Show Me the Money!

How We See It
By Robert Weaver
re-posted with permission by Alan Donald, BuyHomesInCharleston.com

Interest rates provide the key ingredient to the mortgage recipe. They determine the cost of your borrowing, how much you can borrow, and how much of your time will be consumed repaying what you borrow. Their importance cannot be overestimated and an explanation of such would fill volumes. The vital nature of interest rates in our economy begs the question: where are they heading?

We believe that interest rates will rise this year. How much is anyone’s guess but we would not be surprised if the rate on a 30-year mortgage went as high as 6.50%. First, at the end of this month, The Federal Reserve Bank will cease purchasing mortgage-backed securities. By the time the end of the first quarter rolls around, the Fed will have purchased 1.25 trillion dollars in mortgage-backed securities. This has lent liquidity to the mortgage market and has lessened the pain felt by the real estate industry. Investors will have to fill the void left by the Fed beginning in April.

We believe that to attract these investors investment banks will need to offer a higher return for what could surely be a risky investment. Second, the economy as a whole will begin to heat-up. Legislative spending on the federal level will be somewhat stifled this year because of the political gridlock caused by the upcoming November elections. Less government is historically a good thing when it comes to growing a sound economy.

Also, Americans are only going to put up with a recession for only so long before our “can do” attitude finds a way out of our shared misery. A growing economy always brings the pressure of inflation which, in turn, raises interest rates. The reasoning goes like this: the Fed will not want a sharp rise in the cost of goods and services (which inflation brings). Raising interest rates tends to lessen borrowing because it becomes more expensive to borrow.

Third, where can interest rates go? December, 2009 saw the lowest mortgage interest rates in history. Housing demand, especially in the low country, is beginning to heat-up and, as we know, an increase in demand tends to make interest rates rise. When one stops to consider that our current inflation rate is 2.63% and that 15-year mortgages are priced at around 4.375%, end investors are making an astounding 1.745% for their risk. This cannot and will not continue.

What does this all mean?

It means that if you have not acted to refinance your home or purchase the home you have been dreaming about you need to act now. If you feel the rates are not low enough and could stand to lower even further then you stand a great chance of being left out in the rain. Aside from taking action, rising interest rates in this current economy is a good thing: maybe the American economy is going to rise off the canvas, dust itself off, and begin powering/leading the globe once again.

Robert Weaver is a mortgage loan officer with Brayden Capital Home Loans. He can be reached at rweaver@braydencapital.com

A Loan With No Income Verification? In Today’s Market?

I thought that we had seen the last of the loans without income verification!

I just received a promo email advertising a “Stock Loan” for those who have a stock portfolio but don’t have two years’ tax returns as independent contractors, or lack the ability to show supporting income from employment or investments.

Has your stock portfolio tanked? You may still be able to use it to make some savvy investments!

With the recent tightening of the “traditional” mortgage loan markets, this could be the perfect solution for people seeking bridge loans, new construction purchase, lot purchase, home purchase, refinancing, investment property purchase, commercial property purchase & development…

If you have assets such as stocks, mutual funds, treasury bonds or other securities, you may be able to secure a stock loan up to 95% of your portfolio value at rates as low as 4.00%!

It could also be used by non-US citizens to purchase real estate in the US. No citizenship proof is required. The loan uses the stocks/investments as collateral. Commercial Property Purchase &Development, CondoTels

This loan lets you borrow up to 85% of the value of the securities, at rates as low as 4.00%. It it an interest-only loan, with terms up to 7 years, and the interest payments can be deferred for the term of the loan! It is a “limited recourse” loan, that is, only the securities pledged are forfeited.

• No credit check or FICO scores
• No income verification
• No appraisal
• Closing and funding in as few as 10 days
• No restrictions for funds use
• No draw option for loan term (great for construction and development)
• No citizenship requirement

If you have an investment portfolio and want to take advantage of current real estate market conditions, this loan may just be the perfect avenue for you!

Find more articles and real estate information at www.BuyHomesInCharleston.com

Are Banks Being Socially Responsible?

On May 1st, Wells Fargo, one of the nation’s largest mortgage lenders, decided to tighten its underwriting standards for 200 markets they considered as distressed or soft, requiring higher down payments and making state-income loans off limits in most of these markets.

I believe this will cause other banks to follow suit (the bandwagon effect). This is one more action that shows that the stimulus money provided by the Federal Government and intended to loosen up credit and provide funding to stabilize the real estate market is not working as intended.

The government should have required the banks to lend this money out, instead of playing conservative and padding their balance sheets with it.

Regardless of what the government does, banks need to provide access to money to get the economy going. While tightening underwriting rules is a good long-term, safe strategy (which they should have done ten years ago – look at Canada!) their timing stinks and their strategy is not aligned with the consensus view that the real estate market is the key to a swift economic recovery.

Fortunately, FHA-backed loans are providing some relief for lower-priced properties by guaranteeing mortgage loans of up to 97.5% of the purchase price. FHA loans went from “pariahs” to “superstars” in the last three years. Today, a big chunk of all the loans (that are actually closing) are FHA. Once again, it is the government who is taking the risk…

I hope that lenders understand that they also have a responsibility to loosen up their requirements in times of distress. I believe it is a measure of their corporate social responsibility commitment – the communities they operate in are also stakeholders, not only their shareholders. After all, it was their irresponsible behavior during the good times that got us in this mess.

Read more articles at www.BuyHomesInCharleston.com

Credit Scores vs. Mortgage Rates

Recent changes in the mortgage industry has made Fannie Mae (and most lenders) to review their pricing for conforming loan (under $417,000) to better reflect risk by adjusting their pricing (i.e. the interest rate charged on mortgage loans) according to the applicant’s credit score, and loan-to-value ratio (LTV).

The lower the credit score, or the higher the LTV, the higher the interest rate a borrower will be charged. Many clients call me excited about low interest rates they see advertised by lenders. However, those are the interest rates that PREFERRED risk borrowers will get – those with a credit score above 720 and an LTV below 80%.

Kathy Durham from Raven Mortgage sent me an example a while back, for a 95% LTV loan, on a 30-year fixed amortization:

720 Score = 5.625% (323 to 1 chance that bills will be paid on time)

620 Score = 6.500% (26 to 1 chance that bills will be paid on time)

Kathy offers some helpful hints to improve your credit score:

• Don’t close old accounts. The older the account, the better. The computers for the three credit rating agencies will read a good payment pattern for an extended term
• Keep 3-5 accounts open and use them occasionally. If you don’t use them, they may stop reporting
• Pay all bills on time! 🙂
• Don’t be tempted to open a charge card at a store for an immediate discount. Too many accounts and the computer may think you are in trouble because you are applying for more credit
• Pay down revolving debt to below 30% of the available credit
• Do not consolidate debts onto one card – see above comment
• Do not send your borrower to a credit repair company

Read more at www.BuyHomesInCharleston.com

Stimulus Package Advances with Reduced Incentives for Homebuyers

Daily Real Estate News  |   February 12, 2009  |   

Stimulus Advances With Tax Credit Changes

The $790 billion stimulus package hammered out by House and Senate conferees late yesterday increases the home buyer tax credit to $8,000, from $7,500, and drops the repayment feature for buyers who hold on to their property for at least three years.

The NATIONAL ASSOCIATION OF REALTORS ® has sought removal of the repayment requirement because it discourages buyers from taking advantage of the tax credit. The three-year minimum holding period is a safeguard against speculators’ use of the credit.

The legislation also extends the effective date of the credit to December 1 from June 30, and extends eligibility to borrowers who buy their home with the help of state or local financial assistance that comes from the proceeds of tax-exempt mortgage revenue bonds.

The credit remains open only to first-time buyers (those who haven’t owned in at least three years) and some income eligibility restrictions apply, but those are unchanged from the existing program.

Other provisions reportedly in the bill that could help housing markets and communities include:

• FHA and conforming loan limits. Specifics have not been released but reports indicate that the 2008 limits have been reinstated for 2009 except in those communities where the 2009 limits are higher. Additional increases in individual communities may also be available at the discretion of the secretary of the U.S. Department of Housing and Urban Development.

• Foreclosure mitigation and neighborhood stabilization. Funding for states and localities to be used for neighborhood stabilization activities for the redevelopment of abandoned and foreclosed homes are authorized. Some news reports put the funding level at $2 billion.

• Rental assistance. Up to $1.5 billion to provide short-term rental assistance and other aid for families during the economic crisis.

• Transportation infrastructure. Up to $29 billion for highway construction projects, $8 billion for rail projects, and $5 billion to weatherize low-income homes.

• Rural housing development. Increased funding for the Rural Housing Service direct and guaranteed loan programs.

• Low-income housing grants. Allow states to trade in a portion of their 2009 low-income housing tax credits for Treasury grants to finance the construction or acquisition and rehabilitation of low-income housing, including those with or without tax credit allocations

• Tax-exempt housing bonds. Tax-exempt interest earned on specified state and local bonds issued during 2009 and 2010 will not be subject to the Alternative Minimum Tax (AMT). In addition, financial institutions will have greater capacity to purchase tax-exempt state and local bonds

• Energy efficient housing. Grants for energy retrofits for federally assisted housing (Section 8), funding for energy efficiency and conservation block grants to states, and Increases in the residential tax credit through 2010 for certain energy efficient upgrades.

Source: NAR, AP, Washington Post, New York Times, Bloomberg, and Wall Street Journal.

New Mortgage Choice Strategies

With the many changes in the mortgage lending environment, many of my buyer clients are confused and don’t know what to do anymore.  I read an interesting article about new mortage lending “rules” on CNNMoney.com about this and wanted to share my opinion:

1. On buying “points” to reduce the interest rate – many lenders offer the possibility of buying a certain amount of “points” upfront (this is the same concept as prepaying some of your interest charges)  to lower their interest rate. This can be a good idea, but sometimes it is not. the time horizon you expect to remain in the home; the cost of buying points (1 point = 1% of the mortage value) ; and the amount you would save per month by buying points (principal and interest). Look at these numbers and calculate how long your break-even point is. ($$ Cost of Points/Monthly Savings = No. of Months to break even).  If your break-even period is longer than the time you expect to own this home, it is not a good idea to buy points.
2. On making a large Down Payment – 100% LTV (loan-to-value) loans are history. So you need at least 3.5% downpayment if you qualify for an FHA loan. But if you have the money, should you put down say 20%, 30% or 50% of the value? There are several factors to consider:

• Mortage Insurance (PMI/MI) – unless you put down at least 20% of the value of the home, the lender is going to want you to pay PMI. This is really a waste of money, since it only protects the lender. If you have the money to make a 20% downpayment, it is probably a good idea to do so.
• Time horizon you expect to remain in the home. The longer you expect to live there, the less you should be concerned about market corrections “wiping out” your equity. In the long run, real estate will appreciate (supply & demand – more people, same amount of land).  If you are thinking short term (i.e. less than 5 years), I would recommend making a lower down payment to prevent losing your equity in a severe market downturn.
• Your “comfort zone” with the monthly mortgage payments. If you have a large downpayment and what you really want is a low monthly payment, making a large downpayment is probably a good idea.
• Alternative uses for your money (opportunity cost). Could you invest that money elsewhere and make it produce more for you?

Read more at www.BuyHomesInCharleston.com

Berkeley’s Real Estate Expert Suggests Stimulus for Housing

I read this article on the e-newsletter from the Haas School of Business at the University of California at Berkeley (my alma mater)  – I thought it has some great suggestions on how to fix the housing market in the U.S.

 

 

Research Spotlight: Rosen Outlines Steps to Solve Housing Crisis

President Barack Obama’s economic cure depends on solving the housing market crisis, according to Kenneth Rosen, chairman of the Haas School’s Fisher Center for Real Estate and Urban Economics, who has proposed a housing stimulus package for the new administration.

Rosen’s proposal, which he has detailed in the media, includes:

• A 180-day moratorium on foreclosures while a comprehensive, standardized, and massive mortgage restructuring plan is put in place.
• The restoration of mortgage credit for the mass housing market by increasing the availability of low down-payment mortgages.
• A home purchase tax credit, combined with a low-interest fixed mortgage, to ignite consumer housing demand in 2009.

Rosen says the housing and mortgage markets face several interconnected problems: rising foreclosure and delinquency rates on poorly structured mortgages given to high credit risk borrowers; continuing house price declines in the 20 percent range nationally and 25 percent to 50 percent in formerly “hot” markets; and a collapse in new housing starts and a large inventory of unsold homes.

“To address these problems, our economic stimulus policy must focus on the housing consumer,” says Rosen.

Rosen calls his proposed loan modification plan a “partial solution.” It would assist property owners whose loans are delinquent or already in foreclosure and enable them to refinance. Rosen recommends reasonable lending terms at a 4.5 percent fixed-rate loan funded by the Federal Home Management Agency, Federal Home Loan Mortgage Corporation, and Federal Housing Administration to restore the flow of credit. He also supports extending loans or graduated payment loans for low-income buyers and has proposed options for homeowners whose property have dramatically depreciated.

Rosen suggests that each of the five big mortgage insurance companies issue $1 billion of convertible preferred stock to the Treasury in order to insure $250 billion of new low down-payment loans.

To stimulate the demand for homes, Rosen proposes a 10 percent tax credit, up to a maximum of $22,500, for the purchase of a new or foreclosed home for owner occupancy or for the purchase of any house by a first-time buyer.

BEHIND IN YOUR MORTGAGE PAYMENTS?

ARE YOU BEHIND IN YOUR MORTGAGE PAYMENTS?
DO YOU NEED TO SELL YOUR HOME?
DO YOU OWE THE BANK MORE THAN YOU CAN GET FOR YOUR HOME? 

What are your OPTIONS? 

Many people are not aware that they have a few options to explore when they are facing these situations. Some people just give up and abandon the house for the bank to take it over. Before you do this, it is important to explore other options that may affect your credit and personal finances less than foreclosure.  

The first thing you have to find out is who owns your loan note (it may be different from the lender who sold you the loan and/or different from the company who services the loan). Once you find out who is holding your loan, you may want to call their LOSS MITIGATION DEPARTMENT, which specializes in dealing with these matters. 

Notes: I am assuming that when you took the loan you were properly informed of the conditions, and that your lender performed all required disclosures as required by the Truth In Lending Act (if you feel you were not informed properly, or believe there was fraud involved in your loan, you have legal recourses you can pursue).  Also, some of these options may have tax implications for you. If the lender accepts a short sale, the amount of principal they “forgive” may be counted as income for your tax return. It is essential to consult with your CPA and attorney before taking final action.  

Option 1: LOAN FORBEARANCE Depending on your circumstances, a “temporary fix” option you might wish to consider as a way to prevent foreclosure is mortgage forbearance. This option is commonly used for temporary financial hardship situations such as short periods of unemployment or poor health. Mortgage forbearance enables you to temporarily stop making your mortgage payments. However, interest on your loan continues to accumulate and is added to the remaining principal balance of the loan. You are generally also asked to sign a forbearance agreement that states when the lender will require you to pay the amount you owe. Once the forbearance period comes to an end, you are once again obliged to make full payments on your home loan.

Option 2: LOAN MODIFICATION If your mortgage interest has readjusted upward (as in an ARM) and you cannot afford the new payment, or you are having trouble paying your mortgage and you are in a high-interest loan and cannot refinance, your lender may consider changing the terms of your loan to help you. Some of the factors that your lender will consider are: Nature of the hardship that is causing your mortgage payment problems; the amount of equity you have in the property; your ability to pay the mortgage; the amount owed on the mortgage; and mainly, what is financially better for them – whether to foreclose or pursue a loan workout with you or modify your loan. 

Option 3: DEED EN LIEU OF FORECLOSURE This option basically provides a “free out of jail card” for the homeowner, who agrees to give the property back to the lender if the lender agrees to forgive the debt that was secured with the real estate.  Deed-en-lieu-of-foreclosure is only approved by lenders in certain hardship circumstances (conditions vary according to each lender). Both sides have to enter the transaction voluntarily and in good faith. The property needs to be transferred at a fair market value.  

Option 4: SHORT SALE In a declining real estate market, it is quite common for homeowners to owe more on their home than what they can net from sale at a “fair market price”, especially if they haven’t lived long in their home. In many cases you can still sell your home, provided that the lender(s) and other lienholders approve a short sale, where they are paid less than they are owed. Any other liens affecting the property (including mechanics’ liens, tax liens and any judgments against you, the owner) will have to be cleared to be able to “short-sell” the property. 

Option 5: RE-FINANCE If you are in a situation where your loan is at a high interest rate, you may wish to consider re-financing (with the same or with a different lender) to lower your monthly payments. However, in the last two years the guidelines for re-financing have changed, making it impossible for some homeowners to re-finance their mortgage.  The main recent changes affecting your ability to re-finance are: Declining home values; reduced loan-to-value and debt-to-income ratios; your payment capability and your credit score. 

Option 6: FORECLOSURE Foreclosure is a legal process whereby the lender(s) exercise their right to take possession of your home and kick you out for not honoring your commitment to pay the loan(s). This is a slow process (in SC it can take from 6+ months) and it is expensive for the lender. It also affects the homeowner’s credit substantially and for a long period of time. If you fail to pay your loan on time, you will first receive written notices that you are in default and warning you to pay or face foreclosure. After a few months (depending on the lender), they will issue a notice of their intention to foreclose. The case will be handed over to an attorney, who will file suit to foreclose and will file a lis pendens notice at the County Courthouse. Once the court rules the property will be sold to the highest bidder at public auction on the courthouse steps. If you are still living in the house, the new owner will file a motion to evict you.  

Option 7: BANKRUPTCY In some particular cases, the only option that may make sense to you will be to file bankruptcy. The latest changes to the bankruptcy law make it a bit harder for some to file bankruptcy. Some filers with higher incomes won’t be allowed to use Chapter 7, but will instead have to repay some of their debt under Chapter 13. You will have to get credit counseling before you can file a bankruptcy case. And, because the law imposes new requirements on lawyers, it may be tougher to find a bankruptcy attorney. 

Alan Donald is a bilingual REALTOR^® with Keller Williams Realty in Charleston, SC.You can ask him questions by sending him an email to adonald@kwcharleston.com or by visiting his website at www.BuyHomesInCharleston.com  . 

To “Lock” or to “Float”?

It is very important for home buyers or for those who want to re-finance to be aware that in these volatile financial markets we are living in, interest rates on mortgages can fluctuate substantially in a matter of hours! I have heard many stories from mortgage lenders about how they were able to lock a fantastic interest rate for a loan using a 2-3 hour “window of opportunity” that disappeared afterward, or others that missed out because they floated the loan (to “float” means to let the interest rate fluctuate with the market). Understanding how “locking-in” a rate works may help you evaluate your options and could result in thousands of dollars in savings!

So, what is a “lock”? A lock is a GUARANTEE from a lender that if you close your loan within a stipulated time (usually 30 days), the note on your loan (i.e. the nominal interest rate) will be set at a specific interest rate.

When you ask a lender for a quote (also called a “Good Faith Estimate” or GFE), you can ask how long the rate is good for. Bear in mind that until you lock the interest rate, it can (and probably will) change. If you think you need more time to close the transaction, ask the lender for an adjusted rate quote. If you are afraid that interest rates may rise, lock your rate now (rate locks are recommended when interest rates are on the rise, to avoid ending up with higher monthly payment than anticipated). Floating the loan in a volatile market is a gamble – you may win if rates drop, but you may also lose if they go up.

What many people don’t know is that long-term mortgage rates don’t depend on the inter-bank rates set by the Federal Reserve Bank. This rate normally affects only short-term lending (such as credit cards, car loans, home equity lines, etc.). Long-term rates depend on the behavior of the financial (stock & bond) markets. Thus, if bonds are in high demand, mortgage rates drop.

Professional mortgage representatives are constantly checking the financial markets and related news releases to be able to predict future movements in interest rates. Ask your lender to keep an eye out for a favorable rate to lock in your loan! This is one of the reasons why it is very important to pick a very sharp and experienced mortgage representative (if you ever have the need for one, I can recommend several…)

Reverse Mortgages Get a Push

The Daily Real Estate News reported today that the limit for FHA-backed reverse mortgages (or Home Equity Conversion Mortgages – HECMs) had been increased to $417,000.

This new regulation also places a 2% cap on origination fees for the first $200K of the loan amount, or a 1% cap for higher amounts, with a $6,000 limit (adjustable for inflation).

Senior citizens will be allowed to use HECMs to purchase a new property, and lenders will no longer be allowed to sell annuities and other financial products along with the mortgage.

I think this will increase the flexibility for those seniors (like my own parents) who are “house-rich” but “cash poor”. Good move!!