TGIF eh? Below are commentaries on what market conditions are. It's a great time to buy (and refinance too)!
It's really important for all of us to be aware that self employed clients need extra care and attention. Back in the day I was pretty famous in my office and got "elected" (more like drew the short straw) to review self employed client tax returns and come up with an income. Now after many years of hiatus we have to actually verify income! I like to utilize a checklist of needed items (if you ask I can forward you a copy). That's just the beginning. After I get the financials from the client I extrapolate the income to qualify the client. Below the commentaries I've provided information from our underwriting manual as to what we (and most lenders) would need to review - keep this info handy so when you run into a self employed client you can have them get prepared - hope this helps!
You can start by recommending a"Self Employed Workshop" to your clients so that they can get some great information and tips - my friends at NAYA in Portland OR are having one Aug 3rd - if you ask I can forward you their flyer
As usual please contact me when I can be of any assistance.
From Think Big Work Small
The bulls on the economic recovery have a huge hurdle to spin this morning; the advance Q2 GDP report at 8:30 showed the US economy grew at 2.4%, not much lower than 2.5% consensus. The devil however lurked in Q1; in the data released this morning Q1 was revised from +2.7% to +3.7%, the revision took markets by surprise and made the economic decline in Q2 that much worse. In 2009 GDP was revised from -2.4% to -2.6%; 2008 revised from +0.4% to unchanged and 2007 revised from +2.1% to +1.9%. Will the lowered GDP revisions finally wake up markets and media that unless consumers spend the economy will not grow? Or will this data be swept under again in favor of corporate earnings as the economic driver? How many times do markets need to be reminded that until consumers open up and spend the economy is not going to improve, and eventually those better than expected corporate earnings built on massive cost cutting will wane?
Most talking heads on CNBC after the data were already spinning the data better; it doesn't look as bad as the data reflects if one looks at the details according to a couple of analysts. Well, how bad does it need to be to drive home that until the housing sector bottoms and employment begins to improve consumers won't spend much and the economy will muddle along with little growth? The revisions today revised lower the growth in 2007, 2008, and 2009; 2010 won't be any different. Wealth has been peeled away like the skin on an onion, businesses are confused about all the crap coming from Washington on taxes, health care and FinRegs and not likely to hire. US wealth, to the surprise of Washington and Wall Street was in the home, that has eroded and will take more than a few years to recover. Even Bernanke in comments recently has been saying five to six years for full recovery.
On the initial reaction to the GDP data the rate markets rallied, taking the 10 yr note to 2.90%, 2 bp from its 2.88% low that has been tested twice in the last month. The key stock indexes dropped with DJIA running down 100 points; mortgage prices at 9:00 up 8/32 (.25 bp) on the day. At 9:30 the DJIA opened -85, the 10 yr +17/32 2.92% -7 bp and mortgage prices +9/32 (.28 bp).
More data at 9:45; the July Chicago purchasing managers index, expected at 56.0, was stronger at 62.3. New orders component at 64.6 frm 59.1, employment at 56.6 frm 54.2 and prices pd at 58.1 frm 61.9. A much better report from the mid-west manufacturing sector put a little initial support in the weak stock market but didn't have much impact on the interest rate sectors. Prior to the data the DJIA was off 100 points, it rebounded to -75 on the reaction.
One more data point at 9:55; the U. of Michigan consumer sentiment index. It dropped hard on the last outing, the forecasts this morning were for the index to firm a little to 67.0 frm 66.5; as reported the index increased to 67.8; the 12 month out expectation index increased to 66.0 frm 65.0. The slightly better indexes gave the equity market a bounce and stopped the bond market rally on the initial reaction.
The bellwether 10 yr note is working at its recent low yield at 2.88%, touched twice in the past month and failed to fall further. These low rates are likely going to be tough to crack; even the weak GDP data has not busted equities and unless that occurs the rate markets will have difficulty at these low rates. Be alert today for a potential reversal. Still bullish on rates and bearish on economic outlook but markets are resisting that view.
Fixed-Rate Mortgage Rates Inch Downward to Another New Low for the Sixth Consecutive Week
From Freddie Mac
McLean, VA - Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), with the 30-year and 15-year fixed-rate mortgages reaching record lows for this survey. (The 30-year fixed-rate survey began in 1971, and the 15-year began in 1991.)
News Facts
•· 30-year fixed-rate mortgage (FRM) averaged 4.54 percent for the week ending July 29, 2010, down from last week when it averaged 4.56 percent. Last year at this time, the 30-year FRM averaged 5.25 percent.
•· 15-year FRM this week averaged a record low of 4.00 percent down from last week when it averaged 4.03 percent. A year ago at this time, the 15-year FRM averaged 4.69 percent.
•· 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.76 percent this week down from last week when it averaged 3.79 percent. A year ago, the 5-year ARM averaged 4.75 percent.
•· 1-year Treasury-indexed ARM averaged 3.64 percent this week down from last week when it averaged 3.70 percent. At this time last year, the 1-year ARM averaged 4.80 percent.
Quotes
Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac.
•· "For the sixth week in a row, interest rates on fixed-rate mortgages eased to all-time record lows during a week of mixed housing data reports. The number of local markets experiencing annual increases in home prices appears to be growing. For instance, 13 metropolitan areas in the S&P/Case-Shiller® 20-city index experienced price appreciation over the 12-months ending in May, compared to 11 in April and 10 in March.
•· "However, existing home sales in June slowed to an annualized pace of 4.37 million units, the fewest since March. Moreover, although new home sales jumped by almost 24 percent to 330,000 dwellings, it represented the second slowest rate since 1963."
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An applicant that owns 25% or more of any business is considered to be self-employed but if the applicant owns less than 25%, they are considered salaried wage earners. Income from self-employment is considered stable if the applicant has been self-employed for two years or more.
A self-employed applicant introduces an additional layer of risk to a mortgage request due to the uncertain nature of future income. A two-year history of self-employment is required in most instances to ensure that income is stable. When the applicant has been self-employed for less than two years, the loan file must contain documentation that the applicant has a two-year history of receipt of income at the same or greater level in the same or similar occupation in order to consider the income for qualifying. In addition, the Underwriter must consider the applicant's experience in the business before considering the income for qualifying purposes. The applicant's individual federal tax returns must reflect at least one year of self-employment income. If the applicant has been self-employed for less than two years or is relocating to a different geographic area, the Underwriter must consider the acceptance of the company's service or products in the marketplace before considering the income for qualifying purposes. The Underwriter must document and explain how they determined that the applicant's income will continue at the same level in the new location.
The calculation of a self-employed applicant's average monthly income must be based on a review of the applicant's complete individual federal tax returns (Form 1040) including W-2's and K-1's (if applicable) as well as the applicant's complete business tax returns (Forms 1120, 1120S and 1065), when applicable. The Underwriter must analyze the tax returns and provide a written analysis of the applicant's self-employed income. Non-cash items such as depreciation, depletion and amortization may be added back to adjusted gross income for the purpose of determining qualifying income. Documented nonrecurring losses, such as casualty losses, can also be added back to the adjusted gross income, as well as loss carry-overs from previous tax years. As part of the analysis, the Underwriter must consider whether the applicant's self-employed income has increased or decreased over the previous two years. If the analysis reflects that the applicant's income has significantly increased or decreased, the loan file must contain sufficient documentation and justification to support the determination that the income used to qualify the applicant is stable and likely to continue for the next three years. It may be necessary to obtain additional years' tax returns when the applicant's self-employment income fluctuates in order to determine the stability of the income. If the applicant is self-employed and the self-employment income is not used to qualify, the applicant's individual federal tax returns for the prior two years must be obtained to determine if there is a business loss that may have an impact on the stable monthly income used for qualifying. If a business loss is reported on the applicant's individual federal tax returns, additional documentation may be required in order to fully evaluate the impact of a business loss on the income used for qualifying.
The Underwriter must use caution when including additional income that the applicant draws from the applicant's corporation, partnership or S-corporation as qualifying income. The loan file must contain evidence that the applicant has a legal right to the additional income by obtaining a corporate resolution or other comparable document that establishes that right. The Underwriter must also verify the applicant's percentage of ownership of the business entity from a review of the business tax returns, letter from the account for the business or similar documents. The analysis of the business must support that the business is clearly capable of providing the applicant with the additional income used to qualify.
The following documentation is required for all self-employed applicants, whether or not the self employed income is being used for qualification:
· Signed individual federal income tax returns, including all applicable schedules for the prior two years.
Note: If the tax return for the most recent year has not been filed, a signed extension signed and dated by the applicant must be obtained, along with a year-to-date profit and loss statement covering the period of the tax returns not provided and current year-to-date earnings. If an extension is received, it must be during the allowable extension period otherwise the most recent years tax return must be provided. An associate with the appropriate credit authority must review the income documentation for qualifying purposes to ensure the applicant's income will remain as stable monthly income and has not been impacted due to economical market conditions.
· Signed business federal income tax returns for the prior two years, including all applicable schedules, if the business is a corporation, an S corporation or a partnership, unless the applicant and/or co mortgagor, individually or jointly, owns less than 25% of the business. o If the applicant is self- employed and the self-employed income is not used to qualify, review the individual federal tax returns to determine if there is a business loss that may impact the stable monthly income used for qualifying. If a business loss is reported on the applicant's individual federal tax return, additional documentation is needed to fully evaluate the impact of a business loss on the income used for qualifying. o Year-to-date profit and loss statement signed and dated by the applicant if application is dated more than 120 days after the fiscal year end. The profit and loss statement must be consistent with previous year(s) earning. · The applicant's written permission to request copies of his/her income tax returns for the most recent two years and a signed 4506-T. · If applicant is relocating to a different geographic area, document and explain how the applicant's income will continue at the same level in the new location. · Completed Income Analysis Form
Note: Certain single owner LLCs may file documentation with the Internal Revenue Service that does not require the filing of corporate tax returns. Documentation verifying the filing status should be obtained to confirm corporate returns are not required. |
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