Tuesday, December 14, 2010

America's Future Economic Growth - Not What We've Come to Know

Here is an exert from a daily update I received last night from Jay Goldinger with the Early Warning Wire. It provides incredible insight into our economic future as a country.

The chart below is the most important of the year. It clearly shows the dramatic change in US borrowing from the private to the public sector. The red bars shows the dominance of business borrowing until the beginning of 2008 when it was replaced by the government (blue). While most believe we are at the precipice of inflation as persistent government borrowing forces the private sector to pay more interest for new loans I see it as the start of a new chapter in the US economy. Since we only see the future from our own past experiences most US businesses have spent the last three years stockpiling cash and reducing or ending leverage. Instead of the federal government "crowding out" private sector borrowing these record savers will spend the next decade financing growth slowly and internally through profits and using their cash hoard. Of course growth will be slower and unemployment higher than in any recovery since the 1940's but it will have more traction and not be dependent on access to the credit markets which propelled the real estate market into a crash landing. The government will slowly (very slowly) reduce its debt in the next decade mostly by not having to renew existing debt. It is not what we are used to nor is it our first choice but sometimes life is best enjoyed when we learn to take the path of least resistance (low debt) rather than go back to the route most familiar but fraught with risk. Those that adapt to the new paradigm will profit while those that fear change will see assets dissipate and not understand why.

Visit the Early Warning Wire to subscribe to Jay's updates, and to learn about Food on Food, a philanthropic organization to help the homeless in L.A. transition to life off the street.

Tuesday, November 30, 2010

The Buy Versus Rent Debate

One of the effects of the now burst housing bubble is the psyche of the potential homeowner. Is homeownership no longer a desired dream in America after someone experiences foreclosure? Are young people less likely to want to own a home when they see their parents lose their home to the bank? Is the American dream of homeownership dead?

Many investors believe that more young people will grow up to be renters rather than homeowners. There are advantages for renting: mobility; low maintenance; less responsibility. Experts say that young people today show a greater desire to rent than own because of these advantages.

But eventually young people grow up. They get married, have children, and then they want some stability. Their kids enroll in school and they become less mobile and must take on more responsibility. The trends that experts say will result in more renters, in my opinion are simply characteristics of young people.

The Housing Bubble is a major set back for many people. It has and will likely continue to reduce the rate of home ownerhsip in America. But I believe that most Americans still want to own a home. And when they are in a financial position to own a home they will do so.

The real estate website, Trulia.com recently conducted a study on the Top 10 Cities to Buy vs. Rent. They studied the top 50 cities by population and came up with this list of the top 10 cities where it is more affordable to buy versus rent.

1. Minneapolis, MN
2. Arlington, TX
3. Miami, FL
4. Fresno, CA
5. San Antonio, TX
6. Mesa, AZ
7. Jacksonville, FL
8. Phoenix, AZ
9. El Paso, TX
10. Las Vegas, NV

Friday, November 26, 2010

Short Sale Warning

Be careful when participating in a short sale. Part of the negotiation with the lender may involve paying back a deficiency. It is important that people selling their home as a short sale understand the liability they may still have after the sale. It's probably a good idea to involve an attorney to make sure the short sale is in your best interest. Here's a story in today's Arizona Republic...

Some Arizona homeowners still owe after short sale

Tuesday, November 23, 2010

The Impact of Fannie Mae Guideline Changes

Here are some upcoming guideline changes that Fannie Mae is implementing and will be filtering down to the banks and mortgage lenders:

· Minimum Borrower Contribution – The minimum borrower contribution requirements for all Fannie Mae conforming products (except DU Refi Plus, High Balance loans, interest only, 2-4 units and second homes) will no longer require a minimum 5% contribution from the borrower. The borrowers minimum investment may come from gift, grant or community seconds to meet this requirement.

· Foreclosure – Increased waiting period to seven years.

· PreForeclosure/Short Sale/Deed-in-Lieu – if the credit report reflects an account that may have been subject to a preforeclosure, short sale or deed-in-lieu the borrower will have to wait two years until applying for a new loan. Fannie Mae uses the terms “preforeclosure”, “deed-in-lieu” and “short sale” interchangeably.

· Revolving Debt – All revolving debt will be included in the dti calculation regardless of the number of payments remaining.

If you have any questions about these changes and how it may impact you or your clients, please contact me at 602-690-1462. Thank you.

Monday, November 22, 2010

Applying for a Mortgage - Not as Bad as Airport Security

I've never been happier to stay home for Thanksgiving. In the past few days, stories about the new TSA security procedures at the airport have the masses ready to revolt.

If you've flown recently you have probably seen the x-ray machines that aren't there for you bags. They're there for us. They exist because the old metal detectors can't detect many types of explosives that contain little or no metal. It makes sense that the TSA needs to be able to detect explosives that aren't metal, so they introduced these machines that can see through our clothes.

Apparently some people don't want TSA agents to see them naked. I've seen some of the images the machines generate and they don't seem very graphic. And you certainly would not recognize images of any specific individuals. However, they are vivid enough to make folks uncomfortable.

The alternative to the naked image is a rather thorough pat-down from your friendly neighborhood TSA agent. Personally, I prefer being the subject of a risque security photo.

I don't mind having the image taken of me. On a recent trip I had to have my x-ray image taken at the Oakland Airport. The agent instructed me to raise my hands over my head (similar the the image above). Knowing an image was being taken, I found myself flexing. Is that vain? I don't know who was looking at my image, but I wanted to look my best.

What does this have to do with home loans? Nothing really. Sometimes home loan borrowers complain about the amount of documentation we collect: tax returns, bank statements, pay stubs, and letters to explain all sorts of happenings. But I promise that we never ask to see what's underneath our customers' clothes.

Happy Thanksgiving!

Sunday, November 14, 2010

"Flopping" Examined

Here's an article from today's Arizona Republic about "Flopping" real estate. It involves investors that negotiate and purchase short sales, while simultaneously negotiating a second sale to another buyer at a higher price. When fully disclosed it is legal, but this is widely considered an unethical practice.

Phoenix real estate strategy of 'flopping' examined

Sunday, November 7, 2010

How Does One Qualify for a Mortgage These Days?

The Hangover
Let's look at a drinker. Not a raving alcoholic that gets drunk regularly, rather our drinker - we'll call him Jim - will control his consumption most of the time. However every once in a while Jim will let the moment get the best of his judgement, and he'll get smashed. When I was in college we called it FUBAR. Well, Jim had a bad binge and is terribly hung over. He has the kind of headache that makes you think if you could just drill a hole in your forehead, you could relieve the pressure inside. His entire body aches and he wishes he had listened to his girlfriend and gone home early. He swears he will never, NEVER EVER get drunk again. Hopefully he's learned his lesson. Eventually he will loosen up and have a few drinks at a party, but for now he has sworn-off the sauce.
Jim's attitude towards alcohol is not unlike a mortgage lender's toward home loans. The lending binge of the housing boom led to our recession/hangover. There's a party happening in the form of low interest rates. Mortgage lenders are attending the party, but they are very careful not to indulge too much.

A week doesn't go by that I hear a news story about interest rates being at historic levels, "BUT, good luck finding a bank that will lend to you," the reporter says. Mortgage lenders are much more discriminating than they use to be in who and how they lend money for home loans. Qualifying for a home loan is more difficult, but it's not impossible.

There are three areas that a mortgage lender considers when determining whether to approve a home loan application. We call them the Three C's: Capacity, Character, and Collateral. Capacity is the borrower's ability to repay the loan. Character is the borrower's willingness to repay the loan (based on credit history). And Collateral is the asset used to secure the loan, the home.

As a borrower, be prepared to prove your capacity to pay back the loan. Provide recent copies of paystubs, and W-2 forms for the past two years to prove you have enough income to repay the loan as well as your current debt obligations. Self-employed borrowers will need to provide two years of individual and company tax returns.

Another component of Capacity is the amount of borrower's assets. Two months of bank and investment account statements will satisfy the documentation requirement. Be prepared to provide a documentation paper-trail for any unusually large deposits.

Since a mortgage underwriter that makes a lending decision will never get to know or even meet the applicant, they judge the borrower's character by what they see on a credit report. Whether the borrower has defaulted or made late payments in the past will help the underwriter determine the borrower's willingness to repay the loan. Severe delinquent events on the credit report such as a bankruptcy, foreclosure, or short sale tells the lender that the borrower has walked away from obligations in the past. This will keep the borrower from obtaining a new home loan for several years.

The asset that secures a mortgage is the borrower's home. The lender will obtain an appraisal report to make sure the current market value of the property is sufficient to secure a home loan. Many borrowers have had difficulty refinancing because they purchased the home at the peak of the market and now the value of their home is insufficient. But those that had large down payments or bought their homes prior to the run-up in the housing market likely have the equity necessary to refinance.

If a potential borrower can provide the documentation necessary to prove their Capacity, have the credit history that shows good Character, and are purchasing or refinancing a home that is sufficient Collateral, then they can qualify for a home loan. Contrary to some negative news reports, people are doing it every day.

Saturday, October 9, 2010

Halting Foreclosures will only Hurt the Housing Market

In my article, "The Forest Fire" (9/23/10), I use the analogy of a forest to describe how foreclosures will help to repair the housing market. Today's foreclosure is tomorrow's first home for a family that a few years ago couldn't afford to buy a home at inflated prices.

Just last week I closed a home loan for a single mother of two that works as a social worker. If not for the wave of foreclosures and the free-fall in housing prices, the benefits of home-ownership would still be out of reach for her.

Foreclosures also represent investment opportunities, and not just for the wealthy. Many middle-class Americans are purchasing houses as investments. By renting them to tenants, they earn income and provide affordable housing.

More affordable housing is vital as incomes have suffered in the Great Recession. While foreclosures represent the loss of unaffordable housing for someone, they lead to affordable housing for someone else.

This past week, there has been much news about loan servicers halting foreclosures in the 23 states that have judicial foreclosures. In addition, the largest servicer, Bank of America, has stopped foreclosures in every state. Sloppy and inaccurate paperwork seem to be the root cause. Servicers are dealing with such high volumes of foreclosures with systems that were never designed to manage such volume.

Shame on the servicers for not performing their roles properly in regards to foreclosures. But now self-serving lawyers smell blood in the water and are quickly jumping on money-making opportunities to sue the servicers.

I met one of these lawyers at a political event last week. It is clear that he will not let facts get in the way of a profitable lawsuit. Unfortunately these lawsuits, combined with political pressure will result in more servicers halting foreclosures.

The result will be a longer and more painful recovery for housing, less available affordable housing, and further losses for banks and investors that own the mortgages.

Tuesday, October 5, 2010

How Much Do Low Rates Reduce Housing Costs?

That sounds like a simple question. Of course a lower rate means a lower monthly payment. But how much of a difference does that really make. I’ve heard people overly-simplify the issue by saying that a 1% change in rate is roughly the same as a 10% change in price. Let’s look into this a little closer and see if it holds up.

We’ve all heard that interest rates today are at all-time lows. I think we take that for granted, so it helps to include this chart that goes back to 1975. It shows a 36-year average of mortgage rates. The blue line is 30 year fixed rates and since that is the most popular program, that is what we will focus on. As you can see by the graph, mortgage rates in 2010 are truly lower than anything we have seen in our lifetimes.

Current average conforming 30 year fixed mortgage rates are around 4.375%. If you were to purchase a home with a $400,000 home loan, the monthly principal and interest payment at that rate would be $1,997.

Now let’s see how raising the rate to the 2000 average of 8.05% affects the payment. That’s not all that long ago. The payment at same loan amount at the 2000 rate is $2,949. We increased the rate by 3.675% and that resulted in a 48% increase in payment! That seems worse than the 1% rate to 10% price ratio, but let’s look at it from a price perspective.

That increase in payment from $1,997 to $2,949 is the same as raising the loan amount from $400,000 to $590,646. That is also a 48% increase in loan amount. If the down payment is the same percentage for each example, then it also results in a 48% increase in sales price.

So for this example we discovered that a 3.675% increase in rate equals a 48% increase in price. It also means a 1% increase in rate is equivalent to a 13% increase in sales price.

Don’t think I chose a year with an exceptionally high rate. I could have used 1981 where rates were 16.63%. In fact, the average rate over the 36 years is 9%. I chose 2000 because it wasn’t that far back in history. The lesson here is that we must recognize what an amazing opportunity we have to borrow money at this specific point in history. Years from now we can look at an updated version of this graph and see the low point, and remember what a great deal we got in 2010.

Thursday, September 30, 2010

Pushing on a String

I receive daily economic reports from Jay Goldinger of the Early Warning Wire. I am paraphrasing his report from last night.

The Federal Reserve Board controls monetary policy in the United States. Most people may know the Chairman, Ben Bernanke. But there multiple members that have influence on the Fed's decisions that have significant effects on the economy. Most comments from Fed members are a repeat of the Chairman's previous remarks but once in a while Fed President steps up and says something that is important. Minneapolis Fed President Narayana Kocherlakota is quickly showing his firm understanding of our nation's current economic situation. Yesterday in London Kocherlakota spoke on the current economic outlook and the tools of monetary policy. Click here for his complete comments.

When commenting about Chairman Bernanke's plans to implement another edition of QE (quantitative easing) through the purchase of Treasury securities he said, "I do NOT see why they (banks) would suddenly start to use the new ones if they weren't using the old ones." He gets it and is willing to challenge the leader of the Fed about his recently announced policy decisions. Banks are sitting on almost $1 trillion of excess reserves (cash) held at the Fed and this is money created by the Fed in the past two years for the purpose of stimulating the economy through loans to businesses. Lower interest rates have NOT stimulated loan demand, so why would more money create something it has not been able to do before? More quantitative easing is like "pushing on a string." Simply throwing more money at businesses that lack the confidence to borrow isn't going to work. At some point the Fed will lose the confidence of Treasury holders and that will drive real rates much higher on US debt securities. That is a longer term forecast.

For homeowners waiting for the right moment to refinance, they may be pushing their luck. Rates have likely bottomed and now is the time to pull the trigger. For people considering purchasing a home they need to understand that the low rates contribute to a significant discount to the overall cost of the home, and should buy before rates begin their inevitable rise. Click here to apply now.

Thursday, September 23, 2010

The Forest Fire

A forest grows for hundreds of years. Many trees are large and mature. There is much life in the forest, both flora and fauna. Some trees die and their dead wood litters the floor. One dry day, it is inevitable that a fire will burn the wood. Whether it is done by human hands, or by lightning doesn't matter for the purposes of this story.

The fire sweeps through the forest causing death and destruction. When the fire burns out the once emerald green forest, full of life is now a charred, dead, alien world. It is a very sad place. The animals that survive miss the beautiful abundance of their home, and mope around depressed, scraping for any bit of food they can find.

Many animals leave to find food in another forests. Other animals stay and tough it out. Rains come and wash the charred remains of the burnt forest into the soil providing nutrients for the soil to grow new life. Trees and plants slowly begin to return. The forest is springing new life from the ashes of the old trees.

Hopefully you see the analogy with the housing market. The fire is still burning in the form of foreclosures, although we may be closer to the end of the fire than the beginning. But those foreclosures will clean out the dead wood and provide nutrients (affordable housing) for our housing markets to once again grow.

Friday, September 17, 2010

Fannie Mae National Housing Survey

The following is from the Fact Sheet regarding Fannie Mae's National Housing Survey. It provides interesting information about the public's feelings of the housing and rental markets.

Fannie Mae National Housing Survey Key Findings
The Fannie Mae National Housing Survey polled homeowners and renters between June 2010 and July 2010 to assess their confidence in homeownership as an investment, the current state of their household finances, views on the U.S. housing finance system, and overall confidence in the economy. Findings were compared to a similar survey conducted by Fannie Mae from December 2009 to January 2010 and released in April 2010, and a similar survey conducted in 2003. A news release on the new survey can be found at http://www.fanniemae.com/newsreleases/2010/5155.jhtml.
Housing and the Economy

Eighty-two percent of respondents consider homeownership important to the economy, up two points from January.

Only 30 percent think that the economy is on the right track (compared to 31 percent in January), but 44 percent expect their personal financial situation to improve in the next year.

Delinquent borrowers (57 percent) remain more optimistic about the future than the general population, but they are less confident than they were in January (63 percent).

Seventy percent of respondents think it is a good time to buy a house, up six points from January. This is also four points higher than the 2003 survey – well before home prices peaked – when 66 percent said it was a good time.

More than one in three (36 percent) think now is a very good time to buy a house.

But 83 percent said they believe that it is a bad time to sell a house.

More than three-quarters (78 percent) think home prices will stay the same or go up over the next year, up five points from January, with an average price increase of 0.9 percent.

This includes 31 percent who think prices will increase and 47 percent who feel prices will remain about the same. This is a notable shift from January 2010, when these numbers were 37 percent and 36 percent, respectively.

Eighty-five percent of Americans think home rental prices will stay the same or go up over the next year – 39 percent expect them to go up and 46 percent expect them to stay the same.

Almost half of renters (46 percent) expect rental prices to increase, and respondents expect rental prices to increase by 3.6 percent, on average.

Copyright© 2010 by Fannie Mae Release Date: September 16, 2010 1

Desirability of Homeownership
Sixty-seven percent of respondents said they believe buying a home is a safe investment. However, this is down three points from January and 16 percentage points from the 2003 survey – the largest drop by far among all investment types tracked since then.

This compares to 76 percent who think putting money into a bank account (money market or savings account) is safe, up from 74 percent in January.

In contrast, only 15 percent believe buying stocks is a safe investment, down from 17 percent in January.

Eighty-four percent of consumers believe owning makes more sense than renting, down one point from January.

Among renters, 69 percent believe owning makes more sense, down from 75 percent in January.

Sixty-three percent of all survey respondents would likely buy instead of rent if they were to move, down two points from January.

Respondents cite non-financial reasons such as safety (78 percent) and quality of local schools (79 percent) as driving factors in wanting to own a home, ahead of economic considerations.

Seventy-four percent say they prefer a traditional, fixed-rate mortgage with predictable payments over a floating-rate loan.

Renters’ Views on Renting and Homeownership
The number of Americans who say they would likely rent their next home increased from 30 percent in January to 33 percent in July.

Sixty percent of those who currently rent said they would continue renting rather than buy a house if they were to move, up six points from January.

Forty-four percent of delinquent borrowers said they would rent instead of buy, up from 40 percent in January.

Among renters who would rent rather than buy if they were going to move, 63 percent said they plan to buy a home at some point in the future, down four points from January.

Twenty-one percent of renters said they have decided to delay their home purchasing plans over the past year, compared to 23 percent in January.

Eighty percent of renters believe that they would have to make a financial sacrifice to own a home. Fifty-five percent said it would require “a great deal” of sacrifice, and 25 percent said it would require “some” sacrifice.

State of Consumer Household Finances
Nearly six in ten Americans (58 percent) say their monthly household income has remained about the same compared to a year ago, while 46 percent of delinquent borrowers said their income has declined significantly. Just 19 percent of the general population said their income increased significantly.

Thirty-one percent of all respondents said their monthly expenses are significantly higher than they were 12 months ago, 18 points higher than those who said their expenses declined significantly.

Thirty-three percent of the general population are “stressed” about their ability to make payments on their debts. Forty-three percent of renters and 81 percent of delinquent borrowers say they are stressed – while 53 percent of delinquent borrowers say they are “very stressed.”

Twenty-two percent of mortgage borrowers said they have reduced their mortgage debt significantly over the last year. However, 30 percent of delinquent borrowers have significantly increased mortgage debt during the same period, almost three times as high as non-delinquent mortgage borrowers.

Twenty-one percent of the general population has reduced non-mortgage debt significantly over the last year.

Twenty-seven percent of mortgage borrowers have reduced such debt significantly over the last year, while only 19 percent of delinquent borrowers have done so.

However, non-mortgage debt has increased for 26 percent of delinquent borrowers.

Challenges Facing Homeowners
Fifty-four percent of respondents believe it would be difficult for them to get a home loan today, down from 60 percent in January. However, more than seven in ten (71 percent) think it will be harder for the next generation, up from 68 percent in January.

Survey respondents who said it would not be very easy to get a home loan cited their income (19 percent), poor credit (16 percent), uncertainty about having enough for a down payment (16 percent) and job security (15 percent) as the top obstacles.

The majority (77 percent) of respondents expressed some degree of confidence that they would receive the information they need to choose the right loan if they bought or refinanced a home today, down one point since January. However, only 48 percent said they are “very confident” (compared to 47 percent in January).

Diverging Views on Homeownership Among Borrower Sub-groups
Mortgage borrowers (74 percent) and underwater borrowers (69 percent) are more likely to say owning a home is a safe investment than delinquent borrowers (57 percent) and renters (54 percent). However, this measure has fallen among all sub-groups since January, with delinquent borrowers and renters showing the largest declines, down eight and seven points, respectively.

Mortgage borrowers (83 percent) and underwater borrowers (77 percent) said they are more likely to buy in the future than rent – both groups increased two points from January. The number of renters (37 percent) and delinquent borrowers (52 percent) who said they are more likely to buy in the future declined by seven and four points from January, respectively.

Attitudes about Delinquency
Nearly two in ten consumers (19 percent) know someone who has strategically defaulted, or stopped making their mortgage payments even when they could afford to make them.

Delinquent mortgage borrowers and those in the general mortgage borrower population both are more likely to have seriously considered stopping their mortgage payments if they know someone who has already defaulted – almost twice as likely among delinquent borrowers (40 percent among those who know a defaulter versus 21 percent among those who do not) and more than three times as likely among mortgage borrowers in general (7percent versus 2 percent, respectively).

Eighty-five percent of Americans do not believe it is acceptable for people to stop making payments on an underwater mortgage, while 10 percent believe it is acceptable (up two points since January).

But 19 percent of delinquent borrowers think it is acceptable to walk away from a mortgage (down one point since January).

When asked if financial distress makes stopping payments acceptable, 17 percent of all respondents said yes (up two points since January).

But 38 percent of delinquent borrowers think financial distress makes stopping payments acceptable, compared to 39 percent in January.

Hispanic Housing Attitudes

Thirty-six percent of Hispanics believe the economy is on the right track, up three points from January. In comparison, 30 percent of the general population believes the economy is on the right track.

Fifty-eight percent of Hispanics expect their financial situation to get better over the next year, 14 points higher than the general population.

However, 59 percent of Hispanics view a home as a safe investment, down from 64 percent in January. This compares to 67 percent of the general population.

A large majority (70 percent) of Hispanics cite the perception that a home is a good retirement investment as a major reason to buy, compared to 58 percent of the general population.

Even more Hispanics (76 percent) said that owning a home is a good way to build up wealth that can be passed along to their families, compared to 58 percent of the general population.

Fifty-one percent of Hispanics think that owning a home is a symbol of one’s success or achievement, and cite it as a major reason to buy, compared to 31 percent of the general population.

Seventy-two percent of Hispanics think that obtaining a home mortgage today would be difficult, but this is down four points since January.

African-American Housing Attitudes
Almost one out of every two African-Americans (48 percent) thinks the U.S. economy is on the right track, compared to just 30 percent of the general population.

Seventy-one percent of African-Americans expect their personal finances to get better over the next year, compared to 44 percent of the general population.

Fifty-nine percent of African-Americans view a home as a safe investment, down from 63 percent in January and compared to 67 percent of the general population.

Sixty-two percent of African-Americans cite the perception that a home is a good retirement investment, and cite it as a major reason to buy, compared to 58 percent of the general population.

Even more African-Americans (75 percent) said that owning a home is a good way to build up wealth that can be passed along to their families, compared to 58 percent of the general population.

Forty-four percent of African-Americans think that owning a home is a symbol of one’s success or achievement, and cite it as a major reason to buy, compared to 31 percent of the general population.

Sixty-five percent of African-Americans think that obtaining a home mortgage today would be difficult, down eight points since January.

From June 12, 2010 – July 14, 2010, 3,399 telephone interviews with Americans age 18 and older were conducted by Penn Schoen Berland. This included a random sample of 3,001 members of the general population, including 870 homeowners, 1,020 mortgage borrowers, 900 renters, and 289 underwater borrowers (those who report owing at least 5% more on their mortgage than their home is worth). The overall margin of error for the general population sample is +/- 1.79% and larger for sub-groups.
An additional oversample of 398 random national delinquent borrowers was also polled. The margin of error for the delinquent borrower oversample is +/- 4.91% and larger for sub-groups. Delinquency was defined as not having made a mortgage payment in the past 60 or more days.
Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. Our job is to help those who house America.
For more information, visit http://www.fanniemae.com/about/housing-survey-091610.html

Tuesday, August 31, 2010

Taking Advantage of Low Rates

Unless you live in a cave (no mortgage on that cave), you have heard everywhere that rates are at historic lows. "Lowest Rates in 50 years... 100 years ... since the birth of Christ!" Yes, we all know that rates are really, really low. So what does that do for you?

If you don't already own a home, then it means this will probably be the best home-buying opportunity of your life. Not only have home prices been reduced by 50% (more or less) in the past few years, but the financing rates are lower than anything your parents or grandparents ever witnessed.

Consider this example. A $200,000 home loan may carry a rate today of 4.375% on a 30 year fixed (4.488% APR). A principal & interest payment in this example is $998.57 per month. This same loan with a 7% rate (an fairly average historical rate) carries a monthly payment of $1330.60. That is a 33% increase in payment when the rate is 2.625% higher.
If you or someone you know is in a position to purchase their first home, please call me.

Now, for those of you that already own a home, the obvious way to take advantage of low rates is to refinance. There are three basic strategies to refinancing.

  • Lower the monthly payment & improve cash flow.
  • Reduce the term on the loan (e.g. 15 year loan)
  • Take cash out to pay off other debt or make a large purchase

I like to work with my clients to come up with the best strategy that fits their needs. Sometimes their best strategy is to not refinance, and I will often tell clients that. Please contact me to discuss your opportunities.

Thursday, August 19, 2010


Having been in mortgage lending for 18 plus years, I am familiar with MERS as just a piece of the mortgage business. For those that don't know, MERS is the Mortgage Electronic Registry System which allows for the easy transfer of a mortgage from one party to the next. For example, ABC Mortgage Co funds a mortgage for a homeowner, they can easily sell it to XYZ Investor without recording new assignments with the local recorders office.

Unfortunately for mortgage companies, this has created some legal issues as judges deal with foreclosure proceedings. The problem according to MERS opponents is that it is not clear legally who holds the mortgage. Therefore it is not clear who can foreclose.


Tuesday, August 10, 2010

Taxpayers Supporting Freddie's Gambling Addiction

Caution: This will make you angry.

Yesterday it was reported that Freddie Mac lost $4.7 billion in the second quarter and needs another $1.8 billion injection from the government to keep operating. We expect Freddie and Fannie to be losing money due to all of the mortgage defaults that are still taking place. But let's dig a little deeper into the losses.

Buried in the report are the details of the losses for the 2nd quarter (which are actually improved from the first quarter) and you will see the following:
  • net interest income of $4.1 billion
  • minus credit losses of $5 billion
  • minus derivative losses of $3.8 billion
  • Net Loss = $4.7 billion
How did Freddie lose so much in derivatives? They made massive bets on rising interest rates and lost billions as rates fell from April 1 through June 30. We the taxpayers continue to fund their losses every quarter and gives them $$$ to play the interest rate market and lose more $$$.

If they were a public (or private) company they would be out of business. But now they are in control of the federal government and go to the casino with an unlimited piggy bank, thanks to the American Taxpayer and our elected officials who allow it to continue.

Tuesday, July 27, 2010

Warning: Trial Loan Modifications can be Hazardous

The failure of the government's loan modification program, Home Affordable, has made a lot of news lately. Only a fraction of the anticipated number of homeowners have truly benefited from the program. Why do so many people start the mortgage modification process and end up getting denied or canceled? What are the hazards of getting involved in a trial modification?

Trial Modifications
About a year ago, under tremendous pressure from the government and consumer groups, home loan servicers (primarily the big banks) started using trial modifications in order to get more homeowners started in the loan modification process. Because of the mammoth volume of requests for modifications (Bank of America was receiving over 80,000 calls a day at the peak) servicers started homeowners on trial modifications, or temporary modifications, while they began processing and underwriting the homeowners qualifications for a permanent modification.

Often times the processing time to determine if a homeowner takes many months, up to a year. Meanwhile the homeowner continues to make trial modification payments at an amount lower than the payment on their mortgage note. The homeowner assumes if they make their trial payment on time, they will be approved for the permanent modification. They don't realize that homeowners are often denied a permanent modification regardless if they make all of their trial payments on time. Most of the time the reasons for denying a modification relate to the borrower making too much, or too little income.

Something has been happening as they have been making those lower, trial payments. The homeowner has been accumulating a past due balance for the difference between the note payment and the trial payment. The longer the trial period, the bigger that past due balance becomes.

Putting Homeowners in a Hole
Take the example of Stacey. She started a trial modification with Wells Fargo in August of 2009. She was told it would be a three month trial. She made all three months on time, but Wells Fargo was behind, presumably dealing with hundreds of thousands of other homeowners. So Stacey continued to make the trial payments as directed by Wells Fargo. Finally in July of 2010 she received notice that her modification request was declined because she didn't make enough money. We'll ignore the point at this time that Wells Fargo did not calculate her income correctly. So they sent her a letter letting her know she has to start making her note payment again. They also mentioned in the letter that Stacey had to immediately pay the past due balance of over $8,000. "Past due? But I made all of my payments on time," Stacey thought. Yes, but now she owes the difference between the trial modification payments and her note payments over the past 11 months. And she owes it now. According to the letter she must pay it now or face foreclosure.

Be Careful with Trial Modifications
The servicers need to be aware of the hole they are putting homeowners in when they start them on a trial modification. Likewise, homeowners that are on trial modifications need to take advantage of the lower payment and save some money each month so that if their request for modification is denied, they can pay the past due balance.

Sunday, July 11, 2010

Immigration Policy & Real Estate

Nothing has been in the news more in Arizona recently than SB1070. In case you have been living in a cave, I am referring to an immigration enforcement law recently passed in Arizona that goes into effect on July 29. The law requires local law enforcement authorities to question individuals who have been stopped for an infraction and are suspected of being in the country illegally to show identification authorizing them to be in the country. This article will not debate the politics, the effectiveness, or the constitutionality of the law. My interest is in how the law will affect (or not affect) real estate in Arizona. So I will let others argue whether the law is racist and unconstitutional, or whether it is simply the state trying to enforce what the feds have failed to enforce.

What Drives Real Estate Growth?
Growth in real estate, whether in the form of increased home sales or rising values, necessitates a growing population. Arizona real estate has benefitted over several decades from the domestic migration from colder U.S. climates to the Sunbelt. That growth led to spectacular new home starts and rising home values from the early nineties through 2006. The overall economy sailed on a wind driven much by the real estate market.

A great deal of that growth took place beginning in 2000. From 2000 to 2007 the illegal immigrant population in Arizona is estimated to have grown by 70% according to a study by the Department of Homeland Security, while nationally that figure was only 37%. Illegal immigrants have to live somewhere, so they must also contribute to the real estate market. Many rent homes or apartments, which drove up rents and consequently increased property values. Many also purchased homes and even obtained mortgages with falsified identification. While illegal immigrants can’t claim to be the primary source for the rise (and eventual fall) of the real estate market, their impact shouldn’t be ignored.

This impact is more apparent in neighborhoods that are primarily Latino like the Maryvale neighborhood of west Phoenix and Glendale. Many illegal residence simply abandoned homes that they rented or had purchased when they made a decision to leave Arizona.

Why Are Illegal Immigrants Leaving?
Immigrants have been leaving Arizona for a couple of years. It started well before SB1070 was signed into law. In fact that law isn’t scheduled to go into effect until later this month. In 2008 about 100,000 illegal immigrants (18%) left Arizona according to DHS. If most of the illegal immigrants came across the border for higher paying jobs, it only makes sense that they leave when those jobs are no longer available.

The decline of a real estate and construction dependent economy began in late 2006, and was free-falling into 2007 and 2008. The result, the jobs held by many illegal immigrants simply vanished. Compounding the issue was another law that was passed in 2007, the Legal Arizona Workers Act. This law focused on employers that were hiring illegal workers. It placed very stiff penalties, including the loss of a business license, for those employers that knowingly hired illegal workers. While very few companies have been prosecuted under the law, it appears that employers have decided not to take the risk of losing their business.

One would think that Arizona’s dependence on real estate would result in a higher unemployment rate than the rest of the nation. Instead Arizona has been at or below the national unemployment rate in this recession. In fact the Phoenix metro area had 8.7% unemployment in May while the U.S. unemployment rate was a full point higher at 9.7%. I can only speculate that is because the Arizona workforce has shrunk as illegal immigrants choose to leave as their jobs disappeared.

SB 1070’s Impact
The most recent immigration legislation in Arizona does not appear to contribute to any population increase, nor is it designed to. It is designed to do exactly the opposite, at least in the short term. Proponents believe it will lower entitlements, thereby lowering government spending and keep tax rates low. That should provide a fertile ground for business growth and population, a longer term view.

The national and international attention for Arizona and this debate is extraordinary. The attention however has been mostly negative. The opponents of the law focus on racism to make the debate appear Anglo versus Latino. Not a good image for Arizona. Proponents of the law focus on the problems and crime associated with illegal immigration: drug and human smuggling, kidnapping, and executions. Also not a good image for Arizona. This recent immigration debate is not helping the cause to persuade people to move to Arizona.

In the short term it appears that SB1017 is hurting our real estate market. Immigrants that haven’t already left may choose to, creating more vacancies. In addition, a poor image of Arizona is being portrayed by both sides of the debate.

The long term consequences depend on what happens next. We will have to wait and see if Congress will pass any meaningful legislation for immigration reform. The law also faces court challenges including a suit from the U.S. Department of Justice. Interestingly, in this lawsuit my federal tax dollars will be applied to the plaintiff side while my state tax dollars will contribute to the defense.

How can immigration policy help the Arizona real estate market? Real estate growth needs population growth. Therfore it can be positively impacted by policy that allows for an increase in LEGAL immigration, specifically legal immigration from Mexico.

Wednesday, June 30, 2010

Oh Canada! Let's Not Get Carried Away

A couple of weeks ago an article in the Wall Street Journal compared Canada's mortgage market to the U.S. The point of the article was that home loans for our neighbors to the north are more conservative than in the U.S. which is why they did not experience the bursting of the housing bubble.

The same conclusion was reached by reporters on CNBC this morning as they praised Canada's home loan system for a variety of reasons (CLICK HERE for a link to the story). Why do people believe Canada is superior to the U.S. when it comes to mortgage lending?

The Numbers

While 9.5% of U.S. homeowners were 3 months or more delinquent as of March, in Canada the ratio is only 0.44%. The latter number is superior, but not surprising when in is noted that subprime lending hardly even existed in Canada. Even though it was (and still is) tougher to qualify for a mortgage in Canada, the homeownership rate is roughly the same as ours, 68%.

The Lenders

Who is doing the lending in Canada makes a difference. In the U.S. most mortgages are originated by mortgage bankers, securitized and sold on the secondary market. Government guarantees on most mortgages add to the liquidity of our markets. In Canada most home loans are originated by banks and kept in the banks' portfolios. The bank makes the loan and retains the risk. Therefore the banks are very cautious about the loans they will approve.

The conclusion one may take from the story is that traditional bank lending is good, and securitization of mortgages is bad. That is an under-informed conclusion.


Another important factor is that all of Canada's home loans are recourse loans. This means that in the event of a default, the borrower is accountable to the bank for any losses incurred as a result of the default. In the U.S. laws related to recourse vary by state. For example in Arizona, the lender may only sue the borrower for a deficiency in a select set of circumstances.

Since Canadians know they are on the hook if they default, they are more apt to find a way to make their payments on time.

Other Side of the Coin

So are Canadian mortgages better than U.S. mortgages in every way? Absolutely not. There is a major downside that was not even mentioned in the CNBC story - There are no fixed rate home loans in Canada.

With all of the negative talk about the securitization of mortgages, it is often overlooked that with securitization comes fixed rates. With fixed rates comes stability and financial security for a homeowner.

Banks do not like to lend fixed rates with their portfolio. Why? Because 30 years (and even 15 years) is a long time, and they don't want to be committed to earning a fixed level of interest over that long period of time. A bank's cost of funds (the rate paid on deposits) will vary over time, so the revenue they earn (rate earned on loans) must also vary. That is why bank portfolio loans are almost always carry adjustable rates.

Risk of the Canadian System

Therefore in Canada, since banks provide most of the home loans with their own funds, the most common loan program is a 5 year adjustable rate mortgage (ARM). ARMs are great when rates are as low as they are today. My ARM is under 3%, so my payment is relatively low. But what will happen when rates increase? Mortgage payments in Canada will increase and I suspect more Canadian homeowners will find it difficult to make their payments.

Yes, Canada is better today based on their low level of defaults, but I suspect their mortgage issues may be masked by low rates.

Monday, May 24, 2010

Chaos in Europe = Low Mortgage Rates for Americans

Stock market turmoil and chaos in Europe are helping Americans get low interest rates on their mortgages. How and why is this happening?

Flight to Quality
Over the past several months, expectations have been for higher interest rates. The end of the Federal Reserve’s $1.25 trillion mortgage-backed security purchase program suggested that rates would have to rise to attract more investors to purchase mortgages. But with all of the chaos in Europe, investors from around the globe are flocking to American bonds, including mortgage-backed securities.

The financial instability is not contained to just Greece. One of Spain’s largest banks, CajaSur, failed and had to be taken over by the Bank of Spain (Spain’s central bank). This news feeds the flight to quality by investors.

U.S. Treasuries and other “safe,” fixed-income investments are the beneficiaries. Mortgage-backed securities are included in the “safe” category because they have real collateral in the form of real estate. Real estate values have already taken major price hits over the past few years, and the worst of the devaluation appears to be over. In addition, underwriting standards are much more stringent than they were a few years ago, so investors understand that owning mortgages today is a sound investment.

Opportunities for Homeowners
The low fixed interest rates today represent opportunities for homeowners to refinance and lock in a low, fixed payment. In general, a 1% reduction in rate represents a 10% reduction in payment. Reducing a payment isn’t the only benefit. Some homeowners are choosing to shorten the term of their mortgage from 30 years to 15 years so that they can own their home “free and clear” sooner, and reduce the amount of interest they pay over the life of their mortgage.

Long Term View on Interest Rates

In the long run there are some factors that do not bode well for interest rates. Most notable is the growing federal deficit. In the first 220 years of recorded financial records of the United States (i.e., 1789-2008), the nation had cumulative deficits of $5.3 trillion (i.e., outlays in excess of receipts). The combined deficits in the 3 years of 2009-10-11 (i.e., the actual deficit of $1.4 trillion in 2009 plus the government's projected deficits in 2010 and 2011) are estimated to reach $4.2 trillion (source: White House, 5/10).

Monday, May 3, 2010

Twitter and Facebook and Linked In, Oh My!

A few weeks ago I was in Lake Tahoe for some meetings. One of our sessions was a presentation about using social media to market business. They were over a hundred mortgage loan originators in the room, but when the speaker asked how many had a Facebook page, or used Twitter specifically for business, less than a dozen people raised their hand. This surprised me. What didn't surprise me was that all of the people that raised their hand were under 45.

Most people have found the benefits of using Facebook to find old classmates or share photos with family and friends. Likewise, scores have discovered that Linked In helps to connect with business associates, clients, or aids in a job search. I have some friends and family members that love Twitter. I have to admit, I have yet to find my love for this medium. I'm still working on it, but so far I find there is too much noise.

If you work, you should have a Linked In page. That includes working for a company, yourself, or even volunteer work. It is a great venue for networking and there are seemingly infinite numbers of "Groups" to join to generate discussions and connect with like-minded folks.

Facebook isn't just for sharing photos of your family or announcing your mood to the entire globe. It is a phenomenon how many millions of people use Facebook. Many of them are your customers, or potential customers. The most annoying thing about Facebook are some of the games like Farmville or Mafia Wars. My news feed will sometimes get clogged up with my "friends" progress on one of these games. I'm sure there is a way to block that stuff, I just need to figure it out. Also here is a bit of advice, do not post anything on Facebook that you don't want EVERYONE to know. Employer background checks often include visits to Facebook to find out more about the candidate.

Twitter is a beautiful idea. Short and sweet announcements that get shot out to all of your "followers." My advice is to be discriminatory in who you follow so that you aren't tweeted with too much nonsense. Likewise, don't tweet a bunch of gobbily-gook like, "Life is a beautiful gift so treasure each day." That may be true, but I will probably stop following you if that is the depth of tweets I receive. I (and your followers) want useful information.

More people are getting on board with social media for business, even the over-50 crowd. Click the links on the right for my Facebook and Twitter pages. I promise not to publish any gobbily-gook.

Friday, April 2, 2010

Taking Off the Training Wheels

Pedaling Toward Independence from Government

If the mortgage industry were a kid on a bicycle, it just got its training wheels taken off. Although the Federal Government is our dad that is still holding on to the back of the bike, running along as the kid pedals down the sidewalk.

Turn the clock back a few years, and the mortgage industry was riding a unicycle... while juggling chainsaws... blind-folded... and drunk. Well, there was a terrible accident. Now the mortgage industry has to learn to ride again.

The training wheels came in the form of increased government intervention. The Federal Reserve purchased the bulk of mortgage backed securities for a full year. This pushed interest rates lower and help more people afford new mortgage payments. That program ended on March 31. Without the Fed buying up all of those mortgages, rates rose a bit. They are up from the all time lows, but they are still very attractive.

In addition, the home-buyer tax credit is going away. To be eligible, buyers must have an executed purchase contract by April 30, and close by June 30. This was a way for the government to stimulate the housing market. It was successful in encouraging people to buy homes. Going forward people will buy homes if they need them, not for a tax credit, and it is important that the market show it can survive without the extra government support.

But the mortgage industry still has a lot of government support. Dad is still holding on to the back of the bike, running by its side. The only mortgages that are being securitized and sold in the secondary market have some sort of government backing. Fannie Mae, Freddie Mac, FHA, and VA compose almost all of the market. Private label mortgage -backed securities haven't been issued for over two years. However, there are reports that they may be making a come-back. These private-label mortgage-backed securities would be primarily for jumbo loans. Jumbo loans today are primarily being held in banks' loan portfolios.

Re-emergence of securitation of non-government backed mortgages would be another big step for the mortgage industry to ride the bike again, without dad holding on. The true test will be seen with the reform of Fannie Mae and Freddie Mac. That may be a long and painful process. The industry isn't there yet, but at least the training wheels are off.

Tuesday, March 23, 2010

You Have a Foreclosure or Short Sale.... When Can You Buy a Home Again?

A common tale...

Alex and Christina purchased a home in Phoenix back in May of 2006 for $725,000. Last year they requested a loan modification from their lender to whom they owed slightly over $680,000 (in a first & second mortgage). Their request for a modification was denied by the lender. Around the same time, a home similar to theirs on the same block sold for $410,000. Uh oh!

So Alex and Christina listed their home with a real estate agent to do a short sale. They had some offers, but the lender did not approve any of them. You see, since the lender is accepting less than what they are owed in a short sale, they must approved the offer. Alex and Christina became frustrated witht the process and walked away. The home was eventually foreclosed by the lender and sold for $374,000.

Prior to this event, Alex and Christina had perfect credit. Their scores were in the high 700 range. Today they are probably in the low 500's. Question: When can Alex and Christina qualify for a home loan again?

Their scores will rise as time passes and they continue to have other good credit. To qualify for an FHA loan with most lenders, they scores will have to rise to at least 620. In addition there are rules about how much time must pass after a foreclosure, deed in lieu of foreclosure, and short sale. There are different guidelines that lenders follow depending on whether the event was due to extenuating circumstances (e.g. income loss, illness, or death in family), or financial mismanagement (most everything else).


Foreclosures occur when the homeowner defaults and the lender reposses the property. This is the case in the example above with Alex and Christina. Their foreclosure was not a result of extenuating circumstances; like many others they got in over their heads. Therefore they will have to wait 5 years before they can qualify for another home loan with most conventional lenders. If the foreclosure had been the result of extenuating circumstances, then their wait time is reduced to 3 years.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is when the homeowner accepts the fact that they will lose the home and willingly grants the property to the lender without having to go through the foreclosure process. The foreclosure process can be expensive and time consumer for lenders, especially in judicial foreclosure states. If Alex and Christina had done a deed in lieu of foreclosure, then they would have to wait 4 years before qualifying for a mortgage again. If the event was due to extenuating circumstances, that time is reduced to 2 years.

Short Sale

How long would it be if Alex and Christina had followed through with the short sale? Well, that appears to have the shortest "period of waiting." Regardless of the reason for the short sale, in only 2 years they could potentially qualify for a home loan again. That sounds much better than the 5 year wait they will have after their foreclosure.

So if someone is facing a foreclosure or short sale, and they want to buy a home again as soon as possible, then a short sale may be advantageous. If you or someone you know may be interested in more information about a short sale, go to http://emodifymyloan.com/shortsaledetails/.

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Friday, March 5, 2010

Wake Up Home Buyers!

"It's now or never...," Elvis Presley sang. That line also applies to purchasing a home. At risk of sounding like a cheesy salesman, I can honestly say that it has never been a better time to purchase a new home.

Okay, that probably did sound cheesy. I make fun of car commercials that consistently tell us that "Now is the best time to buy a -insert car brand here-!" In fact, even real estate professionals were saying a few years ago, at the peak of the market, that it was the best time to buy. For a moment forget the cheesiness, and past mistakes of real estate & mortgage professionals. I will make my case as to why potential homebuyers are foolish (yes I said "foolish") not to purchase a home now.

I must give credit to Barry Habib, Chairman of Mortgage Success Source, whom I had the opportunity to spend some time with this week when he made a trip to Phoenix. He made this case by telling the story through the eyes of Rip Van Winkle. I took his idea and made some changes of my own.

The classic Washington Irving story of Rip Van Winkle starts before the American Revolution in a village in colonial New York. Forgoing the details, Rip falls asleep for 20 years and awakens after the Revolution. For our purposes we will revise the story a bit. Before he fell asleep Rip put some money away for a down payment on a house. And instead of colonial New York, our story takes place in suburban Phoenix.

Rip Van Winkle wakes up today after a multi-decade slumber. He takes his money that he had set aside before his prolonged nap and immediately begins shopping for a home. He does some research and discovers that home prices have dropped around 50% in four years. He is astonished. "You mean that if I woke up just four years ago, I would be paying double for a house?" he asked his Realtor. "I can't believe how lucky I am."

Rip researched further and realized that he could get an $8,000 federal tax credit if he has a contract prior to April 30 and closes by June 30. "Unbelievable!" Rip exclaims. "If I had slept in for just a few more months, I would have missed out on this opportunity. Thank goodness I woke up when I did. This seems to good to be true!" Then he thought for a moment.

"There has to be a catch," he thought to himself. "Interest rates must be high. They are probably going to stick it to me on my home loan." So he asked his loan officer about it, and he was again astonished to learn that rates were near historic loans. " Do you mean to tell me that along with a 50% discount from home prices four years ago, and an $8,000 tax credit, I can get an interest rate on a 30 year fixed mortgage that is within .25% of all-time lows? I can't believe how lucky I am to have woken up when I did!"

Rip was indeed lucky to wake up at the right time in history. Don't miss your opportunity.

Sunday, February 21, 2010

OMG! - The Fed Raised the Discount Rate

Last week the Federal Reserve raised the Discount Rate by .25% to .75%. "OMG!" was the response by the markets on Thursday. We also saw mortgage rates rise last week. What did the Fed really do, and what does it mean to you?

Discount Rate, Fed Funds Rate & Their Purpose
The Federal Reserve (Fed for short) controls two interest rates: the Fed Funds Rate; and the Discount Rate. Both are short term interest rates used by the Fed to make monetary policy. It is important to know the difference between the two rates. The Fed Funds Rate is the rate that banks charge each other to borrow funds overnight. The Discount Rate is the cost to banks to borrow funds directly from the Federal Reserve.

The Fed prefers the banks to lend to each other (via the Fed Funds Rate) so that it does not have to lend directly to banks. Therefore historically, the Discount Rate has been a full percentage point higher than the Fed Funds Rate, so that the Fed was the lender of last resort to banks. However, that practice changed in August of 2007 when credit markets began to show signs of weakness and the Fed wanted banks to be able to borrow from the Fed if necessary. At that time the Discount rate was lowered by .5% without changing the Fed Funds. Subsequent rate decreases followed as the recession began and the credit freeze took hold.

What They Did & Why
So the Fed raised the interest rate tied to funds that it lends to banks from .5% to .75%, why? In a statement the Fed gave their reason as, "to encourage depository institutions to rely on private funding markets for short term credit." In other words, lend to each other so that we (the Fed) don't have to.

That seems fairly benign. Only $15 billion is currently being borrowed from the Fed. So why were the markets startled at first? Some are concerned that this is the first step in a new climate of tighter monetary policy, better known as higher interest rates.

Atlanta Fed President Lockhart seemed very clear on Thursday when he said that people "should not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent."

I believe him. Our economy is still much to week to begin tightening credit. Credit is already too tight. Rather this move seems to only to attempt to get closer to the 1% spread between the Discount Rate and the Fed Funds Rate that existed prior to August 2007.

What Does the Discount Rate Matter to You?
Unless you are a bank that borrows money from the Fed, then this probably won't impact you at all. The Fed will keep short term rates low (via the Fed Funds Rate) until the economy shows signs of improvement.

The larger concern for mortgage rates rests in the Feds Mortgage Bank Security purchase program (see January 9 post) which is slated to end next month. Expect to see rates bump up unless the program is extended.

Sunday, January 17, 2010

FHA Rule Change Helps First Time Home Buyers

The majority of the home sales in depressed real estate markets like Phoenix, Southern California, Las Vegas, & Florida are lender owned properties. The deluge of foreclosures in those markets has greatly increased the number of home sales as lenders take ownership, and then sell those homes. That increase in sales is good news for those of us whose livelihood depends on homes being bought and sold. But let's look at who is buying those foreclosures. A great number are investors.

Investors Role Important
I have been critical of the large number of home sales in our markets where the new owner is an investor. My argument is that true stability in the housing market can only come from homeowners who intend to occupy the properties. Investors that intend to flip properties only contribute to a bubble that will eventually pop after being over-inflated. However, even I must admit that investors play an important role in rebuilding our market.

That role involves the remodeling and even rebuilding of homes. Unfortunately many of the homes that lenders foreclose are in terrible shape. Prior owners often strip homes of appliances, fixtures, counters, cabinets, wiring, plumbing, and anything else that seems valuable. Homes are even damaged out of spite as angry occupants move out.

The average prospective home buyer cannot afford to make the repairs needed to make the home habitable. First time home buyers are typically scraping together savings to afford a minimum down payment. Investors have the funds to pay cash for the properties and make the necessary repairs. After the investor's work is through, the home is in move-in ready condition. They list the property and sell it to a willing buyer.

90 Day Seller Seasoning
Most home purchases today are financed with an FHA insured mortgage. However FHA rules require a seller to own the property for at least 90 days before a buyer can use an FHA to finance the purchase. Most of the time, the investor can make the necessary repairs to a home in a few weeks. So they were required to hold the property, unoccupied for an extra couple of months before they could sell to an FHA buyer.

On Friday FHA announced a temporary waiver of the 90 day rule. Investors, and any seller for that matter, can now sell the property immediately. There are some restrictions.
  • The waiver begins February 1, and lasts for one year.
  • Sales must be arm's-length transactions.
  • Restrictions apply to sales that increase by 20% or more.
More information can be found in HUD's press release.

This is good news for markets that need lender owned properties to turn over. It will motivate more investors to purchase and repair distressed properties, and get them into the hands of homeowners that will live in these homes.

Saturday, January 9, 2010

Are Higher Rates on the Horizon?

"What goes up must come down...," the song goes. In the world of interest rates gravity works both ways, and so the reverse "What goes down must come up..." also applies.

Federal Reserve MBS Purchases

There is some concern that 2010 will mark higher rates than in 2009. That shouldn't be a surprise. The Federal Reserve kept rates down last year to try and stabilize the economy. Not only has the Fed Funds (short term) rate been at near zero, the Federal Reserve helped to keep mortgage rates low with a massive spending spree for mortgage backed securities. The fact that it is a "spree" implies it cannot last forever, and it won't.

The Fed now holds $909 billion in mortgage backed securities. It sounds like a big number, and it is. Last year, the Fed and Treasury combined to purchase 73% of all Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securities. The Fed's spending spree, when completed in March will result in $1.25 trillion in MBS purchases. Unless you are a politician, $1.25 trillion is a lot of money.

Effect on Interest Rates

Those purchases had a big impact on mortgage rates, and therefore on housing affordability. Home prices are based on what potential buyers are willing to pay, and what they can afford. Rising rates will result in higher monthly payments on new mortgages. That means for someone to be able to afford the same payment with a higher rate, the loan amount (and the sales price) must go down. The bottom line, higher rates equals further declines in home values. Further declines in home values equals more foreclosures. Therefore higher interest rates equals more foreclosures. Here are the equations for any math nerds that are reading this.

Higher Rates = Lower Home Values;
Lower Home Values = More Foreclosures;
Higher Rates = More Foreclosures.

With continued falling home values, and rising foreclosures, will the Fed really stop the MBS purchase program. They recently warned banks to be prepared for "instantaneous and significant changes in rates, substantial changes in rates over times, changes in the relationships between key market rates (mortgages versus Treasuries?) and changes in the slope and shape of the yield curve."

Prediction or Regulation?

Was that a warning from the Fed as to what is to come? Or are they just trying to be a better regulator since they did an obscenely poor job leading up to the recession? What about the President and Congress; will they let allow rising rates to beat down an already bloody housing market? Reeling from worse than expected unemployment numbers for December, there is political pressure to continue to stimulate the housing market.

Knowing that the Fed is ending its MBS purchase program in March, the Treasury's announcement of "unlimited support" for Fannie Mae and Freddie Mac makes sense. Perhaps they will pick up where the Fed is leaving off in the purchase of mortgage backed securities. If not, the absence of such a large buyer will drive up mortgage rates as yields must be bid up to attract new investors.

The Bottom Line

There is great pressure on the government to continue stimulating housing. One way or another they should keeps rates low (continue Fed MBS purchase plan, or use Fannie & Freddie). We are still in the midst of a housing crisis, so it is undesirable to intentionally trigger another one. Eventionally the housing market must be weaned off the stimulants, but this market is not yet ready for that.