our armed services to enable our nation to exist and continue to evolve with ever growing liberty and freedom.

 

Celebrate our nation’s founding next week, as well celebrate the differences that have and will continue to have that make our nation the greatest in human history.

 

Have a great week,

 

Dennis

5-4-18: Do I need to get re-pre-qualified?

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Question of the week:  Do I need to get re-pre-qualified?

 

Answer: Probably.

 

As you can see from the chart below rates for 30 year fixed rate mortgages are about three-quarters of one percent (0.75%) higher than they were in January.

In real numbers, on a $400,000 mortgage that is a difference of about $175 more per month. Depending on several factors, with the increase in the rate you may not qualify for the same price today you did in January.

 

Let’s assume that you were pre-approved for the purchase of a $500,000 home with 20% down and a $400,000 30-year fixed rate mortgage in January. Your credit obligations are about 10% of your gross income. When we pre-approved you in January your income was about $6500 and you were at the maximum debt-to-income ratios will all factors considered (cash reserves, credit score, etc). If there are no other changes to your financial situation for the same purchase of a $500,000 home with 20% down you will need to earn $500 more per month to qualify.

 

If your income is the same, then you either need to pay down your debt so your monthly payments drop $175 per month, or lower your sales price and loan amount. Using the same $100,000 down your new sales price would be $470,000, a drop of $30,000 in purchase price due to the increase in rates.

 

As the prices and loan amounts go higher, so do the differentials in monthly payment with the rate increase, for a $500,000 loan the difference is about $255 more per month today than January.

 

For those who have been waiting for prices to come down before entering the real estate market you are losing more purchasing power with rate increases than you may be looking at whenever any market correction may occur. Take the example above, with a decrease of $30,000 in purchasing power the borrower has lost 6% in value from what s/he could have purchased in January.

 

If you have been pre-approved to purchase a new home longer than three to four weeks ago I strongly suggest you have your information updated so you know what you are qualified to purchase. If you are a real estate agent, I strongly suggest any pre-approval you receive has current rates and “fresh” qualification information—they potential buyer may have been qualified in February, but may not be qualified today to purchase your listing.

 

To go through your options for purchasing a new home, please contact me so we can run through your options.

 

 

Have a question? Ask me!

 

First week of the month economic data is always interesting. On Monday we learned that personal incomes rose a modest 0.3% in March, which was outpaced by consumer spending which was 0.4% higher in March than February. With the increase in spending above income the savings rate declined slightly for the month to 3.1%. The eye grabbing news for investors in the report is that the core inflation rate year-over-year for March was 1.9%, nudging up against the Fed’s 2.0% target rate. Overall the news was somewhat mortgage rate unfriendly, while the increases are somewhat subdued; they are nonetheless reflective of continued growth in the economy and employment.

 

Taking into consideration the inflation rate, on Wednesday the Federal Reserve released its minutes from it meetings this week. The Fed’s expectation for inflation was a high of 1.9% for the year, again just below its target rate of 2.0%. With prices hitting their expected high in the first quarter there is concern from Fed members that they may need to make some unannounced, or expected, rate increases this year. At this point it appears there will be another hike of 0.25% in June, but if inflation speeds up we should expect more rate increases as the Fed tries to keep ahead of prices and not have to chase inflation. The meeting notes were somewhat concerning to investors and puts upward pressure on rates.

 

April employment showed continued growth at a solid pace. Payroll growth was within the range of expectations;164,000 new jobs over all of which 168,000 were in the private sector. Hourly earnings were up a scant 0.1% from March and are up 2.6% year over year. The headline number is the unemployment rate dropping below 4% to 3.9% for the month. The news shows growth in employment, a bit mild but still solid, and that is negative for mortgage rates.

 

Rates for Friday May 4, 2018: An opportunity to catch our breath with rates flat from last Friday after a few consecutive weeks of rates increasing. The expectation is not for rates to drop, if they do it will either be very temporary or as result of some major negative event. What we are looking for is the top of the range. Rates, like stock prices, generally stay within a range for a period of time before breaking out, up or down, and establishing a new range. With rates increasing one-quarter of one percent (0.25%) in two weeks we are looking for when the increases will stop and rates remain within a range week-to-week. Perhaps we have found a new range, but we won’t know until at least two more weeks. Lock your rate when you can!

 

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

30 year conforming                                            4.49%       Flat

30 year high-balance conforming                      4.75%        Flat

 

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

 

Star Wars fan? Me not so much. I enjoy the movies, but am not a big fan or follower. For instance, I got really confused when they started the making movies that were decades beyond the release of the first one and then called it Episode 1. I have no knowledge of the characters beyond the originals, the hairy thing, the beep-boop robot and the others, but understand others are very much into the whole genre. And to them I, somewhat reluctantly, say May the Fourth be with you!

 

Have a great week,

 

Dennis

4-27-18: Should I buy the home I rent?

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Question of the week:  Should I buy the home I rent?

 

Answer: This question has a reverse side as well, “Should I sell my rental property to the tenant?”

 

I have a client who contacted me the other day about wanting to sell a home she rents out because the tenant has given notice. She is nearing the end of the time frame of living in a home two out of prior five years to avoid capital gains and the time is perfect. I asked if she contacted the tenant about purchasing the home, however the tenant is giving notice because they had already entered a contract—otherwise did not think of asking to buy the home or they would have.

 

This was a missed opportunity for both parties. When they decided they wanted to own their own home the tenant should have informed the landlord, who gladly would have worked with them to see if the right price and terms could be found, saving each party a lot of time and expenses.

 

What are the opportunities for the landlord and tenant in having the tenant purchase their rental home from their landlord?

 

From the landlord side, there are several advantages to selling to your tenant.

 

For most landlords selling their rental property the status of the tenant is a primary factor in how the process will proceed. If it is a single-family residence then the buyer will almost always be looking to owner occupy the property, so the property needs to be vacant.

 

Typically, the dwelling should be vacant during the marketing period to maximize the ability to show the property to the most buyers and encourage offers. If you have a long-term lease with the tenant you will need to wait until the lease is nearing termination and provide notice that the lease will not be renewed and the tenant must vacate. If the lease is month-to-month you will need to give the tenant a 30 day notice to vacate. Depending on your tenant at this point it can get sticky if your tenant decides to not vacate on time. In California, the tenant has significant rights to delay vacating the property and can prolong any eviction process for a very long time. Several times over the years I have witnessed landlords paying tenants to vacate properties to get the process over and property vacant for sale or closing.

 

If you tenant is cooperative and does vacate the property you will continue to have costs, mortgage, taxes, insurance, maintenance, until you close escrow with a buyer, without receiving any rent. Depending on many factors you could have a vacant, non-revenue producing property for two, three, four or more months.

 

Speaking of maintenance, when selling to the tenant there may be some repair work requested by the tenant-buyer following a home inspection, however there will not be the costs of preparing the home for showing. No landscaping for curb appeal, refreshing flooring, painting, or other touch-ups most sellers go through before marketing their home to try to maximize value.

When selling to your tenant you have a bit more control of the escrow period, which can be especially important if your intention is to purchase a new rental property, rolling over your proceeds in what is known as a 1031 Exchange to postpone capital gains taxes. When participating in a 1031 Exchange there are time frames to identify your “up-leg” and close on that transaction, if you miss them then your gains from the sale of the property are subject to capital gains. If your sale is an open market sale with two or three other transactions that you have little to no control over it is more difficult to extend the closing date of the sale of your rental property if you need more time to find and close on your up-leg.

 

Your costs of sale can be significantly lower selling to your tenant than going on the open market. You can have more control over timing of the transaction. If you are considering selling your rental property it is advisable you contact the tenant to see if they are willing and able to purchase the home.

 

From the tenant’s perspective purchasing the home you have been renting also has several advantages to going to the open market.

 

One big plus is you do not have to pack, move and unpack. You will not have the added expenses that occur when you move, new shower curtains, dustbins, pieces of furniture, lamps, fixtures, etc. Of course, now that the home is yours you may want to make some changes, however we have found most tenants who purchase their rental home make fewer changes and spend less than those who move into a new home.

 

Familiarity is another major benefit. If you like your neighbors and neighborhood you become a homeowner and still go to the same store for groceries, walk to your local coffee shop to meet friends, go to the same schools for your kids and the same dog park with Phideau.

 

Utilities, seemingly a small thing, but no getting set up with gas, electrical, cable. Dealing with timing to meet vendors or pay deposits.

 

Not every home is perfect, even if you purchase a newly constructed home there can be, and usually are, some issues. Purchasing the home you have lived in for a while you already know the quirks and issues, some of which your landlord may be willing to fix as part of the transaction.

 

A major plus, does not always happens but usually does, is the tenant-discount. Because the landlord does not have to have the property vacant, require your cooperation to show the property if on the market while you are still living there, nor spend the funds to get it “market-ready,” we typically see some discount to market for the tenant-buyer. Some landlords have refused to offer any discount and see their tenants leave the property instead of purchasing the home and the landlord later regrets trying to maximize price instead of maximizing combination of total costs and efficiency of the sale.

 

One more consideration both tenants and landlords should consider, rent control. In more and more cities throughout the state, and at the state level, the rent control movement has been gaining momentum. I will not use this space to present the case that rent control does the exact opposite of what it is intended to do, however it is something to consider if you are a tenant or landlord.

 

From the landlord side, if you have owned a single family home as a rental in an area that appears somewhat likely to be under rent control you will want to consider all options for the future. This includes the option of selling the property, getting out of the landlord business and paying your taxes, or selling the property and going through a 1031 Exchange to purchase a rental property in an area where there is less of a chance that rent control will be enacted. If the option that appeals to you most is selling the property, contact your tenant. If the tenant does want to, or cannot, buy the property then start the process of putting the home on the market.

 

From the tenant side, if rent control goes into effect your options down the road become somewhat restricted as there will likely be fewer units on the market for you to rent when the time comes and the rent you will be paying will likely be significantly higher. If you are in an area where rent control appears to be likely and you have been thinking about purchasing a home in the somewhat near future, say one to two years, then consider moving up that time frame. Call a mortgage professional (I would be an appropriate call…) to get pre-qualified and determine your purchasing power. I can also provide a ballpark price range for the home and if there is a near match and you like the home you have been renting then contact the landlord and make an offer. If the landlord does not want to sell then you know your price and we can hit the open market to see what is available.

 

If you are in a residential rental relationship, as landlord or tenant, and are considering severing that relationship by selling or buying please contact me and I can assist you with options and other professionals who can assist you.

 

Have a question? Ask me!

 

Not great but very good. That was the news this morning from the Commerce Department when it released its first estimate of GDP growth for the first quarter of 2018. The estimate showed economic growth of 2.3%, below the 2.9% growth for the final three months of 2017 but higher than the 2.0% estimate many expected. Part of the slower growth was a slowdown in durable goods purchases, namely vehicles, perhaps a hangover from the huge amount sold post hurricane season in Texas and Florida. By beating expectations the news is slightly mortgage rate unfriendly.

 

Costs going up. The cost of employing the average worker climbed the fastest in a decade in the first quarter, increasing 0.8%. Add to this extremely low unemployment, layoffs near a five decade low and some scarcity in qualified labor and the expectation is for wage inflation to start to impact prices for consumers. This is not friendly news for mortgage rates as higher costs and inflation lead to higher interest rates.

 

Rates for Friday April 27, 2018: The benchmark 10-year Treasury note broke through the 3% mark for the first time since December 2013, in doing so dragged other fixed rates on bonds and mortgages up as well. With very strong employment markets and solid economic growth, what looks like peace potentially breaking out on the Korean Peninsula, there is nothing currently on the horizon to cause rates to drop. We see rates climb again this week from last Friday and it is apparent we have broken out of the prior range; now the question is when will rates level out? We could see rates increase another one-quarter of one-percent before this happens.

 

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

30 year conforming                                            4.49%       Up 0.115%

30 year high-balance conforming                      4.75%        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.

 

Pretty remarkable footage of South Korean President Moon Jae-in and North Korean leader Kim Jong Un meeting at their border today and shaking hands. This is historic and appears to heading to being this generation’s version of the Berlin Wall being torn down. There is historic correlation between the Berlin Wall and the separation of Korea.

 

Korea had been ruled by the Japanese since the 1910’s when it invaded and occupied the county. North Korea and South Korea were created in 1945 as part of the treaties ending World War II, with the Japanese removed from the peninsula and Russia and the United States occupying the peninsula, Russia the northern part and the United States the southern part—the dividing line the infamous 38th parallel. This was the same manner in which Germany, and Berlin, were divided after the war with the exception that France and England joined in those divisions.

 

In 1950 the North Korean Army sent troops over the 38th parallel and the Korean War began. The armed conflict ended in 1953 when an armistice was signed by the representatives from the United Nations, North Korea and the People’s Republic of China. The armistice has been in effect these past 65 years but no peace treaty has ever been signed between the two countries, meaning they have continued to technically be at war.

 

The world watches and hopes that the Korean leaders are able to walk the path to peace and put an end to the tensions and potential for more armed conflict.

 

Have a great week,

 

Dennis

3-30-18: Credit report states impacted by natural disaster

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Question of the week:  Why do some of the creditors on my credit report say, “Affected by Natural or Declared Disaster” when I live nowhere near a natural disaster that has occurred?

 

Answer: Because creditors were not all A+ students in geography class.

 

Last year saw many natural disasters across the country, from hurricanes in Texas and Florida to wildfires up and down the state of California. Many people were severely impacted by the disasters, some of the more fortunate only lost some days at work and had the financial burden of cleaning up after the disaster, however many lost their homes, cars, places of work and neighborhoods. While trying to recover from the disasters, dealing with the emotion of such tremendous loss they also had the reality of bills still due, negotiating with insurance companies to cover losses and added costs of where to stay and how to get there.

 

Understanding that financial disasters create tremendous financial burden on those in the impacted areas more and more credit companies are automatically putting into their reports to the three major credit bureaus that the debtor resides in a natural disaster area. The purpose of this statement is to let those reviewing the credit report for the possibility of extending credit will understand if there are any late payments on the account that the natural disaster could be responsible for the late payments. Essentially letting future creditors know there is likely a very good reason for the late payments that should be taken into account when extending credit.

 

So why are these notices popping up on credit reports for people who have not been affected by a natural disaster? Because the notices are put on credit reports using computer models and the computer models, from what we have seen, are using counties or regions when determining which accounts to label.

 

For instance, a couple in Long Beach, which has not been impacted by any natural disaster in decades, has a couple of accounts labelled with the natural disaster language. While Long Beach has not had a natural disaster declared, within the last twelve months there have been severe fires in both Los Angeles and Orange Counties; Long Beach is in LA County and borders Orange. It appears the creditor plugged in LA County as having a natural disaster and tagged all its accounts in the county, not realizing the size of the county and how geographically distant Long Beach is from any of the fires that occurred.

 

In Texas and Florida people are facing similar reporting, while they were not severely impacted by any of the storms they live near enough, or are in counties, declared natural disaster areas that they have had accounts tagged with the natural disaster warning.

 

Does this impact your credit? No, it does not. Does it impact your mortgage underwriting? As this reporting is relatively new on credit reports we have had some underwriters request appraisers note on the report if the property was impacted by a natural disaster.

 

At this point we have not seen any impact on credit scores, positively or negatively. Meaning if you have an account that has a 30-day late payment on the credit report and that same account is labelled “Affected by Natural or Declared Disaster,” we have not seen your credit score not impacted by the late payment—meaning your score is still depressed due to the late payment.

 

If this label is on some of  your accounts do not be concerned that it is in any way impacting your credit or ability to obtain a mortgage or other applied for credit such as an auto loan. It is merely a head’s up to other creditors that if you do have any late payments in the recent past there may be a very good reason why—if you in fact did live in a natural disaster area and were negatively impacted.

 

If you have any questions about your credit report please do not hesitate to contact me.

 

 

Have a question? Ask me!

 

A few reports this week that can impact rates. On Wednesday, the final revision to Gross Domestic Product for the 4th quarter of 2017 was released, and the revision was up 0.4% from the prior revisions. Strength in the increase was mainly attributed to consumer spending, which increased 4.0% from the 3rd quarter. The news was somewhat mortgage rate unfriendly as stronger economic data portends higher interest rates in the future.

 

While consumer spending led the way in 2017, so far in 2018 that has not been the case, causing expectations for GDP growth in the first quarter to be lower than it was in 2017. On Thursday data was released on Personal Income and Consumer Spending. The good news is that wages continue to increase, up 0.4% in February, matching January’s increase. And like January, consumer spending in February was up a lackluster 0.2%. Workers are earning more but spending less, so it is no surprise that the personal savings rate has increased to 3.4%. With the flat growth in consumer spending prices were up 1.8% from February 2017, still below the Fed’s 2% inflation rate target. The increase in earnings is negative for mortgage rates as it creates expectations for wage inflation, however workers putting more of their earnings into savings instead of spending is positive for mortgage rates. Since consumer spending is approximately 65-70% of GDP, a slow-down in spending could slow down GDP growth, keeping upward pressure on rates at bay.

 

Rates for Friday March 30, 2018:  A short week for markets as stock and commodity exchanges are closed today for Good Friday. Conforming rates continue to hold steady from Friday to Friday, seven weeks in a row now with the same rate. Lenders continue to bounce up and down on the high-balance conforming rates (loans from $463,451 to $679,650) and we are down 0.125% from last Friday. Markets continue to be volatile, and there is more turbulence ahead as indicated by the stock markets down in the first quarter of 2018 after nine consecutive positive quarters. My advice remains to lock through your escrow closing when you can.

 

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

30 year conforming                                            4.25%       Flat

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.

 

For parents on young ones I will give you this Easter tip learned from my mom, count the number of eggs you hide so you make sure they are all found. My mom learned this lesson when her young sons found an egg or two in the middle of August, in Tulsa, that had been rotting in the sun and heat since March. There was a special kind of scent and cleaning her boys after they found the putrid little bombs and did what boys do (throw at each other) taught to always make sure all the eggs were found on Easter…

 

Spring Break begins for our kids and many others, after this next week the next stop is summer. Seems like forever for the kids and tomorrow for the parents.

 

Have a great week,

 

Dennis

3-23-18: What should I look for in a Home Equity Line?

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Question of the week: What should I look for in a Home Equity Line?

 

Answer: With equity building, rates rising and prices continuing to climb we are getting more and more inquiries from clients looking for Home Equity Lines of Credit (HELOC) to remodel homes or for other purposes.

 

Before getting a HELOC some questions I have clients answer to be sure that is the correct route for them to go to meet their needs:

 

  • Can you accomplish what you want with a cash out refinance? The rate on a refinance may be lower than a HELOC, and depending on your current rate and payment may be better in the long run. Yes your rate may go up but it will be fixed and over time you may be paying less for the funds you need.

 

  • If you are looking to remodel and/or add on to your home is what you want in your home available on the market? Instead of converting your two bedroom one bath to a three bedroom two bath home, can you buy the home you want in today’s market? What is the cost of the new home? How do the payments compare to your final costs after the remodel? Do you want to live with a contractor handing you coffee and a newspaper every morning for several months?

 

  • Do you know how a HELOC works?

 

If you go through your due diligence and a HELOC is what you need, what should you look for when comparing different options on the market?

 

Before we discuss what to look for a quick primer on how a HELOC works. This is not a fixed rate loan, it is adjustable and it can adjust at any time. As a rule the base rate for your HELOC is the Prime Rate (what a bank charges its clients with the lowest risk is the standard definition). Prime is not tied to anything, in the past different banks have had different Prime Rates and they were all published in financial media, today most banks have the same Prime Rate. When does the Prime Rate move? Whenever a bank feels it needs a better return on its loans, typically when one major bank changes its rates all other follow.

 

For the past few decades banks have moved their Prime Rate in conjunction with the Federal Reserve’s Federal Funds Rate, the rate banks charge to borrow from each other through the Federal Reserve. This week when the Fed increased the funds rate by one-quarter of one percent (0.25%) banks immediately increased their Prime Rates, as a result the Prime Rate went from 4.5% to 4.75%. As the Prime Rate increases and decreases so does the rate on your HELOC.

 

HELOCs then operate like a credit card, you have a credit limit and can borrow within that limit and pay back as much as you like at any time, and you have a minimum payment due every month based on your balance. If you have a HELOC with a $100,000 limit and borrow $25,000 then you owe at minimum the interest on the $25,000 every month (some banks have a 1% repayment rule, or interest only whichever is greater). As long as your HELOC line is open to drawing against it you can run the balance up and down as often as you like within the credit limit.

 

 

If you get a HELOC is your rate the Prime Rate? Maybe, but most likely not. This leads to one of the important factors about a HELOC you need to know when comparing options:

 

  • What is the margin? We discussed that your rate is tied to the Prime Rate, but that is not necessarily your rate. Your rate will be the Prime Rate plus a margin. The margin is a fixed amount throughout the loan. Perhaps the bank is running a special and you can get Prime with no margin, but generally there will be a margin anywhere from a quarter percent (0.25%) to one and a half percent (1.5%) or higher depending on many factors. What is important to you is what is the margin. If Prime is at 4.75% and you have a 1% margin to start your rate is 5.75% on whatever balance you have outstanding—until the next time the Prime Rate moves at which point your rate will adjust. Whatever your margin is added to Prime is your rate, the margin will remain fixed but your rate adjusts with Prime.

 

  • What determines the margin?
    • First and foremost your margin will be determined by your credit score. The higher your score the lower the margin, which makes sense. If you have a lower credit score you are considered a higher risk than someone with a higher score, so your margin maybe 1.5% while someone with a much higher score may have a margin of 1%.
    • Second, what is the amount of money you are looking for? It seems counter-intuitive but generally the more you want as your maximum limit the lower your margin may be. If you get a line for $50,000 the margin maybe as high as 2%, but if you get $250,000 it may be 1%.
    • Third, what is the total loan to value? If your home is appraised at $600,000 and you owe $300,000 then the loan to value (LTV) is 50%. If you want an equity line for $100,000 the total LTV will be 67% (300,000 + 100,000 = 400,000 divided by value of 600,000 is 66.66666% or 67%). If you want an equity line of $180,000 then the LTV is 80%. Generally, the higher the LTV the higher the margin.

 

  • What are the terms of the HELOC draw and repayment period? Is your line open and available for use for ten years, fifteen, twenty? If the line is shut down for use before the balance is due what are the repayment terms for the final years of the loan? Can you continue to make interest only payments? Does the loan become fully amortized for the remaining term of the loan? Is there a potential balloon payment? These are very important terms to know as they will dictate what your financial obligations will be in the future. If the loan begins to fully amortize for five years after you use it for ten will you be able to make those payments (for instance you have $80,000 balance and your rate is 6% when the HELOC shuts down and is fully amortized your payment at that rate would be about $1550 per month)? What if it has a balloon and you did not do a good job of making principal payments, where will you come up with $80,000, $125,000 or even $25,000, when the time comes.

 

Before getting into a HELOC look at what will happen in the future, know how your rate will be determined by knowing the margin, know how you will have to repay the debt in the near term but equally important later in the loan when the repayment terms may change.

 

HELOCs can be very beneficial financial instruments, but like all financial tools they work best when used properly.

 

If you have any questions about HELOCs or want some help deciphering different options being presented to you please do not hesitate to contact me for assistance.

 

As well, if you currently have a HELOC and are concerned about your rising interest rate and possible repayment challenges in the future (i.e. fully amortized payment and/or balloon payment) please call me to discuss options for refinancing and if that is an option that makes sense for you and your family.

 

Have a question? Ask me!

 

Rate moving news this week did not come from our usual sources of economic reports from various government or private agencies. The first announcement was the Federal Reserve Open Market Committee (FOMC) that it was raising the fed funds rate by one-quarter of one percent (o.25%), which as discussed above resulted in an increase in the Prime Rate to 4.75%. The rate increase alone had no impact on mortgage rates as the markets had fully anticipated the move and it was already priced into our rates a long time ago. What can move mortgage rates are comments from the meeting and Fed Chair Jerome Powell that may indicate the Fed will engage in three more rate increases this year instead of the previously announced two more increases. There were no comments or statements that indicated a change in the rate increase schedule for 2018 and markets reacted somewhat favorably.

 

Yesterday the Trump Administration announced tariffs of about $50 billion worth of certain Chinese imports. The immediate announcement caused stock markets to drop about 2% and the sell-off proceeds were put into bonds and mortgages, leading to a dip in rates. Later as considerations were given to possible retaliation from China one target stands out—U.S. debt. China is the largest holder of United States Treasury bills and bonds, with almost $1.2 trillion. Should China start a significant sell off of their holdings it will cause rates to climb, how much would depend on how much debt China wants to bring to market. The potential retaliation from China caused rates to reverse yesterday into correction mode after their initial dip.

 

Rates for Friday March 23, 2018: Some movement in the price of conforming rates this week, but we end the week steady from last Friday. On the higher side we saw the high-balance conforming rate (loans from $453,101 to $679,650) gave back their brief dip from last week. Rates are volatile for many reasons and I expect rates to have more pressure to move up than down, I retain my mantra of locking as soon as you can through your escrow period.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                      4.5%         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.

 

 

Regular readers of the WR&MU know this last section is usually something personal going on in my life. It is a bit longer than the usual short paragraph or two, but I hope you indulge me and give it a read.

 

Many of you know I am a member of the Rotary Club of Long Beach. I am proud of my membership, not only in our local club that contributes tens of thousands of dollars to assist local non-profits every years, has purchased hundreds of thousands of dollar in books for local schools and every year provides hundreds of thousands of dollars in scholarships to students at Long Beach City College and Cal State Long Beach; but also proud to be part of Rotary International.

Rotary International could be looked at as the primary organization responsible for the nearly complete eradication of polio around the world. Taken on as a primary mission in the 1950’s, Rotary clubs around the world raised funds and volunteers to vaccinate children from Boise to Bangkok, Tulsa to Tunisia. Today there are only a few new cases of polio every year and Rotarians continue to administer the vaccine around the globe to the disadvantaged.

 

Lack of easily accessible clean water is incredibly debilitating to a community. Disease denies children to opportunity to go to school or adults to work, lack of sanitation and ability to properly clean increases the spread of disease. Some villagers, almost always women and their daughters, spend hours each day walking to and from the nearest source of water—not clean but water. Agriculture is poor, if existent, due to lack of water available for irrigation. In sum, it is practically impossible to turn around a community that is under-educated, in poor health and lacking economic activity if it has no clean water source.

 

With the overwhelming success in fighting polio the organization began to look at how it could impact the world again. Water. Clean water for everyone has become a universal cause for Rotarians. Millions of people around the world do not have access to clean water to drink, cook or clean with. Our club is very active in this effort and this past year some of our members were key players in raising funds and partnering with Water Underground to drill wells for four villages in Mozambique.

 

Below is link to  a video of one village on the day its well was tapped and fresh water came shooting from the ground. This was one of the wells our club was primarily responsible for funding. Watch these villagers and consider how so very fortunate we are to have some we consider so simple, getting water to drink, cook or clean with, from a tap.

 

After this video was shown at our club meeting Wednesday those present quickly made donations to pay for one more well in Mozambique. Sometime next year another village of a few thousand people will dance in the water shooting from the ground.

 

Here is the video (click on the “Watch our 2017 film” box embedded in the bottom of the video on the home page). Take a few minutes to watch it, you will be glad you did.

 

Have a great week,

 

Dennis

3-16-18: What is the difference between Fannie Mae and Freddie Mac?

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Question of the week: What is the difference between Fannie Mae and Freddie Mac?

 

Answer: Before we look at the differences between Fannie and Freddie a quick recap as to what they are. Fannie and Freddie are currently owned by the United States government and regulated by the Federal Housing Finance Agency. When you hear or read about “conforming” or “conventional” mortgages, know the reference is to Fannie and Freddie mortgages.

 

Here is how they work. When your conventional mortgage funds the lender will bundle your mortgage with tens of millions of dollars of other mortgages and sell them to Fannie Mae or Freddie Mac. They will then create a bigger bundle, think hundred million, and sell Mortgage Backed Securities (MBS) to investors. So your home loan in Cypress, California becomes an investment for the Shreveport Municipal Employees Pension Fund.

 

Side note: investors purchase MBS as an alternative to US Treasury bonds or other long term fixed rate investments. When investors are buying MBS rates go down, when they are selling, or not buying, rates go up.

 

When investors purchase the MBS of conventional mortgages they do so with the understanding that all the mortgages in their investment have been underwritten and funded under the guidelines of either Fannie or Freddie, depending which on whose mortgages they are buying.

 

To review, your mortgage is underwritten to either Fannie Mae or Freddie Mac underwriting guidelines, after it is funded by the lender it is sold to whichever entity whose guidelines were used to approve the loan, it is then sold as part of a larger package of mortgages to investors.

 

The differences between Fannie and Freddie comes down to their underwriting guidelines. For decades Freddie was known for somewhat looser underwriting standards, in the past few years Fannie has altered several of its guidelines to align with the Freddie guidelines.

 

There differences between the guidelines between the two are not many but useful to know when certain situations arise. For instance for income qualifying Freddie may only require one year tax returns in situations where Fannie may require two years. Certain property requirements are easier for loans going to Freddie as well—for instance we recently had an issue with a property that had a shared private road, Fannie Mae has some challenging requirements regarding maintaining that road whereas Freddie Mac does not have any requirements. Certain instances of how credit and debt are considered, use of co-signers and funds can also vary between the Fannie and Freddie guidelines.

 

If we go into all the differences your eyes will roll back in your head, actually after a few you will quit reading, but there are enough differences that somewhat frequently we will determine to use fund a loan using Freddie guidelines instead of Fannie, or vice-versa, because we need to in order to get the loan approved and funded.

 

Have a question? Ask me!

 

Prices and sales dominated economic news this week. Inflation was subdued in February, the Consumer Price Index rose 0.2% from January and was up 2.2% from last February; strip out volatile food and energy prices, which is what the Fed does when gauging inflation, and prices were up 1.8% from 2017 which is below the Fed’s target 2.0% inflation rate. Wholesale prices were also benign with the Producer Price Index also up 0.2% for the month and 2.5% for the core rate (less food and energy). The price data does not support the Fed looking to alter its stated course of three rate increases of 0.25% this year. Also not support more aggressive rate increases was the retail sales report. Retail sales dipped 0.1% in February from January, a bit counter to expectations with strong job growth and rising wages; an interesting aspect of the report was that nonstore sales jumped 1% from January.

 

Proceed with caution is the advice for the coming week. On Wednesday the Federal Open Market Committee will announce its decision on whether the Federal Funds rate is being increased. The overwhelming consensus is the Fed will bump the rate 0.25% at its meeting, the first of three expected for the year. This rate increase is already priced into the mortgage markets so if there is a 0.25% increase there should be no impact on mortgage rates. Key word in that sentence? “Should.” If the expected rate increase is what is announced, investors will then read with great interest the statement accompanying the rate announcement. Is there any statement regarding following labor markets more closely, concern or attention to wage inflation, changes in expectations for economic growth? Investors will be parsing the statement to see if there is a hint, or a hint of a hint, that the Fed may have four rate increases this year instead of the expected three, or that one or more of the hikes could be 0.5% instead of 0.25% their reaction will be to sell of bonds and Mortgage Backed Securities and we will see rates jump up on Wednesday afternoon.

 

Rates for Friday March 16, 2018: Conforming rates hold steady for another Friday and we see high-balance rates (loans between $453,101 and $679,650) dip after three flat weeks.

 

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

30 year conforming                                            4.25%       Flat

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.

 

Arghhh. Why  did I change my bracket at the last second and put in Arizona to make the Final Four instead of Virginia? Because I over-thought it. It’s a mistake I try to avoid in business and working with clients—don’t over think, the solution is right there just implement it—but when it comes to trying to predict sporting events I tend to over-think which is good for my friendly competitors but frustrates me.

 

A great weekend to be a bar owner with St. Patrick’s Day falling on a Saturday night. I am going to assume the take in the collection plates on Sunday morning will be a directly reciprocal to the take in the tills of the drinking establishments on Saturday night. According to Wallethub.com beer consumption tomorrow will be 152.5% greater than usual, and Guinness sales will be 819% higher. I tend to enjoy Guinness throughout the year, why restrict such a fine beverage to only one day? Not only will purveyors of Guinness benefit from the Irish holiday, but so will cabbage sellers and transporters as the cruciferous vegetable sees a 70% increase in shipments the week of the green.

 

Have a fun, and safe, St. Patrick’s Day,

 

Dennis Cleary Smith (now you know what the “C” is for!)

2-23-18: Do you think we are in a real estate price bubble that is coming to an end soon?

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Question of the week: Do you think we are in a real estate price bubble that is coming to an end soon?

 

Answer: This question, or some variation, has been asked by several different people in several different settings in the past few weeks. From clients, to real estate professionals, to friends, to attorneys and accounts asking in my office, on the phone, at dinner and in networking meetings, everyone wants to know, will housing markets drop precipitously in the near future?

 

My short answer: No. No, I do  not think we are in a real estate price bubble that is ending soon.

 

My long answer: why I feel this way.

 

One underlying facet to the question is everyone’s experience from the 2007-8 market crash, and the expectation that it will be duplicated because we have experienced a very large increase in real estate prices in the past 5-6 years, similar to the home price increases in the early 2000’s.

 

Comparing our current market to the market at the beginning of the century is not comparing similar actions and motivations of the buyers in the markets.

 

The pre-recession housing bubble was created by several factors. First, was the ease of financing. Following the lead of hard money, then soft money, lenders, Fannie and Freddie were purchasing mortgages from lenders that required no verification of income or assets and in many instances required no appraisal. Further, they were buying loans that were secured by homes with no equity—borrowers were also obtaining second mortgages, usually HELOCs, that took their total loan to value to 100% of the property value.  This easy money enabled many people to purchase homes, or refinance current homes and pull out equity, well above the prices and mortgages they would normally be able to qualify for, which often resulted in borrowers choosing adjustable rate mortgages for lower payments.

 

Second, were the motivations for much of the purchasing activity. Prices go up based on purchases not on refinances, the closed sales become comparable sales used for the next sales in a neighborhood. As prices rose many people felt that had to buy right away or miss out, not just on buying a piece of property but also on the money that could be made as the market went up. The shift in purpose that we saw was people buying investments they would live in instead of buying homes. They were motivated by trying to capitalize on a market, which resulting in highly leveraged and risky purchases, with the intention of selling or somehow cashing out—which was done with refinancing, pulling out equity and using this equity for consumption of goods and services.

 

Third, once the market softened homeowners who were highly leveraged, in mortgages they could not afford once they adjusted, and had little to no money in their home from their savings, found it easier to walk away or sell at a loss than homeowners who purchased in conventional markets.

 

Today, there is a healthy foundation to the housing market. Changes in underwriting policies have ensured that borrowers have the income to debt ratios and credit history to afford their mortgages. When purchasing they have down payment into the property, i.e. “skin in the game.” One more solid piece of this foundation, the overwhelming majority of homeowners who have mortgages that are long term low fixed rates.

In one market you had speculative purchasing, made with little to no down payments, financed with non-qualifying mortgages, many of which were non-fixed rate products. In the other market you have buyers purchasing homes for the long term, purchasing with down payments and financed with long term fixed rate mortgages with low interest rates.

 

If/when there is a turn in the housing market and we see prices flatten, or even dip, there will not be the resulting sharp drop in prices across regions because of the solid foundation that has been built with qualified, well-motivated homeowners. Bubbles pop and created market downfalls not because of a slight correction, but because that correction snowballs as owners panic and sell their product, thereby creating significant over-supply and exponential price declines. With families owning homes they can afford to retain and having purchased with their hard earned savings, a dip in the market will not create a panic-selling environment for any significant portion of the market to create a crash.

 

The most significant threats I see to housing in California, particularly along the coastal markets (which I define as any county that touches the Pacific) are cash for purchasing homes and interest rates. Both of these factors can limit buyers ability to qualify as home prices climb.

 

At some point prices will flatten, and possibly decline, I do not see this happening in the near future, but when this occurs it will not be long lived nor a deep decline in housing prices across several markets in the region, state or nation.

 

Have a question? Ask me!

 

Overreaction? On Wednesday the minutes were released from the January Federal Open Market Committee (FOMC), the group at the Federal Reserve that determines the federal funds rate. Almost immediately after the minutes were released, well immediately after investors had time to read them and then take action in the market, rates jumped as investors sold off bonds and mortgages. Why? Because the Fed has adjusted its economic outlook since its December meeting, forecasting stronger economic growth than previously thought and achieving the 2% inflation target sooner than previously thought. The minutes also showed that the FOMC members still feel that the economic outlook supports further “gradual increases” in the federal funds rate. Many investors trying to read the tea-leaves felt the Fed maintaining its stance was instead a signal that it will raise rates more than previously estimated (three times this year). This created a sell-off that became more pronounced as the day progressed spiking rates.

 

Rates for Friday February 23, 2018: After Wednesday’s big sell off investors returned to market with cooler heads on Thursday and Friday as investors bought back into the bond markets and over the two days scratched back almost all the losses. We see a slight bump in high-balance rates, but conforming holds on for the second straight Friday with no change. As we have been saying for over a month, rates are volatile so lock when you can.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                       4.50%      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.

Busy weekend for the Smith household as we host about 20 fifteen and sixteen year old’s for our daughter’s Sweet Sixteen party. Hopefully the weather cooperates and is not too chilly since we are setting up for an outdoor formal event. It is fun watching our little ones become young adults and see their friends grow and mature right alongside them. Sunday will be having family over for another celebration, and then perhaps a nap!

 

Have a great week,

 

Dennis

2-9-18: What is the impact from the falling stock market prices on mortgage rates?

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Question of the week: What is the impact from the falling stock market prices on mortgage rates?

 

Answer:  Before we answer the question, let’s do some Econ 101 review on stocks, bonds, rates and markets.

 

Traditionally there is an inverse relationship between stocks and bonds, when stock prices go up, bond prices go down and vice-versa, remembering that when bond prices go up rates go down, when bond prices drop rates rise. Therefore if stock prices drop, traditionally bond prices rise which means interest rates drop.

 

The underlying reason for the inverse relationship is that stocks are inherently volatile and bonds are inherently stable. When you purchase a bond, and keep in mind your mortgage is someone else’s investment that acts like a bond, you are buying a fixed return for a fixed period of time. If you purchase a 10-year bond for $1000 paying 5% per year, you know you will receive $50 per year in interest. In ten years, after receiving $500 in interest payments you will receive your $1000 initial investment back.

 

If you purchase $1000 of stock in DCSmithCo you may receive 20 shares if you purchase on Monday, 21 if you buy on Tuesday or 18 if you purchase on Wednesday. When you go to sell your shares in the future you may receive your original $1000 back, or $1250, or $875 depending on the market conditions.

 

Because of the volatility of stocks, when there is an “event” that creates uncertainty, investors will engage in “flight to safety,” taking their money out of stocks and purchase bonds. Supply and demand: selling stocks puts excess supply in the market causing prices to drop; buying bonds puts excess demand in the market causing prices to rise—and rates to drop.

 

Fundamentally, when there is a large sell-off, or correction as we appear to be having, in stocks investors selling their stock holdings purchase bonds causing rates to drop.

 

That is not what happened this week. Investors have been selling both stocks and bonds.

 

Why was the traditional relationship broken?

 

An underlying, perhaps overlying, reason for the sell-off in the stock market that started last Friday was concern about rising interest rates by investors. The Fed has been taking actions to create higher interest rates. First, they have announced that there will be at least three increases to the Fed Discount Rate in 2018, which will trickle through to increases in the prime rate, which trickles to other consumer rates. Second, the Fed has begun to sell off Treasury bonds and mortgages it began purchasing in 2008. Selling up to $30 billion per month of these assets, the Fed is adding supply to the interest rate market. What happens when there is over-supply in bonds? Prices drop which means rates rise.

 

With the expectation for higher rates, with the action by the Fed to increase rates by selling interest bearing assets in the market to support those expectations, Mortgage Backed Securities (MBS) have seen prices drop causing rates to rise. Reminder, MBS are the financial instruments that are bought and sold that determine mortgage rates.

 

What is the impact on falling stock prices on mortgage rates? In this current cycle, there is no impact on mortgage rates from falling stock prices. However, falling bond prices (which means higher rates) have had an impact on stock prices, causing them to fall.

 

Markets are very volatile right now as the stock market goes through a correction and the bond and mortgage markets search for stability trying to understand the impact the Fed asset sell-off will have in the long term.

 

 

Have a question? Ask me!

 

There was no significant economic data released this week that would impact mortgage rates—or stock prices. The only somewhat meaningful set of numbers released this week was unemployment claims for the week of February 3rd, which showed 221,000 initial claims filed and continuing claims down 33,000 to 1.9 million still on the rolls. What was very significant about the Department of Labor report was the four-week moving average of initial claims is the lowest in 45 years. The last time there were this few unemployment claims filed the American work force was at approximately 88.4 million workers, compared with approximately 161 million today.

 

While the number itself is not a direct impact on rates, the underlying message of a strong labor force that is showing more being employed and upward pressure on wages lends support to higher rates as they reflect a growing economy. The extrapolation is this will bring inflation and unless rates are higher inflation could become an economic danger, eroding returns on investment and slowing growth as people are priced out of consuming certain products and services. This is the real basis for the volatility in our markets—higher rates and potential inflation.

 

 

Rates for Friday February 9, 2018: As I type this Friday morning from the tire story, see below for those curious, mortgages are seeing their first real positive day in over a week. Is it a short-term blip slowing rising rates, or have we seen the recent jump in rates halted until the next cycle? Conforming rates are up another one-eighth of one percent (0.125% ) from last Friday, the third week in a row with such an increase, but high-balance conforming rates are flat from last week. Anyone who is thinking a downside rate correction is very near and is floating to capture a dip is taking a very big risk. Something I have said for years in up markets bears repeating, rates tend to go up like a rocket and come down like a feather. Lock your rate when you are able.

 

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%     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.

 

Well they say things come in threes and for the Smith household threes have been tires. Last week Leslie had a mishap and needed a new tire. Yesterday the oldest clipped a curb in front of the house and took out a chunk of tire the size of a half-dollar. This morning I am on my merry way to work when I notice the car feels funny, pull up two houses down from ours and see one of my tires is a pancake—with a nail imbedded in it. Thank goodness for AAA, something we have had for 23 years and added our daughter as soon as we could.

 

I see the flats and tire expenses and waiting as the penance I must pay for the joy experienced last Sunday when the Eagles once again overcame underdog status to win their first Super Bowl. Thankfully my daughters were not fast enough with their cell phones to record Dad’s hysteronics as he flapped around the house singing the Eagles fight song and freely expressing his joy at the result of an incredible game. If going through three flat tires in a short period of time is the price of a championship I look forward to a similar cost in June, or perhaps in November, when the Flyers or improbably the Phillies, mimic the Eagles success!

 

Have a great week,

 

Dennis

 

 

 

 

2-2-18: What is “tiered” pricing

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Question of the week: What is “tiered” pricing?

 

Answer:  There are several axioms in economics, the two most well-known are that supply and demand determine prices and that the greater the risk the greater the return. Both of these axioms determine your mortgage interest rate. Rates in general are determined by supply and demand for mortgages as investments, your rate in particular is further determined by risk. When pricing your mortgage we put several factors into the pricing software and it filters through those factors and returns with the price for your particular circumstance.

 

Tiered pricing is used by lenders to adjust for risk, the riskier a loan the higher the rate. What creates risk in a mortgage? Several factors create risk; the most important ones are occupancy, loan to value and credit history as represented by credit score.

 

Tiered pricing comes into play in two different ways. First, the tiers added to a loan price for some of the factors mentioned above, these “add-ons” are standard pricing adjustments on conforming loans from Fannie Mae and Freddie Mac or if a jumbo loan from whomever the investor may be.

 

Let’s take an extreme example. A borrower obtaining a $400,000 loan for the purchase of a condominium as investment with 20% down and a 711 FICO score will have different pricing than someone obtaining a $400,000 loan for the purchase of a condo as their primary residence with 30% down and a FICO score of 798.

 

Taking a look at our non-owner occupied transaction with a condo as the property type. The following add-ons occur to the price of the loan (one point is equivalent to 1% of the loan amount, in this case one point is $4000):

 

Investment property = 3.75 points

Credit Score = 1.25 points

Condominium = 0.75 points

Total add-ons = 5.75 points

 

What if the borrower put down 30% and purchased a condo but for owner occupancy? Because of the change in risk the add-ons, or tiers, change:

 

Credit score = 0.500 points (as opposed to 1.25%)

No add for being a condo

No add for investment

Total add-ons = 0.500 points

 

What if the borrower put down 30% purchased the condo for their primary residence and had a 799 credit score? Essentially there are no add-ons and the price of the loan would be the same if the borrower were purchasing a detached single family home.

 

As you can see in the first scenario with 20% down the cost to the investor is $21,000 more in the cost of the loan than the second scenario where the borrower will have 30% down and live in the property. (5.75 points = $23,000 less 0.50 points or $2,000).

 

Surely an investor is not going to pay $23,000 more in loan fees out of pocket. This is where the second part of tiered pricing comes in. When speaking about mortgages there is a trade off between the cost you can pay and the rate you can pay. Observe:

 

 

 

 

 

The teeter-totter above has the price of the loan on one side and the interest rate on the other side. If you want a lower rate then you will pay a higher price for the loan, if you want a lower price then you pay a higher rate for the loan. In our example above, the investor could get a rate of 4.25% and pay the 5.75 points for the loan, or could get an interest rate of 5.25% and pay only one point for the loan. His payment is higher by $242 per month ($1967 at 4.25% vs. $2209 at 5.25%) if he takes the higher rate, but he saves $19,000 in points.

 

The same scenario on a smaller scale occurs when you are purchasing your home. The you can reduce your cash to close by taking a higher interest rate, the rule of thumb is usually 0.125% in interest rate will reduce your costs by approximately one-half point (0.500%).

 

Using the $400,000 loan example for a primary residence, today our conforming rate for owner occupied purchase with 20% down and 740 credit score at cost of 1.25 points is 4.125%. The payment is $1939 per month and the loan cost is $5000. However, if you take a rate of 4.25% the cost will be 0.75 points, your payment goes up to $1968 ($29 per month) but your cost goes to $3000, a savings of $2000 in cash to close. If you took the lower rate and put the $29 saved per month in a coffee can it would take you almost six years to save the $2000 you would have saved at the time of your transaction had you taken the higher rate. Of course if you did take the higher rate after six years your total cost to purchase the home would be higher by $29 per month.

 

The question you need to answer is do you need the $2000 more today than you need $29 each month in the future?

 

What is tiered pricing? On one-hand it determines the price of your loan based on certain risk factors. On the other hand it allows you to trade more or less cash to close your transaction with a lower or higher monthly payment.

 

Confused? If so please do not hesitate to contact me to discuss your situation and rate options available for your purchase or refinance transaction.

 

Have a question? Ask me!

 

A couple of very important economic data releases this week. On Monday the Bureau of Economic Analysis released personal income, saving and spending data for December as well as the price index. There a bit of good and a bit of not so good in the report, with the good outweighing the not so good in impact on mortgage rates. Incomes increased a solid 0.4% in December against a price increase of only 0.1% (0.2% if food and energy taken out). The increase in income is very positive for economic growth and puts upward pressure on rates. Also putting pressure on rates to go up was a 0.4% increase in consumer spending following a revised 0.8% increase in spending in November from October. As consumer spending is approximately 65-70% of our economy increases point to stronger economic growth. The price index change is lower than expected at this stage of economic growth and a bit of downer in the report, and positive for rates. However, of greater concern was a drop in consumer saving to 2.4%, the lowest rate in thirteen years. While greater consumer spending is helpful for the economy, it is not very helpful if the increase is based on consumers dipping significantly into their savings for their purchases. Overall the report results are not positive for lower mortgage rates.

 

On Wednesday the Fed Open Market Committee—the group that determines what rates the Fed will charge member banks—announced no rate increase in January. This was entirely expected by everyone who follows the Fed and rates so no surprise mean no impact on rates. In the announcement the Fed indicated it feels inflation will increase to 2% at some point this year and stabilize at that level. “Solid” was how the FOMC described employment and business spending.  The announcement gave no reason to expect the Fed will not continue with its plan to raise rates three times in 2018, and the expectation is for a 0.25% increase in each hike. Should inflation and employment heat up further we could see a fourth hike added this year, or perhaps one of the hikes being 0.50% instead of 0.25%.

 

Strong, solid, very positive, all describe the employment report released this morning by the Labor Department. Non-farm payrolls increased 200,000 in January, following a revised 160,000 increase in December. The unemployment level remains at 4.1% and the participation rate is level at 62.7%. Average hourly earnings were another sign of strength in employment showing a 0.3% increase for the month and up 2.9% from January 2017. With the price index increasing 1.7% the gap between hourly pay increases and higher prices being over 1% is certainly good news for workers as their paychecks go further this year than last. The soft spot in the report is a decline in the average workweek from 34.5 hours to 34.3 hours. This is the first decline in sometime for the average workweek so it could be a one-off due to winter weather that impacted most of the country in January, we will see what next month’s report has to report to see if this is a negative and concerning trend. Overall the strength of new hires and higher wages are very positive and negative for mortgage rates.

 

Rates for Friday February 2, 2018: Conforming rates increase for the second week in a row and third time in four weeks and high-balance rates are up for the fourth Friday in a row. The positive economic news and growing momentum will continue to put upward pressure on rates. Lock in your rate when you can remains the advice from this mortgage expert.

 

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

30 year conforming                                            4.1215%       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.

Two weeks ago I wrote in this space how excited I was that the Philadelphia Eagles were playing in the NFC Championship. That excitement is more than doubled as they play in the Super Bowl on Sunday. This is their third trip to the Super Bowl and they are looking to win it for the first time (losing 27-10 to the Raiders in Super Bowl XV following 1980 season and 24-21 in Super Bowl XXXIX to Tom Brady and the Patriots following the 2004 season). The last time the Eagles won a championship was in 1960, so the fans could be described as long-suffering.

 

As is my hope with all big games, and little ones, my hope is that it is well played and determined not by one team playing poorly and making mistakes but by one team playing exceptionally well and deserving the victory. My bigger hope is that victorious team has millions of fans signing their fight song well into Sunday night. The same song that has been my ringtone for the past several weeks.

 

Fly Eagles Fly!

 

Dennis