Duane's Blog

House OK's Increase to FNMA and FHLMC Loan Limits

Duane DeSalvo (Somerset International) — Sun, 27 Jan 2008 18:31:39 -0600

Hallelujah!! The increase to the loan limits of loans bought or insured by Fannie Mae, Freddie Mac and FHA is great news for consumers!!! For those homeowners who have existing Home loans and HELOCs which totaled over $417,000, in order to consolidate and refinance, they would be forced into Jumbo loans which have higher interest rates than do the conforming loans! With the new higher limits $729,750..........these homeowners can now refi into a conforming loan at a Lower Interest rate!! And............of course, those looking to purchase a home, particularly in markets such as California where the home prices have been greatly pushed up over the past few years, will now be able to get a conforming loan as well!! This comes at a great time when our economy has been adversely affected by the sub prime loans. With the lower interest rates and the new higher conforming loans.....this just might be a great year for Realtors..............a welcome thought after the 2007 real estate market!!

Great news as Mortgage rates drop!

Duane DeSalvo (Somerset International) — Thu, 13 Sep 2007 17:49:22 -0500

The following good news is an excerpt from a CNN Money news release!

Mortgage rates dropped in the latest week, which could help home buyers who are looking to refinance, Freddie Mac reported Thursday.

The government-sponsored loan buyer said the average rate on a 30-year fixed-rate loan averaged 6.31 percent for the week ended Sept. 13, down from 6.46 percent last week.

Last year at this time, 30-year mortgage rates averaged 6.43 percent.

Freddie Mac said interest rates on prime conforming loans fell across the board in the past week, with rates on 30-year fixed mortgages averaging 0.15 percentage point below the previous week's level.

"The drop in mortgage rates may give some relief to borrowers who are looking to refinance or purchase a home," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement. "As a matter of fact, all the mortgage products in Freddie Mac's survey this week were lower than they were at the same time last year."

In its latest report, Freddie Mac said rates on 15-year fixed-rate loans averaged 5.97 percent in the latest week, down from 6.15 percent last week. A year ago, the 15-year rate averaged 6.11 percent.

Five-year adjustable-rate mortgages (ARMs) averaged 6.17 percent this week, down from 6.32 percent last week.

A year ago, the 5-year ARM averaged 6.10 percent.

One-year ARMs averaged 5.66 percent this week, down from 5.67 percent last week. They were at 5.60 percent this time last year.

MAKING SENSE OF THE MORTGAGE INDUSTRY

Duane DeSalvo (Somerset International) — Wed, 05 Sep 2007 18:48:07 -0500

Steve Carrigan, Mortgage planner and Branch Manager of Pinnacle Financial in Camarillo, CA wrote a great article which presents the history of the mortgage lending industry in the United States, what is happening in this industry today, and how the changes affect/benefit the consumer. It is reprinted here with permission. I hope you find this interesting!

Saga of the US Mortgage Industry

The Old System of Mortgage Lending

By Steve Carrigan

Once upon a time, during the good old days when life wasn't so complicated, banks lent money to borrowers and never sold these mortgages to unfeeling, multi-billion dollar institutions with call centers in distant lands.

Anyone could walk into his or her local bank and get a local home loan without signing truckloads of paperwork and being interrogated as though they were America's most wanted criminal. There was no fraud or borrower manipulation. There were no reckless bank failures or irresponsible lending practices. In those days, bankers were compassionate, foreclosures were minimal and consumers were respected. RIGHT?

Wrong. Selective memory is a wonderful thing...

Mortgage lending in America used to be a simple affair. Deposits were made to banks, and banks in turn used the deposits to fund loans. However, this simple and rudimentary system of banking did have some HUGE drawbacks.

Remember the old Jimmy Stewart film, It's a Wonderful Life? In that film, Jimmy Stewart plays a small town Savings and Loan banker named George Bailey. George was the good guy. His nemesis was Mr. Potter, the big bad monopolistic banker who would have controlled the town, renamed it Pottersville and kept the commoners dirt poor had George Bailey not been around to stop him.

During the film, which was set during the 1930s and 40s, George the good guy almost lost the family bank during the many "bank runs" that occurred. A bank run is when most, if not all, of the people who have deposited money in a bank decide to withdraw their money all at the same time. This panic-driven event is caused because bank customers get scared that the bank will fail and they will lose the deposits that they have at the bank. Well, needless to say, this often becomes a self-fulfilling prophesy because if everyone pulls their money from the bank all at the same time, the bank WILL fail!

You see, the way banks make money is by paying the depositors a small interest rate on their deposits and then lending that same money to borrowers at a higher interest rate. In essence, the bank is borrowing money from you, the depositor, and lending those borrowed funds to your neighbor, the borrower who applies for a mortgage. Then, the bank borrows money from your neighbor when they deposit their money, and the bank loans those borrowed funds to you when you apply for a mortgage. That is how banks operated under the old banking system.

As you can imagine, this system, while simple and easy to understand, had many flaws:

Numerous banks failed frequently during the many bank panics that occurred in this county throughout the 1800s as well as the 1900s. It was very easy for depositors to get anxious and withdraw all their money from the bank whenever a piece of bad news hit the town or local economy.
It was very easy for the "Mr. Potters" of the world to take advantage of ordinary Americans because these "Mr. Potter" robber-barons had the deep pockets to snap up the failed banks at bargain basement prices. In this scenario, rampant fraud and unfair business practices were the norm due to easy manipulation of the banking system. The rich got richer while the poor got poorer.
To protect themselves from failing in the scenario illustrated above, banks only issued mortgages that were "callable." In other words, the banks had the right to call up every one of their borrowers and "call the loan due" immediately and for any reason. If you didn't have the money to pay back the bank, you lost your home, not because you couldn't make the monthly payments, but because the bank couldn't meet the panic-driven withdrawal demands of the depositors.

Needless to say, this archaic system of mortgage lending allowed only very limited mortgage choices, and the lending guidelines were dreadfully restrictive.

The new system of mortgage lending

As time when on, and after the economic recovery that began during World War II, the US government and financial markets began exploring new ways for Americans to buy homes in ways where we wouldn't be at the mercy of a small clique of wealthy bankers. Thus, the "secondary mortgage market" system was born.

In this new system, bankers would be empowered to take all the mortgages that they issued to various borrowers and sell those mortgages to other investors in an "after-market." In other words, if you owe the bank money, the bank has a valuable asset-your IOU! Two things happen when the bank takes that asset and sells it to someone else:

They hope they can make a profit
They can replace the funds that they loaned to you and loan more money to someone else

This process of loaning money and selling those mortgages to other investors is what we call mortgage banking.

In this sense, the banking process of taking a deposit from you as the bank depositor is separated from the banking process of loaning you money as the bank borrower. You are the same customer, but the bank sets up two different departments to service your needs. One department handles your checking and saving accounts, and the other department handles your loans.

In this sense, one hand no longer has to be involved with what the other hands is doing.

The new system really has three steps with some action taking place on the sidelines:

Step 1 - Consumers get loans from mortgage banks or brokers
Step 2 - The mortgage banks or brokers sell that mortgage to secondary market investors like Fannie Mae, Freddie Mac and other financial institutions
Step 3 - Secondary market investors package these mortgages as "securities" or bonds. This process is called "securitizing" the mortgages into a financial product that can be sold to Wall Street investors like mutual fund companies, individual investors and others.

On the Sidelines: Warehouse lenders provide the interim financing for the mortgage banks. In other words, if a mortgage bank isn't taking in deposits from banking customers, where do they get the money to loan out in the first place? Well, another group of lenders fill in the gap and loan money to mortgage banks during this interim period. These lenders "warehouse" these loans for short periods from one to 60 days, while the mortgage banks sell them to Secondary market investors.

How does this new system of mortgage banking benefit the consumer?

The money for your mortgage is coming directly from Wall Street sources. This basically means that you have, literally, hundreds of millions of investors across the planet who are itching to lend you mortgage money by investing in the mortgage bonds that trade in the US financial markets.

The result?

You have an unlimited amount of cash flow and financing options because mortgage companies have financial incentives to innovate and create new mortgage products. The more products they create and sell, the more money they make and the more choices you have. As the saying goes, "when banks compete, you win."
There is less room for manipulation and abuse due to competitive market pressures. If can't get what you want now, just go down the street and chances are, someone else is offering it better, cheaper and quicker.
There are consumer protections, flexible and fair lending guidelines that protect minorities and ensure that all Americans have access to mortgages and can buy their own homes.

The bottom line here is that in the US, we have a uniquely American, full-blown democratic process of getting a mortgage and buying a home. No other country in the world has this system. That is why we have literally thousands of mortgage choices that cater to just about any need you could possibly think of. Whether you are caring for elderly relatives, sending kids to college, trying to retire comfortably, investing in real estate, buying a second home, getting a divorce, starting a new family, or starting a business, there are mortgage options for you.

Does this system have flaws. Yes, absolutely. In any highly democratic system, there is a need for discipline.

If you let people do anything they want without rules, chances are someone is going to get hurt sooner or later. That is exactly what has happened recently in the mortgage industry.

You see, Wall Street investors were all looking for very high returns in the financial markets. So, they basically told the mortgage bankers, "Create new products and we will buy them." The mortgage bankers joyously replied, "Sounds great to me!" And so were born all the "no credit, no income, no problem!" loans. Consumers got greedy for loans they couldn't afford, mortgage banks got reckless in their guidelines and Wall Street investors in search of high returns, financed the whole she-bang.

When loans began going sour earlier this year, Wall Street investors decided to pull the plug and stop buying the risky mortgages from the banks. In fact, they even started requiring the mortgage banks to buy back all the loans they had sold them in the first place! In other words, the system started working in reverse - instead of providing new money to the mortgage banks, Wall Street started sucking money back from the banks. To compound the problem, the "Warehouse Lenders" who were providing interim financing from the sidelines created a "run on the mortgage banks" by closing down their lines of credit and calling all their loans due.

So there you have it! Instead of a consumer-driven run on the banks, we have a Wall Street and Warehouse Lender-driven run on the banks! This liquidity crunch is currently affecting the entire mortgage industry. Mortgage banks who were very profitable up until this very moment are going out of business. They aren't going out of business because they are no longer profitable. They are going out of business because of the "liquidity crunch" caused by this "run on the banks" phenomena just described.

Warehouse lenders are shutting off the interim financing spigots and wall Street investors are reversing the flow of money by asking mortgage lenders to buy back loans they sold them in the first place. The financial institutions with big cash reserves are sitting on the sidelines waiting to snap up all these failed mortgage banks at bargain basement prices - just like Mr. Potter was waiting for George Bailey to come crawling to him for helps.

What Is the Answer and What Can Be Done About the Situation?

That is the million dollar question! We know that we can't go back to having a small group of wealthy bankers in smoke-filled rooms limiting our financing options for us. We also know that this fully democratic US mortgage process isn't 100% foolproof either. Here are some solutions that should be implemented immediately:

· FNMA & Freddie Mac need to be given increased loan limits in order for them to purchase larger loan amounts from lenders in the high cost states. Their current loan limit of $417,000 means that any mortgage above this amount must be either held by a lender in portfolio or sold to Wall Street in the form of an ABS (Asset Based Security) where there is currently no market.

· Minimum requirements for loan terms for those with blemished credit. Had the sub-prime loans had a minimum period of at least five years before any change occurred would have given these borrowers a fighting chance at improving their credit in order to shift to a standard mortgage.

· Require that all borrowers being given sub-prime loan terms are required to receive independent counseling that would ensure that they understood their options and responsibilities when it comes to the largest loan of their lifetime.

· Stronger standards for loan officers to require that the borrower's interest is being looked after. Many of the sub-prime borrowers where given sub-prime loan terms when they could have easily qualified for standard terms. The loan officer made the decision based on compensation rather that the best loan terms for their borrower. Standards of prudence such as those applied to the financial planning field should be adopted.

· Prohibit builders and realtors from acting as a lender when involved in the sales process. A buyer of a home should be given home purchase advice that is separate from mortgage finance advice. This would eliminate the possibility that the builder or realtor might pressure a buyer to make an unsound financial decision in order to facilitate a sale.

Steve Carrigan is a Mortgage Planner and is Branch Manager of Pinnacle Financial in Camarillo. He has been a financial advisor in Southern California for more than 25 years. His professional designations include Certified Mortgage Planning Specialist, Preferred CalHFA Lender (for First-Time Home Buyers and School Employees), Preferred CalPERS Lender, and Certified Liability Advisor. On behalf of the Area Housing Authority of the County of Ventura, he provides free education on homeownership topics each month throughout the county. He also heads the Housing Task Force Committee for the Camarillo Chamber of Commerce. To send Steve a question, visit http://www.askstevecarrigan.com/; you may also call Steve directly at 805 389-0282

Houston Properties provide Great investment for Out of State Investors

Duane DeSalvo (Somerset International) — Tue, 15 May 2007 17:11:13 -0500

We've been marketing properties in Houston Texas to our real estate investor clients in southern California! WHY, you may ask? BECAUSE it's possible to actually have a POSITIVE cashflow with properties in Houston (and other states as well) as opposed to high negative cashflows with California investment properties. I just recently got back from a trip to Houston in search of great deals and was thrilled to find some Builder Closeouts which, not only can provide an investor with a positive cashflow once it's rented, BUT also provides some built in immediate equity because of the Builder discount. Please see http://somersetintl.vflyer.com/3/index-ext.html this as an example of one of the tremendous deals I found. This BRAND NEW 2400 sq. ft, 4 bedroom, 2 bath, home with granite countertops and high quality appliances, A/C and ceiling fans in all bedrooms was selling for $198,000........................Morrison Homes lowered this last model to $172,000 to close out the neighborhood!! A $26,000 Immediate Equity for the investor!! We have formed an alliance with a Houston Realtor who provides us with a 3% Referral fee ( this is 3%........not 3% of his commission!!!!) on this property and many other new developments. We are offering to split this with Realtors such as yourself if you have clients who want to invest OUT OF STATE. Just refer them to us and upon close of escrow, we will split the 3% referral fee with you!! Pretty easy money as our Realtor contact does all the work after we bring him the clients!! Keep this in mind if you have clients who want to invest out of state. Houston is particularly great because the rental numbers are way up (particularly since many folks relocated there after Hurrican Katrina). We also have found a great property management company that charges only a 5% management fee (we use them on our Houston rental)! For more info, please call me at 805-298-2180.

60 Minutes Piece on Realtors

Duane DeSalvo (Somerset International) — Tue, 15 May 2007 08:39:19 -0500

Don't know how many of you saw the 60 Minutes piece on the real estate industry Sunday night, but if you did (like me) you probably had to extricate yourself from the ceiling after it!! I was on vacation in Bellevue, visiting my Mom for Mother's Day when I thought I'd enjoy my regular Sunday night ritual of getting my blood pressure up a few notches by watching 60 Minutes. Little did I realize that my blood pressure would almost double from seeing this piece on RedFin, the Seattle Internet based Realtor that claims to be "the industry's first online brokerage for residential real estate"and is trying to "revolutionize" the Real Estate Industry by eliminating the middle man (the REALTOR) and cutting commissions to the bone!

It started off with a young Seattle area couple stating that they SOLD their house and Bought another through RedFin and saved $26,000 in commissions, enough for them to have a nice wedding reception! It also alluded to the fact that they only had to do about 10 hours of work to save this amount of commission! Glen Kelman, CEO of RedFin, calls the Real Estate Industry, the most "SCREWED up industry in America"! PUHLEASE!!!!!!!!!!!!!!!!!! you want to talk about screwed up industries? How about the OIL INDUSTRY or the INSURANCE industry? Kelman says his "Internet agents" close EIGHT TRANSACTIONS A WEEK since it only takes them a few hours a piece!

Now, 60 minutes did interview a Seattle based "Traditional Realtor" who attempted to defend the industry and what it is we do to justify our commissions but, when Leslie Stahl asked her how she responds to the fact that RedFin rebates the client back with 2% of the "typical" 3% commission charged by the selling agent, she said "I don't know how to answer that!" Of course, 60 Minutes is known for catching the interviewee off guard with questions and I didn't envy this poor woman at all!

60 Minutes did mention that many people see the industry as a "touchee Feelee" industry where clients want to see many properties and reveiw them thoroughly (sound familiar?) before making one of the most (or THE MOST) important decisions of their lives! RedFin may be for those who like to buy everything ON-LINE without actually seeing it for themselves (RedFin wants to be the "Amazon.com" of Real Estate) but I, personally, don't have any clients who are willing to buy, sight unseen, property from an Internet website.

Kelman says he expects to have to fight HAND TO HAND combat in each state they try to do business in (I think they're only in Washington state right now)!

The piece also mentioned that the Justice Department has filed a lawsuit against NAR for UNFAIR business practices and trying to prevent competition. Well I, for one, don't want to see these Internet real estate guys having the same access to all the information we Realtors have to pay many MLS, organizational, and SupraKey fees for without paying!

Now that my blood pressure has returned to normal (almost), I thought I'd post this to see what other's thoughts and observations were on this program.

Oh, by the way, if you go Here http://216.52.172.179/DispNewsletter.cfm?NEWSLETTER_ID=1956 you can see a Media Alert that was posted by the Inland Valley Association of Realtors warning Realtors of the article (I saw it AFTER the fact)!

Duane

First Time Homebuyer's Programs

Duane DeSalvo (Somerset International) — Wed, 11 Apr 2007 11:01:15 -0500

Todays' crazy real estate market makes it almost impossible for many people, particularly young couples, to buy a home. California's double digit inflation in housing prices from 2001 to 2005 saw, what used to be, almost affordable prices climb rapidly out of reach. Even with the cooling off period we've seen in many markets this past year, prices still are beyond many new homebuyer's pocketbook.

Along comes the First Time Homebuyer's Programs. Many cities throughout southern California have special programs for people on low (or not so low actually!) inicomes. These programs can provide assistance with down payments, closing costs, and special low interest mortgage rates which can make the possibility of home ownership a reality.

California also has a great First Time Homebuyer's program (CALHFA). If you haven't owned a home in the last 3 years, you may be qualified! This program will pay up to $12000 on your down payment and up to 3% of your closing costs (on a simple interest loan which doesn't have to be repaid until you sell your home!!) and an interest rate as low as 5.625% on a fixed 30 year loan. It's a wonderful program which just might make the difference between having to rent or actually owning your own home. For more information, call us at 805-298-2180 or go to http://www.calhfa.ca.gov/index.html .

Camarillo Real Estate Heats Up!

Duane DeSalvo (Somerset International) — Sun, 01 Apr 2007 18:11:31 -0500

Although the media is stating that there will be a 3-5% drop in real estate property values this year (2007), things are heating up in Ventura county and in particular in Camarillo. The lower priced properties are still not moving as quickly as many sellers would like, but the higher end, more unique properties are moving rapidly. We've seen a great resurgence in the market for these higher end ($1M+) properties. Buyers are excited about getting these "one of a kind" properties at a more reasonable price and while bank interest rates are still low.

While, for the most part, in this business there are very few guarantees, the one thing a seller can take to the bank, is the importance of ensuring that their property has great "curb appeal" and is staged properly so as to quickly gain the interest of potential buyers. A great source of inspiration and ideas for effectively marketing one's house can be gathered by watching A&E's television show, Sell This House! Selling a home is a partnering effort between the real estate agent and the seller. Both need to be on the same page and of the mind to show a house in it's "best light".