Payroll Tax Cut Paid for with Higher Mortgage Rates

The Temporary Payroll Tax Cut Continuation Act of 2011 was signed into law earlier this month. At the time it was passed we knew it was going to be financed with higher guaranty fees from Fannie Mae & Freddit Mac. These G-Fees are built into the price or interest rate of a new home loan. Today, Fannie Mae announced that they are raising their G-Fees by 10 basis points (0.1%) beginning April 1.

What this means for those looking to finance the purchase of a home, or refinancing, is that they will pay about 0.1% higher in interest rate than they otherwise would have. Lenders' rates will be impacted a couple months in advance of the April 1 start date.

So a payroll tax cut is paid for by what amounts to a mortgage tax for new homeowners and those that refinance their existing home loans.

Too Difficult to do Mortgages in Massachusetts

I just received this notice from GMAC who is one of the investors that we sell mortgages to.

"GMAC Bank (GMACB) Correspondent Funding Approved Correspondent Clients
please note that effective Tuesday, December 6, 2011, GMACB will no longer
accept new locks for properties located in the Commonwealth of Massachusetts.
This change is necessary due to the complexity of transacting business in an
increasingly difficult legal environment in Massachusetts."

Politicians in Massachusetts and other states need to understand that overly burdensome legislation and regulation on banks and mortgage companies will ultimately hurt the people for whom they are there to serve.

HARP Part Deux

Refinance to a lower interest rate, even if you are infinitely underwater on your mortgage. As long as the homeowner has continued to make the payment on time, this is part of the newly enhanced Home Affordable Refinance Program. The previous guidelines limited loan amounts on HARP refinances to 125% of the current appraised value. Removing that guideline opens the door to many homeowners that owe significantly more than their property is worth.

Here are some important points about the program:

• Mortgage must currently be owned by Fannie Mae or Freddie Mac
• Mortgages must have been acquired by Fannie or Freddie prior to May 31, 2009
• Fannie & Freddie roll out the new guidelines on December 1, but it will take lenders a couple of months to implement the program.
• Program ends December 31, 2013.

Please contact me directly with questions related to refinancing under HARP. cmozilo@homeownersfg.com

Why Aren't Mortgage Rates Lower?

Mortgage rates are very low, historically speaking. But they are also high, historically speaking. Allow me to explain why that is not a contradiction.

The Federal Reserve has made it a priority to try to keep mortgage rates low. This is one of several strategies to stimulate the languishing economy. Starting in 2008 the Fed lowered short term rates to zero (or close to it). Then over the past year or two it purchased voluminous amounts of Treasury debt and mortgage backed securities. More recently the Fed has sold short term Treasury notes (with maturities of three years or less) and purchased long term Treasury debt in a plan coined, "Operation Twist." The Fed has also reinvested money from the early payoff of mortgages into new mortgage backed securities. That should help to lower the yields on those securities and therefore the rates on the loans those securities are backed by.

Treasury rates and mortgage rates typically move in step. I've written about that many times. Back in February the spread between a 10 year Treasury and a 30 mortgage was only 128 basis points (1 basis point is 1/100th of one percent). As of last week that spread has increased to 199 basis points. The work the Fed has done should lower mortgage rates as the Treasury rates have fallen. But mortgages seem to be more expensive than they have been in the past relative to Treasuries. Why?

Fewer Loan Originators
One reason is that there are fewer loan originators than there have been in the past. There are fewer mortgage companies as many did not survive the financial meltdown. Also the mortgage broker segment (small companies that originated home loans and delivered them to wholesale lenders) has lost over 100,000 brokers since 2006. As rates drop it is more difficult for new loan originators to get into the industry to service the demand due to licensing requirements that went into effect last year in all fifty states.

Tighter Underwriting Guidelines
There are tougher requirements to get a loan today. A mortgage company only earns income on loans that close. Since more loans are cancelled or declined in process that creates extra expense for lenders without any offsetting income. Therefore the cost per loan rises and that expense is spread out among the loans that do close.

Compliance & Regulation
As a result of the real estate collapse and the financial meltdown new laws and regulation have been an albatross for mortgage companies. To avoid penalties lenders have to spend extra time and hire additional personnel solely for the purpose of ensuring customer disclosures and re-disclosures are accurate. In addition, rules concerning loan originator compensation that were born out of the Dodd-Frank Wall Street Reform Act have actually hampered loan originators' ability to compete and lower fees for their customers.

"Too Big to Fail" Got Bigger
The top five lenders control 65% of loan production, and they don't seem very interested to compete on rate. In fact, the limited capacity of a few major players encourages them to simply increase their profit margins as demand rises.

Rates are very low, and there are incredible opportunities to finance the purchase of a home or refinance. But these are the reasons why rates are not even lower than what they are.

Lower Costs for Veterans

There is some good news for veterans that are going to use their VA entitlement to obtain a VA home loan. The funding fee that funds the government's ability to guaranty VA loans is going down. The fee is dropping .5% or even more in some cases. For regular military veterans using their entitlement for the first time, the current fee of 2.15% will be reduced to 1.4%. The fee for veterans that have used their entitlement prior will be reduced from 3.3% to 2.8%. The above chart compares the current fee compared to the new fee for loans funded after September 30, 2011.

If you want more information about VA financing, please call me at 480-305-8509. Thank you.

When Will Home Prices Rise?

Here is an article written by my friend Marcia Canady at Lone Mountain Development...

Have we hit bottom yet? When will prices RISE?






The two most common questions that all Real Estate Agents hear are:

"HAS THE ARIZONA REAL ESTATE MARKET HIT BOTTOM?"
and
"WHEN WILL PRICES START TO RISE?


NO ONE CAN PREDICT THE FUTURE....but we can take a look at Historical Data AND the Leading Indicators that help us to determine the state of the Arizona Real Estate Market.


Below is a Chart that shows THE PSYCHOLOGY OF A NORMAL REAL ESTATE CYCLE.



The next Chart shows how THE NORMAL REAL ESTATE CYCLE HAS CHANGED.

We had a DIP from 2010 - 2011, so we are in a bit of a pickle...instead of being in the "HOPE" area of the cycle, we digressed a bit. But read on..there is a light at the end of the tunnel!





The Chart below shows Average Sales Price per Sq. Ft. from January 2001 - August 24, 2011.



Although we were at the Top of the Market in 2005, in 2006 - there were NEGATIVE SIGNALS of the Leading Indicators (i.e. Increase in Inventory) that forecasted a drop in the market.

Right now - there are POSITIVE SIGNALS from the Leading Indicators outlined below.


LEADING MARKET INDICATORS THAT SHOW THE MARKET WILL GET BETTER:


**NOTE: # 1 - 6 have to be in a favorable position for Prices to Rise.


1. Cromford Report Index - this shows Supply & Demand.
2. Days Inventory - How long a home stays on the market before it is sold
3. Pending Listing Count - This is the number of Homes on the Market that have Offers and are due to close escrow. It is the best indicator of increased sales
4. Contract Ratio - 100 x (Pending Listings + AWC Listings (Home that has an offer but it is contingent on something)/Active Listings (contract ratio of above 50% is a "HOT" market)
5. Monthly Sales Volume Self-explanatory
6. Listing Success Rate - # of properties listed vs. # of properties that are actually sold
7. Pending $/SF
8. Sales $/SF


#1. CROMFORD REPORT FOR ALL OF ARIZONA - SUPPLY & DEMAND

**Michael Orr created the Cromford Index which measures Supply & Demand. It is adjusted seasonally and yearly.



SUPPLY & DEMAND: It's basic economics..when there are more Buyers (HIGH DEMAND) than Homes for Sale (LOW SUPPLY), PRICES RISE - SELLER'S MARKET.

When there are more Homes on the Market (HIGH SUPPLY) than BUYERS buying (LOW DEMAND), PRICES FALL - BUYER'S MARKET.


The Economy, Government, Interest Rates, the Ability to Secure A Loan, Emotions, Psychology of the Buyers/Sellers all affect Supply & Demand and therefore affect Price.

Each City/Area has a story..but overall, Arizona is in a SELLER'S MARKET.




THE GOOD NEWS: Supply is at 83% (LOW) and Demand is at 128% (HIGH) which computes to a Cromford Index of 154! It is at its highest since October 2005!


If we look at a more detailed Graph, we see that we have been in a SELLER'S MARKET since the beginning of 2011.


Prices don't start to rise for 12 - 15 months after there is a change in Supply & Demand. If we only look at Supply & Demand, prices will start to rise in January/February 2012.


NOTE: Prices dropped 12% in July 2010 because it was the end of the Buyer's Tax Credit.





#2. DAYS INVENTORY, - this is how many days it takes to sell a home. The calculation is: 365 x (Active Listing Count/Sales Per Year).


As we can see, the time it takes to Sell a Home has been decreasing at a very quick rate since October 2010...which coincides with the Cromford Report (Demand > Supply = Seller's Market).




#3. PENDING LISTING COUNT -


A good sign, Pending Listings are approximately 20% higher than 2010.




Below we are comparing Pending Listings of 2011 to 2004 & 2005 when the market was good...and 2007 & 2008 when the market was bad. Currently, we are way above 2004 & 2005...and sales in Arizona usually slow down during the hot summer months....but it looks like we are on a good trajectory.




#4. CONTRACT RATIO -

The Contract Ratio is how many homes on the market get offers vs. how many homes remain active.


The higher the number...the HOTTER the market.

A Normal Ratio is 30 - 40. Currently, the Arizona Market is at 95 and has been in a HOT market since March 2011. It doesn't SEEM like we are in a HOT market, right? It is because there was such a huge inventory of homes AND, most of the homes being purchased are at the lower end of price scale (i.e. foreclosures/short sales etc.). Again...it takes 12 - 15 months from the change in Supply & Demand (January 2011 is when we stepped into a Seller's Market without dipping back down to a Buyer's Market) for prices to increase.




#5. MONTHLY SALES VOLUME -

If we compare 2003 to 2007, we see that Sales Volume rose to record levels in 2004 & 2005 and dropped in 2006 & 2007.



Sales Volume was down at the beginning of 2008, but rose to 5,000 by the end of the year.

The beginning of 2009 and 2010...volume reached a high of 9500 and didn't drop below 6500 the rest of each year.





In 2011, we are at around the same volume as we were in 2004 & 2005. We dipped below 2004 levels during the summer...but all indicators say that we should hold steady.






#6. LISTING SUCCESS RATE - this is the number of homes that are listed by a Realtor and then Sell.

As you can see, in 2008, only 1 in 4 homes sold that were listed. TODAY, 3 in 4 homes (approx. 75%!) are selling.

The historic norm is 65%!

People "in the know" are Buying in Arizona. They know we have reached the bottom and prices will start to rise soon.





#7 PENDING PRICE/SQ. FT. - this allows us to forecast sales about 30 days ahead with reasonable accuracy.




WHAT? PENDING PRICES/SQ. FT. HAVEN'T RISEN AND IT LOOKS LIKE THEY ARE FALLING????

Let's RE-CAP:

1. There are More Buyers than Sellers. HIGH DEMAND + LOW INVENTORY = Seller's Market

2. The Number of Days it takes to sell a house is way down

3. Pending Listings are 20% higher than 2010

4. The Contract Ratio is at 95%....a hot market is above 50%!

5. Sales Per Month are at the same levels as 2004 & 2005

6. 3 out of 4 listings are selling compared to 1 out of 4 in 2008...


So why haven't prices risen?

It takes time for the market to recover...just as it took time from the top of the market...and negative indicators in 2006 - for prices to hit bottom. Again, most of the homes being purchased are the lower priced homes..plus the foreclosures and short sales need to be bought up.

Currently, there are approx. 4,500 foreclosures on the market and 8,000 Pending Foreclosure Sales. In a normal market, there are approximately 1,200 foreclosures at any one time....so we are not far off from Normal!

Prices are at the lowest level ever. Investors know this and are Buying up the market (35-42% of Buyers are CASH Buyers)....

All indicators say that the Arizona Real Estate Market is recovering and prices start to rise in early 2012, so if you are thinking of
BUYING... THE MESSAGE IS:

BUY NOW!

All of the information presented above focuses on Maricopa County.

Scottsdale is one City that has held its prices better than other Cities. Its Cromford Index is at 166.9 (indicating a Seller's Market)..much higher than the 154 for Maricopa County.

So, if you want to Live in Scottsdale....BUY NOW!







FROM MICHAEL ORR OF THE CROMFORD REPORT (AUGUST 16, 2011)

The Main Trends we currently see are:

* Banks have increased their asking prices for REOs (Lender Owned Properties) as they become scarcer

* Short Sales are getting cheaper and easier to close, though far fewer remain Active without an Offer

* Normal sales include a higher proportion of "flips" rather than owner occupier sales and therefore Average Prices are falling

* HUD homes are selling like hot cakes (which also brings pricing averages down)

So we shouldn't expect to see good news from pricing numbers for a while yet (i.e. January 2012). For those who would like some good news here is a selection:

* Pending Listing counts dipped after the Spring Peak but remain strong for the time of year
* Expiry and Cancellation rates are very low
* Active Listing Counts are moving sideways whereas they would normally be increasing at this time of year
* The Supply Versus the Annual Sales rate is lower than at any time in the recent past with the exception of the bubble years 2004 and 2005.

Blog Post Created by:

Marcia K. Canady
REALTOR®
Lone Mountain Development, LLC

Tel: 602.515.1161
Email: Marcia@MKCLuxHomes.com
www.MKCLuxHomes.com

Refi Out of Reach

Recently there have been some headlines suggesting that the Obama Administration is working on a program to help underwater homeowners refinance to lower rates. These news stories have made the phones of thousands of mortgage loan originators ring. Unfortunately most of the calls end with, "I'm sorry there is nothing I can do to help you right now."

In 2009 the federal government rolled out the Home Affordable Refinance Program (HARP) which is designed to do what the current headlines propose. A homeowner can be as much as 25% underwater on their current loan and still be eligible for a refinance, but only if their current mortgage is owned by Fannie Mae or Freddie Mac. There are some discussion of a new program that expands the HARP guidelines, but there doesn't seem to be anything of substance at this time.

Something that needs to be addressed are adjustable rate mortgages or ARMs. There are a lot of homeowners that can only afford their home because they have an ARM today, and that rate has adjusted so low (sometimes below 3%). However, their interest rate will begin to adjust up in future years. No one knows exactly when, but Fed Chairman Ben Bernanke states that rates will remain low through 2013.

For discussion sake, let's say that rates drive up several points by 2014. Those ARM homeowners will see their payments shoot up, and they better have increased their income by then in order to keep up with their payments. Also, many of these ARM loans are not owned by Fannie Mae or Freddie Mac, so a program that allows them to refinace can help to avoid future defaults down the road. If the government wants to avoid more foreclosures, then this is something they should implement.

The Henderson Application

The Henderson Application
by: cmozilo

U.S. Debt Downgrade & Mortgage Rates

As the stock market tumbled this past week, mortgage rates rallied. Rates for home loans fell to the lowest level of the year on Thursday. On Friday, rates gave back some of their gains, but after trading hours the really big news hit the wire. Standard and Poor's (one of the big three rating agencies) believes that U.S. Treasury debt is no longer safe enough to deserve the top credit rating.

How does this news impact mortgage rates? We won't know for sure until the market opens on Monday, but logic tells us that rates must rise. If Treasury securities are now more risky, then investors will demand a higher yield. Treasure rates which are the benchmark for other bonds will rise. Investors that buy debt should also demand higher yields on corporate bonds and mortgage backed securities.

We'll be anxiously awaiting investors' reaction on Monday morning when the market opens.

June Home Sales Set New Record

Sluggish economy and unemployment be damned. In June more homes were sold in the Phoenix metro area than ever before. 10,868 homes changed hands which surpassed the prior record of 10,252 set in June 2005 (the height of the market).

The median price of $111,000 is well off the peak of the market, but has been stable since the beginning of the year. Despite the high volume of activity, homes are still very affordable.

Renters are becoming owners and owners are becoming renters. Renters have recognized that it is in many cases cheaper for them to buy a home than to rent one. At the same time, many owners have experienced a foreclosure or short sale and must wait a few years to qualify for a mortgage again, thereby forcing them to be renters. The rental market for single family homes is also very hot. The 2,280 leases signed for single family homes in June exceeded the prior record record set in July 2008.

Other June 2011 Housing Stats for Phoenix market (Maricopa & Pinal Counties):

• Single Family Detached (excludes condos, attached homes, 2-4 units) sales accounted for 9,340 transactions. With 16,968 active listings there is a supply of 1.8 months.
• 41% of single family homes were purchased with cash
• Lender and HUD owned sales accounted for 42% of single family transactions
• Short sales accounted for 25% of single family transactions

Thank you to Fletcher Wilcox of Grand Canyon Title Agency for the data. If you have any questions or desire more details about these figures please contact me at 480-305-8509 or cmozilo@homeownersfg.com.

FHA Loan Limits to Decrease October 1

Barring Congressional action, FHA loan limits will decline on October 1 in 669 counties across the country. Current limits, which are high relative to median home prices, were established via three federal laws enacted in 2008 & 2009.

Historically, FHA loans exist to serve low and moderate income home buyers. Without the housing meltdown and financial crisis they would typically be capped at 115% of the median home price for a county. The median price in Maricopa/Pinal counties (Phoenix MSA) is around $120,000. However the FHA loan limit in that same MSA is $346,250. These extra high FHA limits, inflated by laws designed to hold up the housing market, will go away on October 1.

Fortunately they won't drop to 115% of the median price, because there is a floor for FHA loan limits which is 65% of the conforming loan limits (for Fannie Mae & Freddie Mac). The conforming limit is still $417,000 so here in Phoenix the maximum FHA loan is expected to drop to $271,050.

Other notable AZ counties:

Coconino (Flagstaff & Sedona) will drop from $450,000 to $333,500.

Pima (Tucson) will drop from $316,250 to $271,050.

For my friends and relatives still in Los Angeles County, those FHA limits will drop from $729,750 to $625,500.

If those drops in maximum lending limits don't seem so bad, consider this... If Fannie Mae & Freddie Mac drop their limits, or those entities disapear, then FHA limits can fall much further.

If your thinking about buying a home in the high $200,000 to mid $300,000 range in Arizona, I would move to make that purchase this summer.

Here's a link to FHA's announcement and a list of all the affected counties across the country.

Know Before You Owe

One of the many facets of the Dodd-Frank Wall Street Reform Act was the creation of the Consumer Financial Protection Bureau (CFPB). The purpose of this new government agency is to protect consumers from predatory practices of banks and other financial institions including mortgage lenders. Elizabeth Warren, the individual appointed by President Obama to get CFPB off the ground, recently announced that they are working on the consolidation and simplification of the disclosures that lenders are currently obligated to use. The project is called "Know Before You Owe."

There are many laws that affect the mortgage disclosures and documents that a borrower must sign, and hopefully understand. The two most significant of these laws are the Truth-in-Lending Act (TILA) and the Real Estate Settlement and Procedures Act (RESPA). TILA and its relevant disclosures are regulated by the Federal Reserve while RESPA and its disclosures are regulated by HUD. CFPB brings the regulation together under one agency, and one of their projects is to combine the disclosures.

You can actually visit the CFPB website to review two prototype disclosures and vote for which one you prefer. The forms would replace the current Truth-in-Lending form as well as the unpopular and confusing Good Faith Estimate that was just updated last year.

Some in the mortgage industry complain that these forms are too restrictive and stymie loan product innovation. Others argue that loan product innovation created the housing meltdown to begin with. I subscribe to the "guns don't kill people, people kill people" argument when it comes to non-traditional mortgages. Although I recently heard another second amendment argument which was "guns don't kill people, it's those damn bullets." I'm not sure how that statement fits into the mortgage discussion, but I got a chuckle out of it.

Take a look at the two protype forms. Vote on your favorite and give the CFPB your feedback. Give me your comments below.

Questioning Quirky QRM

Can an already fragile housing market handle a further tightening of available capital? That is one of the issues that Congress and the Obama Administration have to grapple with as they attempt to create an environment where the mortgage market is less reliant on the government. This was also the topic of a presentation and panel discussion in which I particpated with several industry leaders including Amy Swaney of Citywide Home Loans, Bill Rogers of Homeowners Financial, and John Foltz. We also were fortunate to have Congressman David Schweikert, Vice-Chairman of the House Capital Markets Sub-Committee.

You may have heard the term, QRM. The initials stand for Qualified Residential Mortgage. It is the title for loans that are exempt from credit risk retention rules that came about from the 2000-plus page Dodd-Frank Wall Street Reform Act. It essentially requires mortgage lenders to retain at least a 5% slice of the loans they securitize and sell to other investors. The purpose, according to policymakers, is so that mortgage lenders keep some "skin in the game" when they sell loans in the form of mortgage backed securities.

On the surface that sounds logical. 5% doesn't sound like much, but it's enough to make sure that lenders make quality loans. And durring the real estate boom, plenty of poorly underwritten loans were sold to investors without the lender having to keep any portion of loan themselves.

The problem is that the 5% retention rule ties up the lender's capital. If a lender securitizes a pool of mortgage loans totalling $100 million, they have to keep $5 million in an escrow account until maturity or payoff of those loans. That could be a long time on a 30 year fixed mortgage. That $5 million just sits in that account waiting for there to be losses on those loans. It can't be lent out or invested any other way.

Now there are some exemptions to the Risk Retention requirements, and that's where QRM comes into play. First of all FHA & VA loans are exempt. FHA loans are about a third of the market right now, but that will soon change as maximum loan amounts are set to go down later this year. Also, Fannie Mae and Freddie Mac loans are exempt but only while the entities are in the conservatorship of the Federal government. It is expected by everyone that Fannie and Freddie will be wound down, and if they exist in the future it will be as private entities.

The only other exemption from the Retention Rule is for Qualified Residential Mortgages (QRM). QRM loans must meet the following guidelines:

• 80% Loan-to-Value (LTV) for Purchase transactions (20% down payment)
  


• 75% LTV for refinances
  


• Housing Expense to Income Ratio of no more than 28%
  


• Total Debt to Income Ratio of no more than 36%
  


• No current late payments on credit
  


• No late payments of more than 60 days in past 24 months
  


• No collections or judgements in past 36 months
  


• No pre-payment penalties, limits on balloons and ARMs

Most of these items are just common sense underwriting standards, but a few restrictions stand out as onerous. The 20% down payment requirement is the most notable. There is an alternative proposal to allow QRM loans up to 90% LTV with mortgage insurance.

Also the housing and total debt ratio limits of 28% and 36% will create complications. Calculating a borrower's income can sometimes be complicated, especially for those that are self employed or have inconsistent sources of income (commission, bonus, overtime, etc). This is a very important part of the underwriting process because the lender must verify the borrower can repay the loan. The method by which an underwriter calculates the income means much more going forward because now it can mean whether or not there is a legal violation. Look for underwriting to tighten up even further as a reaction.

By winding down Fannie and Freddie and pulling back on FHA loan limits, the government is reducing the tax payer's exposure to mortgage loan losses. They are also opening the door for the private market to return the market of purchasing home loans, probably at higher rates than the government programs. In the long run that is going to be healthy for the mortgage and real estate markets. But the housing market is still in an incredibly fragile position, and is in the second dip of a double dip.

Being sensitive to this, I think it would be wise to throw out the credit retention requirements altogether. Lenders already retain risk on loans they sell in the form of "Re-purchase Risk." If the loan they sell doesn't meet the underwriting guidelines agreed to by the investor, then the lender has to buy the loan back for the sold price.

Knowing that Congress and the Administration will not back-track on credit risk retention, I would recommend an alternative definition of QRM that allows for up to 95% LTV with mortgage insurance and throw out the housing expense and debt to income ratio portion of the definition. We are continuing to close the door on the American Dream. And yes, homeownership is still a noble dream for many Americans. We can help people achieve it responsibly.

Celebrity Homes for Sale

I find it interesting to see what celebrity homes are on the market. What would it be like to live in a home once owned by Don King or Mel Gibson, or the house from Home Alone? Here are some dwellings with the "It Factor" that you can own, if you have what it takes. Mainly that's just money.

Private Properties

How Does U.S. Debt Rating Impact Mortgage Rates?

This week Standard & Poor's (one of the ratings agencies that used to rate subprime mortgage backed securities as triple-A) downgraded the U.S. governments fiscal outlook to "negative." Uncle Sam kept its triple-A rating (the best available). The reason for the outlook downgrade was sited as the apparent inability of Democrats and Republicans to come to an agreement to eliminate deficits and begin reducing the national debt.

If Standard and Poor's is correct and Congress continues us on a path of financial mismanagement, then eventually the Government's debt (in the form of Treasury Securities) will be downgraded to a lower rating. The result of this action would be that investors who buy these securities will require a higher yield (aka interest rate).

If the rates on Treasury Securities that are guaranteed by the full faith of the U.S. government rise, then the yields of mortgage backed securities will also have to go up, as those securities are of higher risk to investors. Therefore the interest rates that homeowners will have to pay on their mortgages will be higher. The result is more money out of pocket for homeowners.

The conclusion is that paying down the national debt will lead to lower interest rates and therefore more affordable housing. That is good for everyone.

Nothing to Lose

"I'm just an ordinary man with nothing to lose." - Lester Burnham (played by Kevin Spacey) in the 1999 film American Beauty.

When Lester Burnham had nothing left to lose, he acted recklessly. He wasn't a bad guy, he simply decided that what he had in life wasn't worth keeping secure so he began to act on impulse and do what felt best at that moment.

When homeowners have zero or even negative equity they, like Lester, have nothing to lose. If there is no equity, there is significantly less motivation to continue to make a mortgage payment. This is certainly the case when they can rent a similar or even nicer home for a payment less than their current mortgage payment.

Conversely, equity motivates. Having equity in a home spurs an owner to make mortgage payments, even if their income drops or there is some other financial difficulty. Owners don't want to lose the equity they have already paid into a property. They have something to lose. They also have the ability to sell the home if they can no longer afford it, and turn that equity into cash.

Lack of equity is the number one predictor of homeowners that will default on their mortgage. This is why there is a great deal of debate regarding what an appropriate down payment should be to purchase a home. Conforming loans (Fannie Mae & Freddie Mac) offer as little as 3% down payments. FHA requires a minimum 3.5% down payment. VA requires no down payment for eligible veterans and active duty servicemen.

Housing industry groups and consumer advocacy organizations want to keep down payments low so that homeownership is possible for low-income and middle-class populations. Others want to see minimum down payments increased to 10% or even 20%.

Saving for a down payment is the number one obstacle for homeownership, so any increase will result in fewer new homeowners. But those homeowners will be motivated to continue to make mortgage payments since they will have "something to lose."

Millionaires vs. Billionaires

ARE YOU READY FOR SOME FOOTBALL!!??

Perhaps not this season. The owners and players are currently working to renegotiate the collective bargaining agreement and avoid a lockout. I subscribe to Freakanomics Radio podcasts and found this episode to be a great explanation of the issues at hand.

Millionaires vs. Billionaires | Freakonomics Radio

Weaning off FHA

In 2005 & 2006 at the height of the housing bubble, less than 2% of mortgages were insured by the Federal Housing Administration (FHA). In 2010 FHA accounted for 38% of all new mortgages. As the private market for home loans collapsed in 2007 & 2008, FHA has stepped up to take a larger and more important role in housing.

But the desire to have the government less involved in the mortgage market has FHA pushing back. Last year there was a tightening of credit standards, as well as an increase in the premium that borrowers must pay to have their loan insured by the FHA (FHA insurance pays a claim to the lender in the event the borrower defaults).

In April of this year FHA will once again raise annual premiums by .25% of the loan amount (from .9% to 1.15%, a 28% increase). That equates to a $31.25 increase per month on a $150,000 mortgage.

In FHA's announcement explaining the reason for the increase, along with the obvious increase in revenue, they also expressed a desire for more home loans to be handled by the conforming market. Conventional loans with 5% and even 3% are available for borrowers with excellent credit scores, and less expensive mortgage insurance premiums. So they should be successful in reducing the number of borrowers that use FHA loan programs.

But if the highest quality borrowers (those with the highest scores) can get a better deal on conventional loans, and borrowers with lower scores are still stuck with FHA, then FHA will lose those higher quality borrowers which may hurt their overall quality and financial position.

Any insurance company (FHA, auto insurance, etc) needs customers will little or no chance of requiring a claim. Those customers going forward will likely choose conventional mortgage products with less expensive premiums.

Bail Me Out!

Like many homeowners, the Petersons find themselves in a predicament. They purchased a home in 2007 for $450,000. They like the home and the neighborhood. Both Mr & Mrs Peterson have stable employment and can afford the home. But some of their neighbors are not so fortunate.

There have been a few foreclosures and short sales on their block. In fact the home on the corner had an open house last weekend. It's a short sale for a larger home on a nice size lot. The Peterson's always liked the exterior of the home, so they decided to walk down the block and take a peak inside.

They liked what they saw. Not only was it a larger house, but it had nicer upgrades: granite countertops, stainless steel appliances, wood floors, and beautiful landscaping in the back yard. This seemed much nicer than the Petersons' home. Mrs Peterson picked up the flyer and her eyes widened as she read the list price, $325,000! If this house was going to sell for $325,000, then what would their more modest home sell for? $250,000, or maybe less. Mr Peterson did some quick math in his head. They were probably around $150,000 upside down. He thought they might be slightly upside down, but nothing this severe. The Petersons' hearts sank.

The agent that was holding the open house introduced herself to the shell-shocked couple. After some quick pleasantries, she got the story out of the Petersons. It doesn't matter whose idea it was, but after 30 minutes the three of them came up with a plan.

The Petersons would purchase the house on the corner which they love. They would do an FHA loan with minimal down (3.5%). They would put their current home up for rent, and with their income they have no problem qualifying with both payments. But here's the kicker, in reality after closing on the new home, they will end up listing their current home as a short sale.

The plan makes perfect financial sense for the Petersons. They can get a bigger, nicer home with a smaller mortgage and lower monthly payment. And they get out from underneath a mountain of debt on their current home. This should be perfectly okay, right?

Wrong. This is a common strategy which has a name, "buy & bail." Mortgage lenders quickly caught on to this in recently years. A prudent underwriter for a mortgage company would deny the Petersons' application for the FHA loan on the new home. The reason is that they are likely going to default on their current mortgage. Why should the mortgage company care about the old loan?

The Petersons are going to pay the new loan as agreed. But most loans have a government guaranty or backing of some kind (FHA, Fannie Mae, Freddie Mac, VA, FDIC, etc). Therefore the industry is sensitive to any mortgage being defaulted, even for other mortgage companies. One should also be aware of their potential tax and deficiency liability will be when selling a home as a short sale or going into foreclosure. Consulting an attorney is recommended.

Home Buying Benefits for the Troops

Many people are aware of the home loan program for veterans created by the Veterans Administration. The VA loan program allows veterans to finance 100% of the purchase of a home for their primary residence. It's really the only zero-down mortgage that still exists.

There is also another benefit for military personnel that have recently served. Remember the first-time home buyer tax credit? That expired for us civilians last spring. But for military personnel that were deployed between January 1, 2009 and May 1, 2010 they have until April 30, 2011 to purchase a home to qualify for a tax credit of up to $8,000.

Here is a list of the reasons why Veterans and active military personnel have an amazing home buying opportunity:

• Tax Credit of up to $8,000 for purchasing a home by April 30, 2011
• Historically low interest rates
• Home prices reduced by 50% or more from their highs a few years ago
• Zero down payment required for those eligible for a VA home loan

If you or someone you know is a veteran or active duty military and is interested in buying a home. Please contact me at Homeowners Financial Group. 480-305-8509 or cmozilo@homeownersfg.com.