Real Estate and Financial News

Foreclosure help another first step

2008-11-12T14:19:00.000-08:00

Fannie Mae and Freddie Mac have a new plan out to help homeowners facing foreclosure.

Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans' principal may be deferred, though not reduced.
Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.

This plan differs from the housing bill passed in August. The original plan allowed borrowers to refinance into a FHA 30 year loan at 90% of the current appraised value of the home. This required that the current lender agree to write down the loan, which is at their sole discretion. Even though it was in the best interest of the current lender (they would likely lose more money by going forward with foreclosure), very few loans were modified.

This new plan removes the stipulation that the current lender agree to the modification, but also does not write down the principal amount of the loan.

In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.

"Loan modifications are not a gift ... the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment," said Brian Montgomery, commissioner of the Federal Housing Administration. "This is not loan forgiveness."

Another major issue in this loan modification is that it does not address a majority of the loans likely in or headed to foreclosure - subprime loans.

Though Fannie and Freddie own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.

This plan is an important first step, and hopefully its success will encourage private lenders to follow suit. As always there are no simple fixes to complicated problems, and it will take some time to dig our way out of the mess we have created, but this is an encouraging step.

Full article.

The mortgage market likes Obama

2008-11-05T11:30:00.000-08:00

Using the same 30 year fixed loan with a 20% down payment that I have used in previous posts, the rate is now back down to about 6.125% when it was 6.625% just yesterday. What a difference a day makes.

A word from Jim Turner and Warren Buffet

2008-10-24T11:12:00.000-07:00

While looking for ideas for writing a spooky article for this month’s newsletter I thought I had found something really scary: The Dow Jones Industrial Average. Eeeek! So I stared into the face of this terror, and got into the spooky spirit of this all-hallowed-holiday and started writing a bone chilling article about the end of the economy. Chaos in the streets, martial law, dogs and cats sleeping together! But then a real party-pooper came along and canceled all of the festivities of fright and started turning on the lights. It was Warren Buffet.

It turns out that this wet blanket was cautious about the market when everyone else was
having a celebration. His entire personal portfolio was in Treasury Bonds, not in the stock market at all! Now that everyone is scared out of their wits in the stock market what does he do? He calmly walks in and starts converting almost all of those Treasuries to stocks! Doesn’t he know that the stock market just dropped 36% from its all time high of a year ago? Oh…wait a minute.

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful," said Buffett. "And most certainly, fear is now widespread, gripping even seasoned investors."

I suppose he must have seen how disappointed he had made the partygoers who were dressed up as stockbrokers and financial analysts. He then threw them a bone by saying: "In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary." But before the DJ could start playing “The Monster Mash” he sobered up the crowd again by saying: "Fears regarding the long-term prosperity of the nation's many sound companies make no sense. Most major companies will be setting new profit records 5, 10 and 20 years from now."

This article isn’t scary at all! Especially when it comes to real estate! Everyone needs a place to live, so that even when times are tough housing always doubles in value (or more) every decade. That’s including the busts that occur almost every decade like clockwork. Even when I find an article that is really trying to be scary like: “Housing starts hit record low”, I can’t even get a little chill. Even the dimmest economics student knows from their “Supply and Demand 101” class that when you decrease inventory, but increase population, you have a housing shortage. So when the current overstock of inventory has sold, normal demand and reduced supply will drive prices up. This is still good news for the homeowner and real estate investor.

Perhaps I never really got scared on Halloween anyway. Now that I think of it, I come to the party for the fun outfits, the silly games and for the people. I hope I haven’t let you down this year. For those of you who really need the fear and the terror to really enjoy the holiday there’s
always CNN.

Credit market beginning to thaw

2008-10-21T09:56:00.000-07:00

Watching the Dow over the last week or two has probably given folks a little motion sickness and whiplash. Mortgage rates over the last week have been similarly volatile. After jumping up a percentage point last week, they have improved dramatically in the last few days. Using the same 30 year fixed loan with a 20% down payment that I have used in previous posts, the rate is now back down to 6.0% after climbing to 6.875% a week ago. Lower rates indicate more willingness to loan, and could give a much needed spark to the real estate and mortgage industry.

There are other signs that the credit market is beginning to thaw. The overnight LIBOR rate has fallen to 1.28%, below the Federal Funds rate of 1.5%, suggesting that credit markets are stabilizing. "Libor is a daily average of what 16 different banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages...Overnight Libor soared to a high of 6.88% earlier this month after the government's $700 billion bailout bill was signed into law."

Other signs of the credit market beginning to thaw:

Larger companies that were having difficulty getting overnight loans a month ago, are now finding a market for their 30 and 60 day loan paper.

Shoreline School District sold capital-improvement bonds valued at $25 million for a total interest rate of 4.94 percent, said Trevor Carlson...As recently as last week the interest rate — and the potential cost to the district's taxpayers — would have been substantially higher, he said.

King County's sale of $48 million in short-term "bond anticipation notes" for jail improvements attracted eight bidders — more than expected, said Ken Guy, the county's finance director.

CNN Money
Seattle Times

While you're waiting, take the time to get prepared

2008-10-16T17:49:00.000-07:00

If you are interested in buying a house, but not ready to act on it at this point, it would be wise to prepare yourself to be a strong buyer in the meantime. As 100% loans have all but disappeared, you should be setting aside some money for a down payment.

In addition, you should make sure your credit score is as high as possible. Lenders have become more restrictive and have raised credit score requirements. A higher score also means a lower rate on your loan, which translates to a lower house payment and/or a better house.

While the credit score is calculated on various formulas that aren't published, the following are the general portions that make up your score:

35% Your payment history Pay your bills on time. Automating payments online can help. Mortgage or rental lates are particularly damaging to your score.
30% How much you owe Keep balances on credit cards and other revolving accounts below 50% of your credit limit, preferably below 30% (lower is always better).
15% Length of your credit history Rather than let old cards go dormant, charge a latte a month (then pay it off). No activity lowers your score.
10% Your new credit Don't open unnecessary new accounts. And if you're rate shopping for a mortgage or an auto loan, do it within two weeks; multiple requests could ding your score.
10% Your mix of loans You can't do much to change this (except get a credit card if you don't have one). "No payment for 90 day" type loans are also a ding against your score.

You can also get a copy of your credit report at annualcreditreport.com. Check to make sure there are no errors on your report. Correct any errors as soon as possible.

Also, if you have any collections on your report, depending on how old they are, it may be wise to leave them alone. By paying them off, you make them a more recent factor in your score than they were before. If they are sufficiently old, it may make sense to pay them at the same time your mortgage loan closes.

Other helpful information can be found here on my website seanday.net.

Both Dow and rates climb, Fed considers more action

2008-10-13T13:37:00.000-07:00

The Dow closed up 976 points today as investors (finally) reacted to worldwide government interventions to ease the crisis. This is the largest single day point gain, and the fourth largest when viewed as a percentage gain (11.1%). This of course follows a historic slide over the last week.

At the same time mortgage rates climbed further, up almost a full point since Thursday to around 6.875%. Though the stock market is now reacting to the Fed's recent moves, credit markets remain somewhat frozen.

The Fed is considering a less talked about provision in the bailout bill that allows it to pump money directly into banks for an equity share. Rather than buy up the mortgage backed securities that have unstable value, the Fed can pump money into the banks and credit market. An article in the Seattle Times does a good job of explaining the different strategies and benefits.

If Paulson pays banks exactly what their mortgages are worth, he will not increase banks' capital (or their lending ability) — he will merely convert one asset (mortgages) into another (cash), making no impact on the credit crisis. If, to protect taxpayers, he buys mortgages at lower prices than banks list them, banks will have to write down their capital and consequently contract lending — and the credit crisis will worsen. If Paulson overpays for mortgages, he may marginally augment bank capital, but also incur massive taxpayer losses when he later resells the mortgages at their real price.

The silver lining is a little-noticed provision in the bailout bill allowing Paulson — if he chooses — to buy ownership stakes in banks. According to Robert Johnson, the Senate Banking Committee's former chief economist, this would cost roughly $375 billion less than the mortgage-buying plan and, better yet, more aggressively attack the credit crisis.

Mortgages may be underpriced today, but they retain some value on banks' books. So rather than purchasing mortgages (a capital-neutral transaction), Paulson could buy bank stock, infusing banks with new capital on top of their mortgages. That would exponentially increase lending capacity, prevent taxpayers from buying toxic assets, give the public a share of future profits, and grant regulators ownership leverage to restructure bank management.

Full Article

Crisis metaphor

2008-10-12T19:31:00.000-07:00

Here is an article that was published in the Seattle Times that uses It's a Wonderful Life as a vehicle to explain the current mortgage crisis. It is pretty basic, but introduces the subject of credit-default swaps which is a complicated piece of the crisis puzzle.

Mortgage rates up sharply

2008-10-09T12:47:00.000-07:00

The rate on a 30 year fixed mortgage shot up by over half a point overnight following the drop in the Federal Funds Rate.

The Federal Reserve has dropped the rate that banks lend to each other from 4.25% in January to 1.5% yesterday, trying to spur economic growth without increasing inflation. Yet mortgage rates have been (relatively) steady in the high 5% to low 6% range for most of the year.

This latest point drop had an effect opposite to what people may expect. Rates at one of our lenders shot up from 5.875% to 6.5% on the same 30 year fixed loan. The effect of lowering the Federal Funds Rate is more a long term economic fix, as it can take six months to increase borrowing. It is unusual to see such a dramatic jump in mortgage rates as a response. It is possible things may settle down in the next couple of days, but clearly lenders are not any more confident in the market, and credit (at this point) remains tight despite the Fed's actions.

Spooky

2008-10-09T09:00:00.000-07:00

Forwarded to me by a friend

Prices down, but activity up

2008-10-08T13:40:00.000-07:00

An article in the Seattle Times detailed statistics released by the Northwest Multiple Listing Service for the month of September. While the median price in King County slid by 7.8% compared to September of 2007, it is an improvement over August's numbers, and the number of pending sales is up 15% from a year earlier. These are small, early indications that the market may be beginning to bottom out.

With the recent financial news, the market will continue to change of course. Rates are still very good and could possibly improve with the recent drop in the Federal Funds rate (though the past year's rate drops have had little effect on mortgage rates). Home prices are also back to levels seen in March of 2006. If you are interested in buying a house (and of course have the ability), the buyer's market may be peaking.

The Fed drops the rate again

2008-10-08T10:23:00.000-07:00

The Federal Reserve has dropped the Federal Funds rate by a half a point from 2% to 1.5%. This is one more response to the worsening economy and stock market.

As I said, I'm not sure how effective this will be in loosening the credit markets. The rate drop was matched by similar rate drops in the U.K., Canada, Sweden, Switzerland, China, Hong Kong and Australia over the past day, so with this world-wide coordinated effort there may at least be a psychological boost to the market.

Wall Street Journal

CNN Money

Bernanke speaks

2008-10-07T12:29:00.000-07:00

Federal Reserve Chairman Ben Bernanke released a statement predicting that the global economy will be down well into 2009 and hinted at a possible future rate cut. The next scheduled meeting is October 28-29, but there is a possibility of an emergency meeting.

CNN story

I don't believe another rate cut is warranted at this point as it is not rates holding people back from borrowing money, but the banks refusal to make the loans in this uncertain climate. There are also less funds to loan with the collapse of the secondary mortgage market, further restricting banks ability to approve loans. Hopefully the Fed's plan to buy up short-term debt (as well as troubled mortgage backed securities) will help unfreeze the credit market.

Rates are still historically low, at least in the mortgage lending market.

More Federal Relief

2008-10-07T11:08:00.000-07:00

On the heels of the passing of the $700 billion bailout plan, the Federal Reserve has expanded it's economic rescue plan and is planning on buying massive amounts of short term debt to try to unclog the credit markets.

Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

In more normal times, about $100 billion of these short-term IOUs were outstanding at any given time, sold by companies to buyers that included money market mutual funds, pension funds and other investors. But this market has virtually dried up as investors have become too jittery to buy paper for longer than overnight or a couple of days.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to provide a "backstop" that would give companies a new place to get cash, the Fed said. The action makes the Fed a crucial source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

Full Seattle Times Story

Housing bill

2008-08-07T11:02:00.001-07:00

The "American Housing Rescue and Foreclosure Prevention Act of 2008" was passed by both houses and signed by the President on July 30, 2008. The measure provides mechanisms to help the troubled housing market as well as tighten lending practices and reform financial institutions. Though the 238 page law can be found online, I thought I’d hit a few of the highlights here.

One of the provisions garnering the most attention is the program to allow homeowners in danger of foreclosure to refinance into a new 30 year fixed loan. At a glance, the bill provides that the homeowner would be eligible to refinance into a FHA 30 year loan at 90% of the current appraised value of the home. This requires that the current lender agree to write down the loan, which is at their sole discretion. However, it is estimated that banks would lose an average of $25,000 to this program vs. $64,000 by letting the house go to foreclosure. As a trade off for this opportunity, any future appreciation realized in the home would be shared with the FHA.

The bill also creates an independent regulator to oversee both Fannie Mae and Freddie Mac, while increasing the dollar amount of loans they can buy or guarantee from $417,000 to a maximum of $625,000 (based on individual markets). FHA down payment requirements increase from 3% to 3.5% as well, and the bill provides an additional $4 billion for hard-hit communities to buy and rehabilitate foreclosed homes.

One bright spot in the legislation is the tax credit for first-time homebuyers. A taxpayer is considered a first-time homebuyer if they have had no ownership interest in a principal residence in the last 3 years. If your home purchase closes before June 30th 2009, you may be eligible for a tax credit for 10% of the purchase price, up to $7,500. This is a credit, not a deduction, so it can wipe out what you owe and get you a refund as well. It does phase out at certain income levels.

However, this is not a gift. The credit must be paid back over a 15 year period ($500 a year for a $7,500 credit). If you sell the house before that time, the remaining repayment will come from the gain. If there is not enough, or no gain at all, you will not be required to make up the difference. In essence, the tax credit is an interest-free loan with the government taking all the risk on house appreciation. Plus with the time value of money, you will be paying back less than you received. This is a great benefit to first-time homebuyers, and could give the market a little boost.

Foreclosure

2008-06-17T22:15:00.000-07:00

Here is a good description of foreclosure and pre-foreclosure options detailed on the blog of one of the agents in our office. Hopefully you will never need to go through any of this, but with so many people going through this around the country, it can't hurt to know the related terms/options available.

Home Foreclosure Options Explained

Foreclosure occurs when the homeowner falls behind in monthly mortgage payments and defaults on the loan. The lender repossesses or sells the home in order to satisfy the debt. Typical options you can pursue to avoid a home foreclosure are set out below. Your solution will depend on your financial status, the mortgage's default status, the type of loan you have and the various laws that apply.

List of options.

Thinking of refinancing? Don't let a good rate slip away.

2008-06-11T09:00:00.000-07:00

Are you watching interest rates to see a substantial dip before moving ahead with your planned refinance? When you see that dip, you may not be able to react quickly enough to lock in that good rate.

Lending guidelines have tightened significantly and underwriters are taking longer to pore through a borrowers documentation. You can't really lock in a rate until you know your credit score and documentation will get you that loan approval. There are fewer lenders remaining after the mergers and closures, and the remaining underwriters are backlogged. It can take a week or possibly three to get approval. In that time rates may have bounced back up and your refinance doesn't look so attractive anymore.

Get pre-approved today. Once you have that pre-approval, we can watch rates daily and be prepared to lock in a good rate when it comes along. All it takes is a little time to gather your documentation and $19 for the credit report.

It is a great idea to watch rates. It is absolutely essential to be pre-approved to lock in that good rate before it slips away. Contact me today.

Comic relief

2008-06-10T11:47:00.000-07:00

Click to enlarge.

Don't wait on the sidelines

2008-06-09T13:10:00.000-07:00

The real estate and lending market is pretty uncertain these days. The Puget Sound area has fared better than most around the country, but we are feeling our own pain.

It is understandable to feel hesitant, but this is actually a great time to be a buyer. There is a surplus of homes on the market, and buyers are enjoying their first real buyer's market in some years.

However, though rates are still historically low (low 6% range), many buyers are being kept out of the market due to tighter restrictions from lenders. As I mentioned previously, 100% financing is pretty much gone outside of VA finacing. Higher credit score and lower debt ratio requirements are keeping other buyers out as well.

Do you know where you stand? Are you staying out of the market for fear that you can't qualify? Or are you staying out of the market because you are waiting for prices to hit bottom?

Don't wait on the sidelines. Find out if, and for how much, you can qualify. Even if you know you can qualify, you should get pre-approved as soon as you are in the market for a house. The pre-approval process can take some time, and you want to be ready to nab that perfect home at a great price. If you wait to start the loan process until you think prices have "hit bottom", you could be weeks away from acting on it. In the meantime interest rates continue to change and have been on the rise in the last couple of weeks.

As always, I want you to be the strongest buyer possible. Contact me today to see if you can qualify. After some questions and some quick calculations, we can tell where you stand. If you are ready to enter the home buying market, it will only cost $19 for a credit report and a little time to gather your documentation. By being pre-approved now, you are ready to act when that perfect home comes along.

100% financing no longer available

2008-05-14T11:53:00.000-07:00

First a little refresher on the lending market.

Lenders loan money to home buyers, then typically sell the loans to investors on the secondary market to obtain more money to lend out. In the past, investors rushed to buy up these Mortgage Backed Securities, seeing them as a safe investment with a nice return. In the rush of cheap money the last few years, some lenders didn’t bother to qualify the people they were lending to. This lack of underwriting, in addition to rising unemployment in the Midwest, pushed defaults and foreclosure rates to record levels. Investors unsure of which securities held bad mortgages stopped buying the securities altogether. This in a nutshell is what lies behind the “Subprime Crisis”.

When investors stopped buying loans, many lenders had no funds to lend out, and many (246 at last count) went out of business. The remaining lenders have tightened guidelines to stabilize the industry, and in hopes of making mortgages attractive again to investors. These steps included eliminating “no document” loans and 80/20 programs, reducing the amount of debt a borrower may carry, raising credit score requirements, and requiring significant down payments in declining markets.

The latest change comes from the mortgage insurance industry. As you may know, mortgage insurance (MI) is required on any loan that exceeds 80% of the homes value. MGIC, a leading MI company, will no longer issue insurance on loans over 97% loan to value (LTV). Going to 97% also requires a credit score above 680. In restricted markets they will only go to 90 – 95% LTV. Restricted markets include the entire states of California and Arizona, and the Tacoma area in our own state. Cash-out refinances and condominiums have further LTV restrictions.

So with mortgage insurance unavailable, lenders will not issue loans above 97% LTV. This of course affects first-time homebuyers the most as many have not saved up for a down payment. This will eliminate more buyers from an already slow real estate market.

Because of the slower market, I imagine lenders will seek to find a way to assist first-time homebuyers, but it may be some time before that happens. In the meantime, homebuyers should concentrate on saving up for a down payment.

While you're waiting for prices to drop, you're losing buying power

2008-02-25T12:28:00.000-08:00

Many buyers are sitting on the sidelines waiting for home prices to drop or bottom out. While they've been watching prices, interest rates have gone up half a point in the last three weeks.

For example, three weeks ago a principal and interest payment of $2,000 would have qualified you for a $342,000 home at 5.75%. At today's rate of 6.25%, that same $2,000 principal and interest payment now qualifies you for only $325,000.

You've lost $17,000 in purchase power and it is unlikely that the home's price has dropped by 5% in that same three weeks. In the last year home prices in King County dropped .2%, and in Snohomish County prices actually increased by 2.4%.

As an Integrated Agent at The Real Estate Group, I am both a Real Estate Agent and a Loan Officer. While I can save you some money during the real estate negotiation, it is likely I can save you even more when I help you obtain financing. I will search for the best loan program to maximize your buying power, and I will keep an eye on rates each day and do my best to lock you in at the lowest rate available.

Home buyers are in their strongest negotiating position in the last 5-10 years. Don't wait any longer. You can't afford to.

What 80% of buyers find out the hard way

2008-02-25T12:15:00.001-08:00

That their loan officer sabotaged their home purchase.

In speaking with a number of Escrow Officers, they estimate that about 80% of people signing their loan documents when buying their home are surprised to see that the rates and fees are higher than they were told. They try to reach their loan officer on the phone, but no one answers. Do they sign for the loan with worse terms, or do they risk losing the house?

Law requires that, if requested by the borrower, the closing statement figures must be given one business day in advance. Without this review, clients see the final figures for the first time at the closing table when they sign their papers. Victims of these bait-and-switch tactics are put on the spot and usually sign the papers with these higher terms in place.

There are several advantages of using an Integrated Agent from The Real Estate Group when purchasing your home. Integrated Agents are both real estate agents as well as mortgage loan officers. Your Integrated Agent will have all the important figures at hand throughout your transaction, so you will always have up-to-date figures available to you. Also, typically a real-estate agent will be with you when you sign your papers, but rarely/never your loan officer. As we are one in the same, you will have both at your signing to explain every figure and answer any questions.

An Integrated Agent from The Real Estate Group is your strongest ally in buying or selling your next home. Please call me or drop me an e-mail if you are interested in learning about the best way to buy a home.

Is your loan officer licensed?

2008-01-24T11:48:00.000-08:00

In Washington State, mortgage brokers and loan officers now need to be licensed. Beginning in January of 2007, loan officers needed to submit fingerprints and undergo a background check. Sometime last year they also needed to pass a competency exam and complete some continuing education.

At the end of 2006 there were approximately 18-19,000 loan officers. 13,722 applied for the license, and by the end of last year, only 5,720 had successfully completed the entire process. Part of this is due to the slowing industry, but I wonder if some are still operating without a license.

Any advertising by a loan officer must list their license number. The Department of Financial Instiutions (DFI) is advising consumers to verify the status of loan brokers or originators either online at http://dfi.wa.gov/cs/list.htm or by calling 877-746-4334.

Sellers looking for any kind of help

2008-01-23T21:08:00.000-08:00

Sellers and their agents have been turning to St. Joseph for help in selling their homes. The Catholic saint is believed to help with home related matters. You can purchase a “real-estate kit” online for about $5, and it consists of a 3-inch statue of the saint, a prayer and burying instructions. Apparently burying the saint upside down near the for-sale sign, front or back door will help you sell your home more quickly.

Some Catholic leaders think burying St. Joseph is not terribly respectful. They also say that faith and devotion are necessary, otherwise it is simply superstition. I would also hope that the sellers’ agents are doing everything in their power to help sell the home, and not simply relying on faith.

The FED drops both rates again

2008-01-22T13:07:00.001-08:00

The Federal Reserve in an unscheduled meeting today dropped both the federal funds rate and the discount rate by 3/4 of a point. The federal funds rate (the rate many credit card and home equity rates are based on) now stands at 3.5%. There is speculation that the FED will drop rates again at their normal meeting on January 30th.

It is not clear what affect this will have on mortgage lending rates. As I have mentioned previously, lending rates follow the bond market, not the rise and fall of prime. The rate drop was primarily to ease concerns about a tight credit market for business and to probably to bolster the stock market. As of 4:30 east coast time, the DOW is down 128 points, and has dropped substantially in the last few days.

I don't know that this rate drop is a wise move. The U.S. (unfortunately) depends heavily on foriegn investors to sustain our spending. Lower rates will attract fewer investors, so that spigot of cash may be shut off. Our dollar is already weak in the world market, and a weakening dollar means any investment in U.S. dollars will be worth even less.

There are also significant inflationary pressures with rising fuel and food prices. The FED would typically raise rates to fight inflation, not lower them drastically as they have done today. It seems that the rate drop was simply to stop a panic in the stock market. I don't know that it will work, or if it is worth the risk as it may create much larger problems in the near future.

Read beyond the headlines

2007-11-28T12:43:00.000-08:00

I saw this on money.cnn.com the other day:

No wonder there is so much uncertainty as to what is going on. If you click the links you find that these stories cover back-to-back one-week periods. This sort of time period is hardly indicative of any trend, especially when they conflict with each other. Also, when you read beyond the headline about "sliding" applications, you find this information:

Refinance volume plunged 15.3 percent during the week, while purchase volume increased 6.1 percent.

So actually purchase loans increased during this time period which is a better indication of what the real estate market is doing. You certainly wouldn't know that from reading the headline.

CNN is of course dealing primarily with national trends which may or may not have any bearing on your local market. Keeping an eye on your local information and speaking with local professionals is your best bet to keep a finger on the pulse of market.

Mayor bans the phrase "I don't know"

2007-11-28T12:07:00.000-08:00

The mayor of a Siberian town has banned 25 phrases including "I don't know", "I can't" and "It's not my job". People using these phrases will be on their way to unemployment.

I embrace this mentality. In past jobs when I was supervising projects and people, when people contacted me with a problem, I expected them to have thought of some possible solutions before they contacted me. They were deeper in the project than I was and would have a better understanding of the problem. They often came up with good solutions, and could then check in with me for my opinion on which course was best. It certainly simplified my job and as the article states "To say 'I don't know' is the same as admitting your helplessness."

As an Integrated Agent, any time I normally would answer 'I don't know', I replace it with "I will find out". I try to have as much knowledge as possible, but I am certainly not all-knowing. I am your advocate and it is my responsibility to provide you with the best information possible. And you definitely won't hear "It's not my job". That is just another dead-end answer. I will contact the responsible party and find out what is going on. As always, I want you to be the strongest, most well-informed buyer out there.

How walkable is your new neighborhood

2007-11-27T22:15:00.000-08:00

I have added a Walk Score tile onto my website. The Walk Score tile allows you to enter in an address and compute the walkability of the surrounding neighborhood.

The formula computes the score by seeing how close the home is to grocery stores, restaurants, coffee shops, etc. You can use this tool to compare different homes and neighborhoods you are considering. Check it out!

When the FED lowered the prime rate, why didn’t mortgage rates go down?

2007-10-23T15:22:00.000-07:00

The Federal Reserve lowered the prime rate by .5 a point at their September 18th meeting. A major reason stated for lowering the prime rate was to prevent the mortgage market’s trouble from affecting the economy.

“…the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

Their major concern is to protect the broader economy, not necessarily to save the real estate market. As I mentioned in an earlier post, I didn’t think that lowering interest rates would bring any new buyers into the market. As it turns out, lowering the prime rate didn’t produce a similar lowering of mortgage interest rates anyway.

Mortgage interest rates are not tied to the prime rate. They are more influenced by the bond market and inflation. The graph below shows how the rates have moved mostly unrelated over the past three years.

The immediate effect of lowering the prime rate is a drop in your credit card and home equity lines of credit rates. The drop in prime did little to lower mortgage rates, but they are still historically low. Lowering prime may help boost consumer confidence and might bring investors back, but if you’re waiting for them to drop prime again to get a better rate before buying a home, you may be waiting in vain.

“Mortgage Meltdown” is an overstatement

2007-10-17T15:16:00.000-07:00

Part of the reason I haven’t written an entry on this blog in some time is the glut of sensational articles in the media. With headlines that scream CRISIS, MELTDOWN, and FORECLOSURE it is hard to get to the meat of the issue. Many potential buyers think that they can not get financing. This is not true for most borrowers.

First a little flowchart of how money is lent out. The mortgage broker or bank approves a loan for a home buyer. Rather than keep the loan and wait for the monthly payments, that loan is likely sold by the bank in order to get more funds to loan out. The way these loans are sold is by bundling many loans together and selling them as mortgage-backed securities on the bond market. Investors buy the securities and get a rate of return based on the types of loans in the security. The bank gets the needed cash to lend; the investors get a regular return.

The mortgage market’s problems stem from the past few years of easy lending requirements. The investors were all too eager to buy the mortgage-backed securities, not accounting that there was some risk attached to them. As the investors were buying without analyzing risk, some lenders (particularly sub-prime) stopped looking over borrower’s documentation. Borrowers were getting approved for more money than they could afford. Some borrowers never should have qualified at all. The lenders are to blame for not qualifying the borrowers; the borrowers are to blame for not realistically judging their ability to pay, and the investors are to blame for not balancing the return on investment vs. the risk.

Some loans started going bad --> Investors stopped buying the mortgage-backed securities --> Funds for new loans dried up --> Many lenders have gone out of business.

The remaining lenders have tightened their guidelines, partially to reduce the risk of foreclosure, but mostly in hopes of getting investors to start buying the loans again. This does mean that some borrowers no longer qualify, but many still do. The high loan-to-value and “no documentation” loans are largely gone, but the borrower that earns a paycheck and has a decent credit score can still get financing. 100% financing is still available as well, and mortgage insurance (if needed) is deductible just like interest on your loan. Rates are still at historical lows. This is actually a great time to be a buyer with low interest rates, a large supply of homes for sale, and employment still strong in the area.

Some sanity has returned to the lending industry. Lenders are back to qualifying borrowers based on their documentation. The highest risk borrowers will not qualify. It may be a while before the panic of the investors subsides, but for many borrowers not much has changed.

A long walk to the bathroom

2007-10-17T14:10:00.000-07:00

The city of Bothell has a population of about 31,000 residents, and it covers roughly 12 square miles. The odd thing about Bothell is that roughly half of the land area is in King County, the other half in Snohomish County.

A new condominium complex adds to this confusion. The county line splits the complex so that thirteen of the buildings are in Snohomish County and three in King County. Worse yet there is one building that actually straddles the line. This means that a home’s bedroom might be in a different county than the bathroom. I imagine the permit process for this building was a nightmare.

I wonder if they will get a property assessment from each county. Will the King County half be worth more than the Snohomish County half?

More Hints from the FED

2007-09-01T12:05:00.000-07:00

On Friday, Federal Reserve Chairman Ben Bernanke spoke to a group of economists and indicated that the FED wants to avoid bailing out investors from the consequences of their financial decisions. Investors scooped up mortgage backed securities at an incredible rate the last couple of years. Often these securities were backed by riskier subprime mortgages, and these more speculative investments are now losing value due to the subprime mortgage market’s fallout. Bernanke indicated that the FED stands ready to take action if the financial markets woes spread too far into the general economy, but his statement seems to indicate he is trying to avoid a cut in the federal funds rate at their next meeting on September 18th.

Guidelines Getting Tougher

2007-08-31T22:06:00.000-07:00

One of our lenders sent out an e-mail last Thursday that they were eliminating their 80/20 and 75/25 programs. Many borrowers had used these programs to obtain 100% financing while avoiding Private Mortgage Insurance (PMI). They would now only go to 95% financing.

Five days later they announced they would only go to 89.99% financing. Lenders are really pulling back from any loans with increased risk until the investor panic cools down. I imagine these programs will be back in some form in the future, but until then things can change daily.

Another agent in our office sent out this joke e-mail about lender guidelines. It’s an exaggeration, but it becomes less so day by day.

Very Important- Guideline Changes

· All borrowers must have one blue eye and one brown eye to qualify.

· LTV’s > 65% SISA Loans now require a minimum credit score of 849.

· For all LTV’s > 65%, 360 months of payment reserves now required.

· Borrower’s must have no previous bankruptcies in their family history going back three generations (including, but not limited to 2nd cousins twice removed).

· A minimum of 25 years self-employment history now required for all Stated Programs (at same location).

· Minimum Credit Score for Subprime Loans raised to 720.

· All non-arm’s length transaction borrowers (mortgage, real estate professionals,family members) will be required to provide full-documentation, subject to criminal background checks, wire tapping, strip-searches, blood tests, and a minimum of 12 hours of interrogation by the Department of Homeland Security.

Please note that these changes will go into effect within the next five minutes. So please lock your existing loans immediately. All existing loans in your pipeline must fund by noon today. The vast majority of fulfillment staff is off today, so no Rush Requests will be accepted.

We apologize for the inconvenience. We realize these are tough times in the mortgage industry for all of us. Be assured that we have a commitment to remaining strong and weathering out the storm. We ask for your understanding and cooperation.

McMansions Under Fire for Environmental Waste

2007-08-31T21:16:00.000-07:00

Representative John Dingell, a Democrat from Michigan is drafting a “carbon tax” bill that will remove the mortgage interest deduction for homes over 3,000 square feet. Rep. Dingell is chairman of the House Energy and Commerce Committee. He realizes the proposal will be controversial, but he feels in order to address issues of climate change, we must address issues of consumption. Many of these larger homes have two story entry areas, vaulted ceilings, extra bedrooms and walk-in closets. All these additional space require more energy to heat and cool.

Critics point out that square footage may not be the best measure. Some newer houses are “built green”, and include energy efficient appliances, windows and heating systems. Also measurement of square footage often varies significantly, so it may be tough to police. Finally, the mortgage interest deduction is one of the biggest tax deductions for most Americans, and Capitol Hill will face quite a battle trying to take away this sacred deduction.

Houses are growing as families are shrinking

2007-08-22T11:43:00.000-07:00

Nationally the average household has shrunk slightly since 1990, to 2.6 people. However in the same period, the average new house grew 400 square feet to 2,434. One in five American homes had at least 4 bedrooms in 2005. That is up from one in six in 1990. Locally 20.7% of homes in Washington have at least four bedrooms, up from 18.3% in 1990. Houses are growing in size as families shrink, even though cost of materials, labor and energy to heat and power the homes rise.

Some communities are fighting back, though their motivations are not likely ecological. In the Seattle/Bellevue area it has been a popular practice to tear down an 1100 square foot rambler and replace it with a 4,000 square foot home that bulges up to the property line. These “McMansions” as they are called overpower their neighbors and do not fit in with the neighborhood. Neighbors are fighting back and trying to get their cities to regulate the tear-down/rebuild practice.

Seattle is considering:
· Shrinking the height limit from three stories to two.
· The house can occupy only 35% of the lot. Currently it is 35% or 1,750 sq. ft., whichever is greater. This means a 1,750 house can be built even if the lot is under 5,000 sq. ft.
· Replacing multiple houses with one large one would also be prohibited.

Bellevue is considering:
· Requiring a certain percentage of trees on the lot to be preserved, possibly up to 15%.
· Measuring the height of the home by grade before construction begins. Some developers have changed the grades of lots dramatically to get around regulations.
· Requiring weekly removal of debris, distributing guidelines to developers, posting of informational signs before construction, and cleanup of abandoned work sites.

The cities are weighing the regulations against concerns over property rights and effects the regulations will have on home builders. Of course the larger homes often mean higher tax revenue for the cities, so I am sure that is a major factor in their decision.

Will a rate decrease boost the real estate market?

2007-08-21T14:00:00.000-07:00

Lowering the federal funds rate might not have the immediate intended effect of making it easier for people to buy a house. There are many other hurdles to buyers trying to obtain financing. As the secondary market for mortgage-backed securities has dried up, many lenders large and small have disappeared. According to the Mortgage Lending Implode-o-meter, 130 lenders have gone out of business or have been bought out. Greenpoint Mortgage owned by Capital One was shut down just yesterday.

There are very few lenders issuing subprime or Alt-A loans. These are loans that many people turned to in the last few years as home prices increased dramatically. These lenders had expanded guidelines that allowed self-employed and lower credit borrowers to obtain financing. They are also where many borrowers found 100% financing. Even prime lenders have tightened their guidelines significantly in the past months in response to investor fears of mortgage defaults. Many have increased credit score and down payment requirements. They have also required borrowers to have more money in reserves as well.

Unfortunately with fewer places to find a mortgage, and with much tighter guidelines at the remaining lenders, many buyers are now out of the market. A rate drop may help the people who already qualify to afford a larger home, but it won’t necessarily bring more buyers into the market.

As it has become more difficult to obtain financing, it has become even more important to have an Integrated Agent in your corner. When anyone could get a loan, deals didn’t fall apart on financing as often as they had historically. Now that borrowing has become more difficult, our track record of closing 98% of our purchases will stand above the rest. Find out more about Integrated Agency and myself at www.seanday.net.

The Fed cuts one of the rates

2007-08-21T12:58:00.000-07:00

The Federal Reserve cut their discount rate by half a point late last week, from 6.25% to 5.75%. The discount rate is the rate at which the Fed will loan directly to banks. They did not change the federal funds rate, which is the rate banks will lend to each other. This rate sits at 5.25% and is what prime (8.25%) is based on.

By lowering the discount rate, the Fed has tried in another way to infuse the lending industry with more liquidity. The Fed had already pumped billions of dollars into the banking system in the past two weeks. The rate drop came as a bit of a surprise, however, as there has not been a rate change between meeting dates since the week after September 11th 2001.

Their next meeting is scheduled for September 18th, and there is increased speculation that they will lower the federal funds rate. In a statement accompanying the rate decrease last week, the Fed indicated that they were now more concerned with adverse effects of market instability over their fears of inflation. This is a clear shift from their statement at their last meeting on August 7th.

The Fed steps in.

2007-08-13T16:02:00.000-07:00

The turmoil in the subprime lending market continues to ripple through other markets. Though subprime loans are estimated to be only 13% of outstanding loans, and only 13% of those are late on their payments (1.7% of the total), investors are averse to the risk of possible loan defaults.

The Dow Jones industrial average has been erratic with triple digit swings in the past two weeks. A large French bank halted withdrawals from three investment funds that are tied to high-risk U.S. mortgage securities. They were unsure as to how to value the funds anymore. Commercial banks in Europe have been hesitant to loan to one another, causing short-term rates to rise. The Central Bank poured $130 billion into the banking system to shore up available funds, lower rates and calm investor fears. The U.S. Federal Reserve also injected $38 billion into our own banking system. They also allowed banks to use mortgage backed securities as collateral, attempting to show that these securities are still reliable. Speculation varies as to whether they will lower the federal funds rate at their next meeting.

Lenders are having trouble selling mortgage backed securities on the open market. By selling these bundled loan packages to investors, lenders get more funds to loan out. As fears of loan defaults grow, investors have stopped buying any loan packages that have any subprime loans in them. Many subprime lenders have gone out of business as they can no longer obtain new funding. Even prime lenders have tightened their guidelines significantly over the past month or so.

What does all this mean to you as the home buyer? Basically, it is more difficult to buy a home right now. There are fewer lenders and fewer loan programs to choose from. This is especially true for buyers looking for 100% financing. You must get a pre-approval ahead of time to be sure you can obtain financing before you bother to look for a home. It is even more important now to use an Integrated Agent to purchase your home. Your Integrated Agent will be intimately involved in both the real estate and the mortgage portion of your transaction. With the mortgage industry changing daily, you can’t afford to have any more uncertainty in your purchase.

Fed announces no change in federal funds rate

2007-08-07T14:20:00.000-07:00

The Federal Reserve announced today that it will be leaving the federal funds rate at 5.25%. This is the ninth consecutive meeting where they have left the rate alone, after raising the rate in the previous 17 consecutive months.

“Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.”

There had been speculation that the Fed would lower rates later this year as a reaction to the tightening of credit standards in the lending market. The above statement, though mentioning the credit issue, seems to indicate they are a bit more worried about inflationary pressures if they were to lower the rate. The bond market has indicated that mortgage rates may come down a bit, but it is difficult to predict with all that is going on related to the subprime market problems. Many lenders no longer exist, and remaining lenders have tightened criteria on loans, or eliminated programs altogether. Zero down programs still exist, but they are a bit harder to find and qualify for.

Capital One will now report limits

2007-08-05T18:05:00.000-07:00

Capital One now says it will begin reporting their cardholders’ credit limits to the three credit bureaus. It has been a long-standing practice of theirs to only report the cardholder’s current debt, but not their limit. This practice has very likely harmed the cardholder’s credit score. Approximately 30% of your credit score is based on your utilization of credit. If you are near your credit limit, your score goes down, while low balances benefit your score. Ideally your balance would be below 30% of your limit on each card.

The problem with Capital One’s practice is that with no limit reported, the bureaus were forced to either ignore utilization on the account or use your highest balance as your limit. Let’s use an example of a card with a $10,000 limit, and you typically carry a balance of around $900. If the most you’ve ever charged was $1,000, your utilization would show as 90% rather than the real utilization of 9%. Your score would go down even though in reality you are managing your debt well. Lower scores translate into higher mortgage rates, which then translates into higher monthly payments. Once Capital One begins reporting credit limits, cardholders will hopefully see their credit scores go up in the few months.