As the Federal Reserve is set to meet next week to discuss key interest rates, they will no doubt focus in on the current state of the labor markets. As one analyst stated that as long as people have jobs and are spending money the Federal Reserve has no reason to cut rates. However, others in the financial sector believe that no matter what the labor report shows tomorrow the Federal Reserve is going to cut at least .25 bps or could shock the market and cut as much as .50 bps. What ever happens housing continues to suffer and borrowers are still finding access to credit harder than in previous years.
The employment numbers to be released tomorrow are considered to be a lagging indicater. This means that the unemployment rate will increase and job growth decline as the economy begins to slow down. In turn consumers worried about the propects of lower paychecks hold on to their money instead of spending it on goods and services. All signs in the economy point towards a recession except for the labor markets. As long as the people are still employed expect the economy to stay out of a recession. The Feds action next week will set the stage for the first quarter of 08.
Appraisals are just as important as a home inspection.
By Michael Mapes, The Responsible Mortgage Lender
Congress recently took up action to place a bar between lenders and appraisers. The rationale to this proposal was that on too many occasions mortgage brokers where applying pressure to appraisers to inflate the value so the deal would work. However as the recent foreclosure rate continues to rise. Fraud during the mortgage application process seems to becoming a re-occurring theme. In many cases across the country regulators are finding appraised values on properties that were for more than the house was actually worth at the time of sale.
In the past a lender would send an appraisal request to an appraiser because he was fast and fair and would work to resolve any issues quickly. Appraisers are human and do make mistakes. Lenders rely on the work of the appraiser to package and sell loans, which the appraisal serves as the underlying valuation of the collateral. When the value of a home is over inflated it hurts everyone involved including the borrower and even someone who buys the house next door.
In many cases across the country as home owners are defaulting on their loans, those who wish to refinance their existing loan are finding that the foreclosures are hurting the value of their own home. Sellers who are trying to sell their homes are also finding stiff competition with foreclosure sales at much lower prices for the same square footage and features.
An appraiser is typically not the friend of the listing agent or the home seller. After all the appraisers role is to not only look after the lender but in reality a good appraiser can save a borrower from making a poor investment, over spending on an investment or alert a home owner that your home is not actually worth what they thought. An appraiser can end up saving a consumer and lender hundreds of thousands of dollars.
Many homeowners who are currently refinancing their home have come to learn this valuable lessen. However, there are options but avoiding the realities should not be one of them.
Yesterday I was approved............Today I am declined
By Michael Mapes, The Responsible Mortgage Lender
If the mortgage lending business was a car then quite frankly ever lender would be in court explaining the speed at which changes have occurred. Once borrowers lined up at the lenders door wanting ever kind of loan and loan product the lender had to offer. Cash out refinance, no problem, 100% -104% financing no problem, marginal credit no problem, little cash in the bank, no problem. Fact is lenders found ever which way to provide loans to people who wanted them.
Alas, Then the Bubble Burst
In November of 2006 the music to the dance started to skip a beat. These loans lenders had been serving up began to default and investors who had provided the capital woke up as the party was ending. As their heads started to clear they began to realize that the loans that they thought were good investments turned out to be rotten apples. Trying to manage the debt obligations and figure out where to go from here led them to tighten the purse strings or just stop buying mortgage securities all together. As lender after lender began to go bankrupt and CEO after CEO began to lose their jobs it has become apparent that it is too little too late.
But my loan was approved yesterday.
As the song goes "yesterday, life had such meaning and now I long for yesterday". Both lenders and borrowers are singing the same tune. Program guidelines have gone through such rapid changes that today, with only a hand full of new products available consumers who were once approved are now finding the doors to capital to finance a home closed. As capital markets have no appetite left for sub prime loans or Alt A loans, those borrowers who can not document their income or have poor credit histories are now on the outside looking in. For many what once was a dream has now turned into a nightmare and lenders who once invested in communities are now trying to just stay afloat.
Analysis suggest that the worse might not be over, However, at interest rates around 6 percent or less in some cases opportunity is still there and while it is true quite a few home buyers can no longer qualify for the house they want. But with hard work you will get there just not 0 to 60 in 5 seconds flat.
As a wise person said to me recently, this situation too will pass.
A few years ago I went out for dinner only to find a gentleman standing at the bar having a drink. He appeared to be in an extremely good mood. So being the ever inquisitive person that I am I had to ask him why he was so happy? He told me that he was a mortgage broker and had just closed a loan that paid him $5,000.00. Now this gentleman did not know that I am a Mortgage Banker but I thought to myself that this seemed like a lot of money to make on one loan, must have been a big loan. So I asked him about the loan and he said that the loan was for 140,000.00 and that he charged the borrower 3 points on the front end and 2 on the back end, the borrower ended up with an 8.5% interest rate. He really was quite proud of himself for this feat that he had just completed. As my mouth took over where my brain left off, I explained to him that how is it that he expects to get referrals from this guy when he just ripped the guy off and how long is it going to take for the customer to realize he got duped? Well he did not seem to care and today some 4 years later he is no longer in the mortgage business, thank goodness.
When a consumer walks into a Mortgage Brokers office or a Bank there are some expectations that go along with this. The first is that the person across the table knows what they are doing and can explain the ramifications of the loan they are selling. The truth of the matter is that most Mortgage Brokers have no real skill other than being a sales man or a pitch man. That is not to say that there are not very good and very honest mortgage brokers out there, there are. But by and large most mortgage brokers have no formal education in financing, No training in the Rules and Regulations regarding home financing and most are more concerned with how to fleece you then actually help you. Unfortunately the ones that are decent and very good get painted with the same brush as the bad ones.
Mortgage Brokers typically tell you that they work with several lenders in order to get you the best rate. While this sounds good and noble it is far from the truth. Brokers shop lenders in order to get a better price for themselves and pass the higher price onto the consumer so that they (The Broker) can make a bigger premium spread. As well as Brokers can not perform the actions of processing or underwriting or closing of a loan. This means that the broker must pay for these services as part of the loan transaction. Therefore as a consumer you are charged sometime thousands of dollars extra in fees for services that a Mortgage Banker provides for free and at a much lower cost of borrowing to you.
Is a Mortgage Broker right for you, yes in fact it could be. They do fill a void that banking institutions can not. However, as a consumer compare real lenders to actual brokers. Real competition between like kind businesses is a good for the consumer and it is good for the market place. Competition makes us sharper, more knowledgeable and holds prices down. This is good for you and good for business.
Lender Paid Mortgage Insurance, an old concept with a new twist
By Michael Mapes, The Responsible Mortgage Lender
Like old yeller it is hard to teach a new dog new tricks, in the world of mortgage financing we are continually finding new ways to open doors to potential homeowners and those wishing to escape adjustable rate mortgages in a declining market place.
One example of an old idea that has a new twist is Lender Paid Mortgage Insurance. It works very simply. Suppose you are purchasing a 100,000 home and going to put a down payment equal to 10% of the purchase price. A normal loan at 6% would have a principal and interest payment of $540.00, taxes and home owners insurance would equal about $150.00 and mortgage insurance would equal about $48.60 for a total payment of $738.60. Lender paid mortgage insurance would carry a rate of about .50% above the normal rate. So at 6.5% your principal and interest payment would be $569.70 add to that personal property taxes and homeowners insurance and a new payment would be $719.70 or roughly $19.00 less per month. While, $19.00 may not seem like much and perhaps its not. However most borrowers today are not borrowing 90,000.00, they are borrowing 190,000 - 250,000.00 and at those levels lender paid mortgage insurance will save a homeowner 50-60.00 per month on average. This translates into huge savings month over month and year over year.
When comparing mortgage financing options looking at lender paid mortgage insurance could save you money, allow you to purchase more a home and provide you with a higher tax deduction at the end of year. As consumers look for more financing options to finance their home purchase new and creative uses of old methods is proving to a safe harbor in uncertain times.
Mortgage Insurance Agencies like MGIC, United Guaranty, Radian and others announced last week that they would no longer insure certain products issued by Fannie Mae and Freddie Mac. This is direct response to mounting loses from early payment defaults. Under the old rules if a borrower received an approval from FNMA (Fannie Mae) or FHLMC (Freddie Mac) automatic underwriting system, then mortgage insurance was approved as well based on those findings. In reality the mortgage insurance agency's walked in lock step with the Quasi-Federal Agencies. That is no longer the case.
In a recent announcement, mortgage insurers will no longer rubber stamp certain loan products for borrowers below 620 credit scores and loan to value above 95%. For those borrowers who are above a 620 credit score but lower than 660 will find the cost of mortgage insurance 35-40% higher than they normally would have paid. As well as mortgage insurers are raising the rates they charge on all loans across the board regardless of credit score or loan to value.
Mortgage Insurance provides no protection to a borrower. It is paid for by the borrower as part of their housing payment. When a borrower's down payment is less than 20% of the purchase price then mortgage insurance is required in order to obtain loan approval. Mortgage Insurance pays for the foreclosure and protects the actual lender against steep financial losses when a loan goes bad. Developed in the late 1960's mortgage insurance has allowed lenders to stretch guidelines and loan millions more too home owners since it creation.
As we continue to move through a rather challenging time in the housing industry there are alternatives to programs affected by this latest rule change. FHA provides one such alternative solution. The FHA reform bill is set to go to a vote in the Senate, soon home buyers will have the added protection of a safe secure fixed rate FHA loan with reasonable payments and terms.
10 years ago there was only a handful of ways to finance a home and by the way you better have had pretty decent credit and a down payment. That was replaced in 1999-2000 by the over exuberance of lenders and brokers pushing tailor made, easy to process, approve and close sub prime and Alt A loans. Gone was the rational of actually having a financial stack in your home. Gone was the rational of ever thinking someone could actually pay back the loan and gone was the thought of credit quality.
As with all good things the party had to end. Sad to say but it did. In its wake the hangover effect has been like a heroin addict still searching for that next fix. Homeowners are losing their home, Realtors and Mortgage Brokers are packing up shop and finding other jobs and Mortgage Banking operations like New Century Financial, Home 123 and American Home Mortgage has ceased to exist as companies.
Although the down turn in activity has led to the extinction of several companies and good mortgage products. It has also spawned new and innovative uses for long last products that where once the back bone of the Housing Market. As we shall see some new twists to some old products can still generate a home purchase:
30 year fixed rate loans where the seller can pay up to six months of house payments.
Lender paid Mortgage Insurance or Buyer Financed Mortgage Insurance. (This feature lowers total housing costs by 22%)
FHA and VA buy downs funded by the lender.
State Bond programs which offer good credit families below market interest rates.
30 year No Doc, Stated Income and No Ratio programs for people with good credit and down payment (ideal for self employed or commissioned people)
40 year fixed rate loans offering the same protections as those of other fixed rate products.
New FHA loan to be introduced in 2008 allowing for 1.5% down payment instead of the traditional 3%
While those with poor credit histories may not be able to buy today, a good lender will always work with these people to help them get their credit to where it needs to be in order to purchase. However, as we have seen in the last few months home buyers wishing to purchase have found that rates are attractive and some lenders are still willing to be creative in its approach. After all home ownership is still the number one investment families can make and it is still a great time to buy a home.
During most of 2007 two inevitable things have happened. One foreclosures have risen has home owners could not keep up the rising costs of housing as their adjustable rate mortgages have reset. Secondly, this factor among others has led to a decline in the average home price in just about every market in the country.
The Credit Crunch and Liquidity issues experienced in August and September have yet to show up in the economic data released in October. However, the Federal Reserve Board headed by Ben Bernanke saw signs that the economy was going to fracture and that the stability of the US Financial System was at risk. Their direct response was to lower the discount rate by .50 bps in August followed by a lowering of the Fed Funds Rate in September and October. The direct result of this is a lowering of interest rates for things like credit cards, home equity loans and to a smaller extent home mortgage.
During the summer months interest rates on home mortgages climbed to as high as 7.25% for a 30 year fixed rate loan. Now that the investors appetite for prime loans has returned (mostly due to the FEDs action) mortgage rates are now approaching the 6.0% level again. This lowering of the mortgage rates is beginning to stimulate the home buyers back into the market. With rates still low and the rest of the economy steaming along home buyers are finding tremendous value in the market place. In most cases sellers are willing to not only pay closing costs for the buyers but in some cases they are will to improve the property as well.
As we move into the winter months and the home buying season of 2008 there are still cause for concern but if you are looking at buying a home a trusted realtor can show the value in buying a home at today's price levels.
Federal Reserve Cuts rates .25 bps. How will mortgage rate respond?
Now that the widely anticipated rate cur for October has occurred how does the market respond? The first over all response is that oil topped off at over 94.00 a barrel. However, that price is driven by market speculators who will soon be burned when the bubble on oil burst and goes down to 60.00 a barrel in short order. Although, the economy is not out of the woods just yet, In the weeks and months that precede this rate cut turmoil in the financial markets still exists. For one the LIBOR rate which is the rate banks loan to each other is still at extreme levels, since banks typically have inside knowledge this rate spread between treasury's and LIBOR (London Interest Rate Over Night Lending Rate) is still troubling to say the least. Couple this with a declining valuation in home prices still means the bottom may not have yet been achieved.
In a positive note rates are once again going lower than the previous high of this summer at 7.0% and the liquidity crisis that griped the housing market is loosing. This will bring with it opportunity for the home buyer who is positioned to take advantage of the lower than expected home prices.
How low is a home price going to go is anybodies guess? Predictions range from 10-15% from 2006 levels. However, home prices are a market to market situation and in Hampton Roads, Va home prices are expected to hold their value given the relative economic wage increases and low taxes which tend to attract high quality jobs. However, in many markets across the country as in Florida and Southern California home prices are declining in excess of 40% of 2005 price levels.
In retrospect we have learned a lot from the business models of brokers and the predatory nature of sub prime loans. Expect to see a return to traditional lending standards as we move forward into 2008. Currently rates are approaching 6% with an opportunity to go lower.
There have been some very interesting developments that I'd like to share. These developments have given us some very positive news as well as some clearer signals about how the mortgage market and housing market will look in 2008. I want to leave you with two very important points
There are some very important signs in the capital markets that the liquidity is returning for "prime" mortgage loans and bonds.
These positive trends in capital markets liquidity are being muted by continued concerns over the housing market, the broader economy, and the concerns over the soundness of the financial system - we should not assume the worst is over.
Capital Markets Liquidity
Over the past several weeks, we have seen very encouraging signs that capital markets liquidity is returning. Prime quality loans and bonds are now trading with much greater regularity than during the August and September spreads. Currently about half of the widening that took place has been regained.
I'd like to reiterate that the market is looking for Prime quality loans right now, however there is limited interest in Alt A loans and even less for Sub Prime Quality loans. However, the fact that investors are buying these types of loans at all is a very encouraging sign. The reason for this is that the investors that are currently buying Alt A and sub prime are very knowledgeable and have a much deeper understanding of mortgage loans and the risk associated with them. This should be viewed as extremely encouraging for everyone.
One last point that I would like to make is that since the steep decline in the Jumbo volume is happening across the country and continues regardless of price or tightening we need to look for the cause of this. The most likely cause of this is the "media effect". The overall health of the real estate market is the single most important factor affecting the outlook of mortgages and the capital markets affecting 2008.
Supply and Demand
While it appears that the sting of the liquidity crisis is past us and is losing strength, it is giving way to the longer term realities. That is that the housing market will have a much bigger and longer term impact on our industry. The feed back loops between reduced capital liquidity, tighter lending standards, declining home prices, increasing defaults and the inevitable stresses to the economy as a whole are fueling a storm that will likely lead to the largest housing market correction since the Great Depression. Conversely this will be one of the biggest challenges to our financial system has had to endure in many years.
Defaults
The credit performance of the 2006 Alt A loans and sub-prime loans continues to be miserable. 2007 sub prime and Alt A loans are actually performing much worse than 2006. The rate of delinquency is much faster and with greater regularity than any one thought possible.
The story is housing as a whole is one of increasing supply with a decrease in demand. This factor alone is and will continue to drive prices down. While housing starts and new permits are declining-which helps lessen the supply, sales of new and existing homes continues to decline which results in a build of supply.
Excess supply combined with falling demand means more home price declines, higher defaults and greater losses are still to come. Estimate right now are that home prices between now and 2009 are for a 10-15% decline.
While I do not want to leave you with doom and gloom that parts of this article suggests. There are tremendous opportunities in the market place, interest rates are very favorable for a good housing market and new and creative uses for prime products are being introduced every day. With that said it is a great time to buy and sell a home contact your local realtor today.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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