First let me begin this post by apologizing for my absence yesterday. I had surgury on my left wrist so typing was a little much, but I'm back and wanted to break the news. Rates are and will be improving throughout the day today with the MBS market currently trading up 7 ticks.
This is probably due to the fact that the 10 year treasury yield has fallen to recent lows. Should this hold, we will be in excellent position for Mondays open.
If you are looking to close on a home loan in the coming weeks and are currently floating your interest rate, you might want to consider locking. With better reprices due, and us coming off of recent highs earlier in the week, these gains help reinforce what we saw earlier in the week, so although we have had to make up a little ground lost on Wednesday, offered rates will probably be the best they've been all week.
If you have particular questions about locking please post 'em here.
Friday, April 30, 2010
Wednesday, April 28, 2010
Don Quixote (Senate) takes on a windmill (Goldman Sachs)
I spent the day at home yesterday watching the Senate hearings with Goldman Sachs. Let me be clear I am not defending Goldman Sachs or downplaying the importance of Senate hearings. But some things need to be pointed out, because the travesty that went on yesterday was insulting.
Anyone feel like the pot was calling the kettle black? Does anyone else want to see the emails that Congress and the Senate sent around to one another when debating (I use the term loosely)health care reform?
But I digress... this is not about what Congress and the Senate has done right or wrong... this is about a sub committee interrogating a private company on internal documents that they really do not understand. It was this misunderstanding that fueled questioning that was designed to envoke anger and empathy for the finance reform they are currently trying to pass.
I will sight one example of this - specifically when Goldman was asked about Stated Income home loans. The Senate basically made it sound like the borrower simply stated their income and whatever number they provided was accepted at face value. This is simply not true.
When stated income home loans were available in the market the loan orginator asked the borrower what their monthly income was. If the number they stated did not support the home loan they were applying for they should have been denied immediately by the originating agent. But let's be honest this did not always happen, nor was it the only backstop to prevent unqualified borrowers from securing home loans. Lenders also ran internal checks on income. For example if you stated that you were a personal assistant in CA, the lender would log into a database and look up the median income for personal assistants in your area. If the number you stated was outside the range the database provided based on your profession, your loan was denied. In addition employment was also verified with a phone call to the employer. Inside this conversation the lender would ask specifically what position the borrower held. If the borrower misrepresented the position they held, their loan would be denied. Stated income loans were not what the sub committee represented them to be... perhaps if they corrected themselves and discussed no doc loans or NINA (no income no asset) loans they would have had a point, but stated income loans were not the guiding force that lead to the collapse.
This is a single example of how this sub committee stretched their position of authority and innocence. Sitting on the high chairs, speaking down, and dismissing the testimony as combative, the Senate made it seem like Goldman was the reason for our real estate woes. Realistically it was the Community Reinvestment Act that was passed by our government that forced lenders to loosen guidelines allowing more people to achieve the dream of homeownership. For lenders to stay competitive and remain in business they were forced to offer products that they probably would not have offered.... then we come to Goldman Sachs - a market maker - not a lender... they didn't originate these loans, they simply packaged and sold them to investors. These investors are not individuals with small porfolios... these are sophisticated investors that have millions of dollars at their disposal. They understand the conept of risk versus security... and the risk they took as for a higher return... rates on stated loans had interest rates that were at least a full point higher than their full doc counterparts. These investors wanted the higher rate of return, and they knew the associated risk. It is not the market makers responsibility to tell them not buy... after all there has to be a seller if there is a buyer... they wanted to buy, and if Goldman did not make the market, someone else was going to.
It is clear to me that this was a witch hunt and the prosecutors new next to nothing about witchcraft.
Moving forward, I expect (although do not support) this financial reform bill will pass leading to more regulation, more beauocracy and ultimately higher costs for all of us. This is not the solution.
Anyone feel like the pot was calling the kettle black? Does anyone else want to see the emails that Congress and the Senate sent around to one another when debating (I use the term loosely)health care reform?
But I digress... this is not about what Congress and the Senate has done right or wrong... this is about a sub committee interrogating a private company on internal documents that they really do not understand. It was this misunderstanding that fueled questioning that was designed to envoke anger and empathy for the finance reform they are currently trying to pass.
I will sight one example of this - specifically when Goldman was asked about Stated Income home loans. The Senate basically made it sound like the borrower simply stated their income and whatever number they provided was accepted at face value. This is simply not true.
When stated income home loans were available in the market the loan orginator asked the borrower what their monthly income was. If the number they stated did not support the home loan they were applying for they should have been denied immediately by the originating agent. But let's be honest this did not always happen, nor was it the only backstop to prevent unqualified borrowers from securing home loans. Lenders also ran internal checks on income. For example if you stated that you were a personal assistant in CA, the lender would log into a database and look up the median income for personal assistants in your area. If the number you stated was outside the range the database provided based on your profession, your loan was denied. In addition employment was also verified with a phone call to the employer. Inside this conversation the lender would ask specifically what position the borrower held. If the borrower misrepresented the position they held, their loan would be denied. Stated income loans were not what the sub committee represented them to be... perhaps if they corrected themselves and discussed no doc loans or NINA (no income no asset) loans they would have had a point, but stated income loans were not the guiding force that lead to the collapse.
This is a single example of how this sub committee stretched their position of authority and innocence. Sitting on the high chairs, speaking down, and dismissing the testimony as combative, the Senate made it seem like Goldman was the reason for our real estate woes. Realistically it was the Community Reinvestment Act that was passed by our government that forced lenders to loosen guidelines allowing more people to achieve the dream of homeownership. For lenders to stay competitive and remain in business they were forced to offer products that they probably would not have offered.... then we come to Goldman Sachs - a market maker - not a lender... they didn't originate these loans, they simply packaged and sold them to investors. These investors are not individuals with small porfolios... these are sophisticated investors that have millions of dollars at their disposal. They understand the conept of risk versus security... and the risk they took as for a higher return... rates on stated loans had interest rates that were at least a full point higher than their full doc counterparts. These investors wanted the higher rate of return, and they knew the associated risk. It is not the market makers responsibility to tell them not buy... after all there has to be a seller if there is a buyer... they wanted to buy, and if Goldman did not make the market, someone else was going to.
It is clear to me that this was a witch hunt and the prosecutors new next to nothing about witchcraft.
Moving forward, I expect (although do not support) this financial reform bill will pass leading to more regulation, more beauocracy and ultimately higher costs for all of us. This is not the solution.
Tuesday, April 27, 2010
Interest Rates improve on Greece's Poor Fortune
Well, Greece is about to put itself up for auction. Well not really but they might as well considering their bond rating has been downgraded so substantially that you would probably have better luck investing in snowfall in Florida than buying Greek debt.
I am not trying to beat a dead horse. I feel terrible about what is happening in Greece and hope they are able to bring their economy back from the brink, but in all honesty this is looking more bleek everyday (watch Portugal, Italy, and Spain closely... they are following in Greece's footsteps...).
In their wake of misfortune we have, at least in the short term, benefited. Ultimately foreign investors are investing in our markets forcing treasury yields down and Mortgage Backed Securities up resulting in better interest rates and pricing for people currently looking to secure financing.
To put not too fine a point on it the MBS market has improved by 16 ticks, that's half a point better. If these gains hold, lenders will pass this on to borrowers in the coming days. Fingers should be hovering over the lock button... especially considering the treasury auctions going off this week and the FOMC meeting tomorrow.
The minutes released from the FOMC will be ciritical in determining whether or not these gains are justified and if they will hold.
I am not trying to beat a dead horse. I feel terrible about what is happening in Greece and hope they are able to bring their economy back from the brink, but in all honesty this is looking more bleek everyday (watch Portugal, Italy, and Spain closely... they are following in Greece's footsteps...).
In their wake of misfortune we have, at least in the short term, benefited. Ultimately foreign investors are investing in our markets forcing treasury yields down and Mortgage Backed Securities up resulting in better interest rates and pricing for people currently looking to secure financing.
To put not too fine a point on it the MBS market has improved by 16 ticks, that's half a point better. If these gains hold, lenders will pass this on to borrowers in the coming days. Fingers should be hovering over the lock button... especially considering the treasury auctions going off this week and the FOMC meeting tomorrow.
The minutes released from the FOMC will be ciritical in determining whether or not these gains are justified and if they will hold.
Monday, April 26, 2010
What's an REO?
With the goings-on in the real estate market, there appears some confusion about what exactly a REO is.... it simply means "real estate owned". Understandably, most think of foreclosed properties, no thanks in part to the media attention that has been focused on that particular type of property. To clear the air, foreclosures and REO's are different. For the purpose of this description, I am going to assume that we are on the same page and are referring to banks and lenders and how they distinguish between the two.....
When a homeowner defaults on a payment for a property, the bank has the ability to force a foreclosure. Foreclosure by definition is the proceeding, by a creditor, to regain property or other collateral following a default on mortgage payments. It begins when the trustee files a notice of default. This is a letter which is sent to the owner/trustor notifying him or her of their default of the loan. This notifies the owner of the intent of the lender to follow through on their right to collect on the debt. The copy of the notice is mailed to the address of notice as per the deed of trust. The next step in the foreclosure process is the publishing of a notice of trustee's sale in a local paper while at the same time filing said notice with the county recorders office. This cannot be done till after 90 days have passed since the recording of the notice of default. Once the notice of trustee's sale is filed, the home may be sold at public auction, but no sooner than 20 days from the filing.
What happens if no one buys the foreclosure at auction? Ownership reverts back to the lender who wrote the mortgage note! Hence the term REO! The lender assumes ownership of the property, and may dispose of that property to recover their cash investment. You may ask yourself, why didn't it sell at auction....there could be a myriad of reasons..but most common being the payoff(auction min bid) of the note was more than the home was worth!
REO's represent a good opportunity for an investor to pick up properties with built in value. Because the Banks are not in the business of selling real estate, but rather lending, and since the property is now a toxic asset on their books (there is no mortgage $ coming in, the bank is now on the hook for among other things, property taxes, HOA etc.) they are more than willing to sell at a discount (in most instances) to remove the non-performing asset from their books. Lender REO's only come to be(in most cases)when the property fails to sell at the foreclosure auction.
When a homeowner defaults on a payment for a property, the bank has the ability to force a foreclosure. Foreclosure by definition is the proceeding, by a creditor, to regain property or other collateral following a default on mortgage payments. It begins when the trustee files a notice of default. This is a letter which is sent to the owner/trustor notifying him or her of their default of the loan. This notifies the owner of the intent of the lender to follow through on their right to collect on the debt. The copy of the notice is mailed to the address of notice as per the deed of trust. The next step in the foreclosure process is the publishing of a notice of trustee's sale in a local paper while at the same time filing said notice with the county recorders office. This cannot be done till after 90 days have passed since the recording of the notice of default. Once the notice of trustee's sale is filed, the home may be sold at public auction, but no sooner than 20 days from the filing.
What happens if no one buys the foreclosure at auction? Ownership reverts back to the lender who wrote the mortgage note! Hence the term REO! The lender assumes ownership of the property, and may dispose of that property to recover their cash investment. You may ask yourself, why didn't it sell at auction....there could be a myriad of reasons..but most common being the payoff(auction min bid) of the note was more than the home was worth!
REO's represent a good opportunity for an investor to pick up properties with built in value. Because the Banks are not in the business of selling real estate, but rather lending, and since the property is now a toxic asset on their books (there is no mortgage $ coming in, the bank is now on the hook for among other things, property taxes, HOA etc.) they are more than willing to sell at a discount (in most instances) to remove the non-performing asset from their books. Lender REO's only come to be(in most cases)when the property fails to sell at the foreclosure auction.
Interest Only Programs
There have been many rumors floating around between professionals regarding the future fate of agency loans, namely Freddie Mac and Fannie Mae servicers. After all, if we're honest about these two entities, we are in agreement that they are in need of a drastic overhaul and could perhaps even be disbanded for the benefit of all (a different post - perhaps later today).
To put a number on it about 90% of loans originated in the market right now are agency loans. That's 9 out of every 1o loans! Kind of scary considering it was not too long ago that our Federal Government siezed Fannie and Freddie because they were in jeopardy of collapse due to "toxic assets."
This unprecedented move sent shockwaves through the marketplace. If what was said about Fannie and Freddie was true a return to traditional products was necessary to protect the fragile real estate market. In fact it was last month that I wrote a post discussing the possibility that Fannie and Freddie were considering reducing the programs offfered to only 15 and 30 year fixed programs. In other words Adustable Rate Mortgage programs would no longer be offered agency programs. Needless to say this has not happened; in fact to many mortgage professionals' surpirse recently agency interest only programs have been pushed on us from various wholesale lenders representing the agency market.
This is incredibly interesting considering, it was these more risky and exotic programs that led many homeowners into trouble. Regardless this is something to think about. Does it suggest lenders are loosening guidelines and have more confidence in home values? Is this a reaction to try a increase borrowing demand?
Whatever the reasons behind the push for borrowers to consider interest only options, it is imperative that borrowers continue to have a wide variety of financing options, this being one of them.
There is no doubt the interest only option is an important feature to be available in the lending market. Although it was oversold in the last few years, in certain instances that an experienced loan consultant can help you identify an interest only option can be the right solution.
If you do consider a home loan with an interest only option, make sure you understand what will happen when that interest only period expires. Even if you are in a fixed rate program with the interest only option you will probably be subject to a monthly payment adjustment which you should be prepared for.
To put a number on it about 90% of loans originated in the market right now are agency loans. That's 9 out of every 1o loans! Kind of scary considering it was not too long ago that our Federal Government siezed Fannie and Freddie because they were in jeopardy of collapse due to "toxic assets."
This unprecedented move sent shockwaves through the marketplace. If what was said about Fannie and Freddie was true a return to traditional products was necessary to protect the fragile real estate market. In fact it was last month that I wrote a post discussing the possibility that Fannie and Freddie were considering reducing the programs offfered to only 15 and 30 year fixed programs. In other words Adustable Rate Mortgage programs would no longer be offered agency programs. Needless to say this has not happened; in fact to many mortgage professionals' surpirse recently agency interest only programs have been pushed on us from various wholesale lenders representing the agency market.
This is incredibly interesting considering, it was these more risky and exotic programs that led many homeowners into trouble. Regardless this is something to think about. Does it suggest lenders are loosening guidelines and have more confidence in home values? Is this a reaction to try a increase borrowing demand?
Whatever the reasons behind the push for borrowers to consider interest only options, it is imperative that borrowers continue to have a wide variety of financing options, this being one of them.
There is no doubt the interest only option is an important feature to be available in the lending market. Although it was oversold in the last few years, in certain instances that an experienced loan consultant can help you identify an interest only option can be the right solution.
If you do consider a home loan with an interest only option, make sure you understand what will happen when that interest only period expires. Even if you are in a fixed rate program with the interest only option you will probably be subject to a monthly payment adjustment which you should be prepared for.
Friday, April 23, 2010
Mortgage Rates Start to Climb
Let's not get ahead of ourselves, despite worsening rates right now, let me begin this post by mentioned we are still trading well within our established range so there is no reason for us to hit the panic button yet. With that said, the mortgage backed securities market is currently testing its support levels and the 10 year treasury is currently testing its resistance level. Should we break out of this established range, things could get interesting.
A couple things to consider. First, it is Friday, and typically Fridays are not a good day to base trends off of due to the typical low volume traded. Point in fact Friday's are considered by some as a profit taking day, so a sell off today is not something we should get too concerned over.
In addition home loan applications are falling off which means less demand, so the money available to offer goes further. This should help calm the storm should rates start their climb higher, but it is by no means an answer to the rising rates the market is starting to offer.
Considering the run we have had in the secondary market we should be pleased with the rates currently offered on home loans. Even though we have lost some gorund today, over he last week we have seen steady gains that have lead to better rates offered. This minor sell of will result in slightly worse pricing, but we are still up from recent lows, so there is little to complain about.
Regardless tracking today's activity and keeping a close eye on monday will be mandatory. A firesale is still a possibility and we have to take into consideration the equity markets. Corporate profits by in large have been strong, inferring a stabilization of the stock market (although some believe it is due for a retraction). If this remains the case, we will see more and more investors return to short term markets which will bring an end to these low rates.
Secure em while you have the chance.
A couple things to consider. First, it is Friday, and typically Fridays are not a good day to base trends off of due to the typical low volume traded. Point in fact Friday's are considered by some as a profit taking day, so a sell off today is not something we should get too concerned over.
In addition home loan applications are falling off which means less demand, so the money available to offer goes further. This should help calm the storm should rates start their climb higher, but it is by no means an answer to the rising rates the market is starting to offer.
Considering the run we have had in the secondary market we should be pleased with the rates currently offered on home loans. Even though we have lost some gorund today, over he last week we have seen steady gains that have lead to better rates offered. This minor sell of will result in slightly worse pricing, but we are still up from recent lows, so there is little to complain about.
Regardless tracking today's activity and keeping a close eye on monday will be mandatory. A firesale is still a possibility and we have to take into consideration the equity markets. Corporate profits by in large have been strong, inferring a stabilization of the stock market (although some believe it is due for a retraction). If this remains the case, we will see more and more investors return to short term markets which will bring an end to these low rates.
Secure em while you have the chance.
Thursday, April 22, 2010
Is Now The Time to Buy a Second Home?
Contrary to what most people believe there are three different types of designations for homes when it comes to financing. They are: primary residence, investment property, and second home.
This final category - second home - is what most people overlook. Point in fact second home financing offers the same terms as primary residence financing right now. This presents significant opportunity for people looking to purchase or refinance a second home. Below we'll discuss this in greater detail, and break down the differences between these various designations.
Primary residence financing is self explanatory. It is financing secured against the home that you live in. For this reason the lender assumes little risk, after all the last thing most people do is compromise their living arrangements.
Second homes and investment properties however fall in a different bucket because there is not a constant presence of the homeowner. Investment properties are the second class we have listed. They represent the polar opposite of primary residences because they are rented out by the homeowner or property management company under their direction to a third party. This third party because they have a very small commitment to the property typically do not treat the real estate as well as they would if they were the owner. In addition the owner is leveraged further out, making the possibility of default more probable. What happens if the tenants leave and you can't rent it out? The point is the inherent risk associated with a loan against an investment property means the lenders terms are not going to be as favorable as financing offered on primary residences. Why? Because of the larger risk they are taking. Plain and simple.
So what about second homes? A second home is a home that is not used for investment purposes and that the owner uses for personal use for at least two weeks out of the calender year. Generally speaking second homes are located in destination locations and or are in areas that the homeowner frequents for a legitimate reason, child attending college in the area, a second home in an area that your job takes you to, or simply a vacation location. So how does pricing compare for second homes in relation to investment properties and primary residences?
Considering the reason for higher premiums on investment properties it would seem as though a second home would have similar terms, after all it is always vacant. The borrower can never offset the expenses with income. It seems as though pricing for second homes should be very similar to that of investment properties. Actually second home terms are identical to primary residence terms.
Let me say that again. Second home financing terms are identical right now to primary residence financing terms. We can discuss why this is, or we can simply accept this as an incredible opportunity. California offers some of the best destinations in our Country. From oceanfront vacation properties to mountain resorts offering skiing an other winter recreations over to deserts offering golf and recreational vehicle trails, on to beautiful lakes offering watersports - there is no other State that has can offer what California can.
Couple this with the fact that our real estate market has depreciated to levels we have not seen in decades, and it becomes evident everyone is in a position to take serious advantage of this real estate market through second home financing solutions.
A second home after all appreciates just as fast as a primary residence and destinations like San Diego beaches, Big Bear Lake, and Palm Springs offer people what everyone deems to be the most important aspect of real estate - location, location, location.
I am not advocating these particular areas to buy... these are simply examples and I could go on - Lake Tahoe, Mammoth Mountain, Santa Barbara... the point is CA and CA home prices right now coupled with the terms offered on second homes present everyone an incredible opportunity to buy a second home with very favorable terms.
If you have been considering a vacation home. Now would be the time make it a reality.
This final category - second home - is what most people overlook. Point in fact second home financing offers the same terms as primary residence financing right now. This presents significant opportunity for people looking to purchase or refinance a second home. Below we'll discuss this in greater detail, and break down the differences between these various designations.
Primary residence financing is self explanatory. It is financing secured against the home that you live in. For this reason the lender assumes little risk, after all the last thing most people do is compromise their living arrangements.
Second homes and investment properties however fall in a different bucket because there is not a constant presence of the homeowner. Investment properties are the second class we have listed. They represent the polar opposite of primary residences because they are rented out by the homeowner or property management company under their direction to a third party. This third party because they have a very small commitment to the property typically do not treat the real estate as well as they would if they were the owner. In addition the owner is leveraged further out, making the possibility of default more probable. What happens if the tenants leave and you can't rent it out? The point is the inherent risk associated with a loan against an investment property means the lenders terms are not going to be as favorable as financing offered on primary residences. Why? Because of the larger risk they are taking. Plain and simple.
So what about second homes? A second home is a home that is not used for investment purposes and that the owner uses for personal use for at least two weeks out of the calender year. Generally speaking second homes are located in destination locations and or are in areas that the homeowner frequents for a legitimate reason, child attending college in the area, a second home in an area that your job takes you to, or simply a vacation location. So how does pricing compare for second homes in relation to investment properties and primary residences?
Considering the reason for higher premiums on investment properties it would seem as though a second home would have similar terms, after all it is always vacant. The borrower can never offset the expenses with income. It seems as though pricing for second homes should be very similar to that of investment properties. Actually second home terms are identical to primary residence terms.
Let me say that again. Second home financing terms are identical right now to primary residence financing terms. We can discuss why this is, or we can simply accept this as an incredible opportunity. California offers some of the best destinations in our Country. From oceanfront vacation properties to mountain resorts offering skiing an other winter recreations over to deserts offering golf and recreational vehicle trails, on to beautiful lakes offering watersports - there is no other State that has can offer what California can.
Couple this with the fact that our real estate market has depreciated to levels we have not seen in decades, and it becomes evident everyone is in a position to take serious advantage of this real estate market through second home financing solutions.
A second home after all appreciates just as fast as a primary residence and destinations like San Diego beaches, Big Bear Lake, and Palm Springs offer people what everyone deems to be the most important aspect of real estate - location, location, location.
I am not advocating these particular areas to buy... these are simply examples and I could go on - Lake Tahoe, Mammoth Mountain, Santa Barbara... the point is CA and CA home prices right now coupled with the terms offered on second homes present everyone an incredible opportunity to buy a second home with very favorable terms.
If you have been considering a vacation home. Now would be the time make it a reality.
Wednesday, April 21, 2010
Is your Loan Officer Licensed by the CA Department of Real Estate?
Not all loan officers are licensed by the our State's department of real estate. If you would like to know if your loan officer holds a California Real Estate License and whether or not he or she has had any disciplinary action filed against them click on this link and follow the prompts:
Department of Real Estate Licensee Look Up.
It is always a good idea to know who you've hired to secure your financing.
Department of Real Estate Licensee Look Up.
It is always a good idea to know who you've hired to secure your financing.
Is Propostiion 13 in Trouble
O.K. our great State of California is broke and it seems next to impossible to get the politicians in Sacramento to balance our budget and bring our deficits down. You can ignore the problem if you choose to, but ignoring the fact that our State is out of money is not going to solve anything. It's like turning away before getting stuck with a needle... the needle's still coming.
Couple this with the fact that our State's bond rating the the worst in Union, and we are actually subsidizing our farmers to not grow food for export in order to protect a fresh water sardine, and I think it's pretty clear that our State is in peril and something needs to be done.
There is talk in all directions on how to solve this problem, but the golden goose that is on the mind of Sacramento's public officials is without a doubt Proposition 13.
Proposition 13, amended into the California Constitution in 1978 (by initiative) essentially limits the taxation of real property. Proposition 13 limits the amount of taxes levied against property to 1% and prohibits the state from raising the taxes more than 3% (based on and designed to match inflation) in any given year, and cannot reassess taxes unless the property is sold to a new owner or new construction is completed.
This law was designed to ensure older residents are not taxed out of their homes. Regardless, CA lawmakers are ogling over the possible revenue they could take in if this law was repealed. The question becomes - can they do it?
Considering the fact that it is a Constitutional amendment one would think it would be difficult to alter. This is not the case. It only takes a majority vote to amend the consitution by initiave... a scary thought considering lawmakers in Sacramento are scrambling to solve the budget issues.
What would a repeal of Proposition 13 do to our real estate market? It would send a shockwave through our State's economy. And although Sacramento might recieve more tax revenue from the change, the effect it would have on individuals would be devastating, especially to our older residents on fixed income that have owned their homes for long periods of time.
Regardless if they can ever get away with it now would be the time. With home values low due to recent depreciation and a suffering economy, a reassessment now would result in overall increases in property taxes across the State, but these changes would not be as large as they would be during the peak of real estate some 3 years ago. I am not arguing that Sacramento could sneak this buy taxpayers, and I think it would result in a large turnover in politicians; what I am saying is desperate times call for desperate measures and right now CA lawmakers are desperate.
Let me be clear I do not and would never support this, but it is something we all should be aware of, and fight against.
Couple this with the fact that our State's bond rating the the worst in Union, and we are actually subsidizing our farmers to not grow food for export in order to protect a fresh water sardine, and I think it's pretty clear that our State is in peril and something needs to be done.
There is talk in all directions on how to solve this problem, but the golden goose that is on the mind of Sacramento's public officials is without a doubt Proposition 13.
Proposition 13, amended into the California Constitution in 1978 (by initiative) essentially limits the taxation of real property. Proposition 13 limits the amount of taxes levied against property to 1% and prohibits the state from raising the taxes more than 3% (based on and designed to match inflation) in any given year, and cannot reassess taxes unless the property is sold to a new owner or new construction is completed.
This law was designed to ensure older residents are not taxed out of their homes. Regardless, CA lawmakers are ogling over the possible revenue they could take in if this law was repealed. The question becomes - can they do it?
Considering the fact that it is a Constitutional amendment one would think it would be difficult to alter. This is not the case. It only takes a majority vote to amend the consitution by initiave... a scary thought considering lawmakers in Sacramento are scrambling to solve the budget issues.
What would a repeal of Proposition 13 do to our real estate market? It would send a shockwave through our State's economy. And although Sacramento might recieve more tax revenue from the change, the effect it would have on individuals would be devastating, especially to our older residents on fixed income that have owned their homes for long periods of time.
Regardless if they can ever get away with it now would be the time. With home values low due to recent depreciation and a suffering economy, a reassessment now would result in overall increases in property taxes across the State, but these changes would not be as large as they would be during the peak of real estate some 3 years ago. I am not arguing that Sacramento could sneak this buy taxpayers, and I think it would result in a large turnover in politicians; what I am saying is desperate times call for desperate measures and right now CA lawmakers are desperate.
Let me be clear I do not and would never support this, but it is something we all should be aware of, and fight against.
Tuesday, April 20, 2010
Lending Guidelines
Moving forward there are still a great many people that would like to secure new financing but are unable to because of strict lending guidelines. Everyday someone inevitably asks when lending guidelines will loosen. Although we have seen signs of loosening guidelines; generally speaking qualifying standards are going to remain strict moving into the future.
The point of this article is to differeniate between the guidelines that are loosening slightly and the qualifying standards that will remain strict moving into the future.
Certainly we have seen some guidelines loosen as we move into 2010. Point in fact it was not long ago that loan to value limits were raised from 90% loan to value to 95% for conventional loans. This raise in Loan To Value is a significant change, inferring home prices are stabilizing in CA. Should this stabilization continue we could see 100% financing available again for conventional loans. We do not want to get ahead of ourselves but this change is significant because it brings us that much closer to 100% financing.
Another change we have seen is a lender re-entry into jumbo and super jumbo markets. It has been quite sometime since the major lenders participated in this market. In the last couple of years it has been portfolio lenders that were servicing this type of loan. This is not the case anymore as larger lending institutions find themselves offering solutions in this market. Large lenders expanding back into this market is important because it signifies that banks are healthier than they have been and can assume capital risk. This return to the jumbo and super jumbo market also introduces competition that has the potential to lower offered rates in these markets.
Despite these changes qualifying and meeting the specific guidelines required to establish a new home loan are still very strict. If you plan on securing a new home loan you will be required to document your income, assets, and have a credit score of at least 620. Let's discuss these points individually.
Credit. Although a minimum score of 620 is required to secure financing in this market, it should be mentioned not all programs are available to people with a 620 score. Point in fact the lower your credit score the lower the loan to value you will qualify for. In other words someone with a 620 score cannot secure 90% financing, while someone with a 700 score can. In addition lower credit scores result in price adjustments against you, which will result in a higher offered interest rate. This price discrepancy is not likely to change. As for Loan To Value when lenders extend the loan to value to 100% (currently at 95%) the best credit scores will have access to this program first. Unfortunately at this time we have not heard any rumors about 100% financing returning to conventional markets any time soon. Regardless credit scores are still very important. Make sure you score is as high as possible.
Assets. In the past there were programs that allowed people to state assets without documenting them. This is no longer the case. For most programs you will be required to prove at least two months reserves (Principle Interest Taxes Insurance - PITI); for jumbo conforming expect to provide 6 months reserves. For jumbo and super jumbo home loans you may actually be required to open and deposit reserves in a new account at the lending institution. Some require as much as 100,000 in verifiable assets (for loans up to 3 million). The point is verifying assets is something you should be prepared to do. This requires statements that include all pages demonstrating a two month history. Be prepared to source and document any large deposits. As mentioned above in the past stating assets was an available option. I do not expect this option to return to the marketplace any time soon. The simple reason... documenting assets demonstrates the borrower has a emergency fund that they can use should they find themselves out of work. With foreclosure rates the highest on record after the introduction of stated income programs, it is unlikely that they will bring this back.
Income. Documenting income is now a requirement if you plan on securing conventional financing. This requires at least a two year history of tax returns (sometimes three years) and recent paystubs. Although there are some stated income programs now available and offered from private lenders, this is something that we should not expect to see in the conventional markets for quite some time. If you are waiting for a stated income program, our economy is going to need to fully recover and unemployment must fall substantially. Essentially this is the most important qualifying aspect becuase it demonstrates your ability to pay back the loan. It will be a long time before this returns.
These are the major points underwriters consider when looking at a borrower qualifications. Another aspect they consider is the home. Your home is their collateral. Collateral itself has also become stricter. Condos have suffered the major brunt, primarily because they have suffered in value the most. Lenders took note of this and have added pricing adjustments depending on the type of home you are looking to finance. In addition lenders have regionally classified areas based on their level of depreciation. The classification ultimately results in a capped Loan To Value. Of all the guidelines discussed these are probably going to be the first to change. Setting the legal issue of redlining aside (have always been curious how this is not redlining) home values have fallen to what appears to be their lows which suggests these guidelines are no longer applicable, after all they were designed to protect the lender from funding a loan that would result in the property depreciating to a point in which the collateral is worth less than the recently issued home loan.
To wrap up this article we must touch on the fact that some programs we have become comfortable with are temporary programs that we must be prepared to live without. Point in fact jumbo conforming home loan limits here in CA are temporary. That is loans up to 729,500 (cap based on region). At some point in time this is going to disappear placing these people back in the jumbo and super jumbo markets. In addition HARP programs offering financing up to 125% for Fannie and Freddie rate and term refinances are a temporary program that will be disappearing in the future.
If you have been waiting and plan on taking advantage of one of these programs, now would be the time to act. As for loosening guideline - documenting your claimed position on the loan application is something you should be prepared for.
The point of this article is to differeniate between the guidelines that are loosening slightly and the qualifying standards that will remain strict moving into the future.
Certainly we have seen some guidelines loosen as we move into 2010. Point in fact it was not long ago that loan to value limits were raised from 90% loan to value to 95% for conventional loans. This raise in Loan To Value is a significant change, inferring home prices are stabilizing in CA. Should this stabilization continue we could see 100% financing available again for conventional loans. We do not want to get ahead of ourselves but this change is significant because it brings us that much closer to 100% financing.
Another change we have seen is a lender re-entry into jumbo and super jumbo markets. It has been quite sometime since the major lenders participated in this market. In the last couple of years it has been portfolio lenders that were servicing this type of loan. This is not the case anymore as larger lending institutions find themselves offering solutions in this market. Large lenders expanding back into this market is important because it signifies that banks are healthier than they have been and can assume capital risk. This return to the jumbo and super jumbo market also introduces competition that has the potential to lower offered rates in these markets.
Despite these changes qualifying and meeting the specific guidelines required to establish a new home loan are still very strict. If you plan on securing a new home loan you will be required to document your income, assets, and have a credit score of at least 620. Let's discuss these points individually.
Credit. Although a minimum score of 620 is required to secure financing in this market, it should be mentioned not all programs are available to people with a 620 score. Point in fact the lower your credit score the lower the loan to value you will qualify for. In other words someone with a 620 score cannot secure 90% financing, while someone with a 700 score can. In addition lower credit scores result in price adjustments against you, which will result in a higher offered interest rate. This price discrepancy is not likely to change. As for Loan To Value when lenders extend the loan to value to 100% (currently at 95%) the best credit scores will have access to this program first. Unfortunately at this time we have not heard any rumors about 100% financing returning to conventional markets any time soon. Regardless credit scores are still very important. Make sure you score is as high as possible.
Assets. In the past there were programs that allowed people to state assets without documenting them. This is no longer the case. For most programs you will be required to prove at least two months reserves (Principle Interest Taxes Insurance - PITI); for jumbo conforming expect to provide 6 months reserves. For jumbo and super jumbo home loans you may actually be required to open and deposit reserves in a new account at the lending institution. Some require as much as 100,000 in verifiable assets (for loans up to 3 million). The point is verifying assets is something you should be prepared to do. This requires statements that include all pages demonstrating a two month history. Be prepared to source and document any large deposits. As mentioned above in the past stating assets was an available option. I do not expect this option to return to the marketplace any time soon. The simple reason... documenting assets demonstrates the borrower has a emergency fund that they can use should they find themselves out of work. With foreclosure rates the highest on record after the introduction of stated income programs, it is unlikely that they will bring this back.
Income. Documenting income is now a requirement if you plan on securing conventional financing. This requires at least a two year history of tax returns (sometimes three years) and recent paystubs. Although there are some stated income programs now available and offered from private lenders, this is something that we should not expect to see in the conventional markets for quite some time. If you are waiting for a stated income program, our economy is going to need to fully recover and unemployment must fall substantially. Essentially this is the most important qualifying aspect becuase it demonstrates your ability to pay back the loan. It will be a long time before this returns.
These are the major points underwriters consider when looking at a borrower qualifications. Another aspect they consider is the home. Your home is their collateral. Collateral itself has also become stricter. Condos have suffered the major brunt, primarily because they have suffered in value the most. Lenders took note of this and have added pricing adjustments depending on the type of home you are looking to finance. In addition lenders have regionally classified areas based on their level of depreciation. The classification ultimately results in a capped Loan To Value. Of all the guidelines discussed these are probably going to be the first to change. Setting the legal issue of redlining aside (have always been curious how this is not redlining) home values have fallen to what appears to be their lows which suggests these guidelines are no longer applicable, after all they were designed to protect the lender from funding a loan that would result in the property depreciating to a point in which the collateral is worth less than the recently issued home loan.
To wrap up this article we must touch on the fact that some programs we have become comfortable with are temporary programs that we must be prepared to live without. Point in fact jumbo conforming home loan limits here in CA are temporary. That is loans up to 729,500 (cap based on region). At some point in time this is going to disappear placing these people back in the jumbo and super jumbo markets. In addition HARP programs offering financing up to 125% for Fannie and Freddie rate and term refinances are a temporary program that will be disappearing in the future.
If you have been waiting and plan on taking advantage of one of these programs, now would be the time to act. As for loosening guideline - documenting your claimed position on the loan application is something you should be prepared for.
Wednesday, April 14, 2010
Recovering Rates
Wow, it has been a wild ride since the last days of March. We have seen rates as volatile as they've been in months, and just over the last 5 market days, settling into a recovery.
Why, and what does it mean. I think we can point to a combination of factors, not just one in particular. Arguments floating around include the notion that the bond market participants(traders and such) expect weaker than expected corporate earnings. Right there would explain the recovery.... flight from risk, think fixed income investments, a nice safe return (Americans are all to aware of the pains of falling stock prices and/or below expectation earnings disclosure). Others feel that the bonds markets are deriving their strength from the FED stance and their pointed verbiage on rate policy and anti-inflation, another excellent point to consider......Or,perhaps rates jumped because the notes backing the interest rate market were "perceived" risky, and not unlike lemmings into the sea, did the traders get carried away, and we are now seeing the correction of their over-exuberance? I think it is safe to say, it is a combination of all these factors!
With that said, our mantra has always been float at the lows of the market and lock at the highs. The last weeks have seen some recovery and we are now tickling the highs of the market...it's time to lock! If you are in contract but floating, a 30 day lock might be a good call, at this point there is more to lose if you guess wrong with market direction. Bear in mind, you are not the only ones looking to secure the best rates, or in the case of hedge funds or other market participants...profits, and with the highs being approached, I think it is only fair to assume that there will be profit taking! Till the next market update, look sharp, these rates could be gone by the end of the week.
Why, and what does it mean. I think we can point to a combination of factors, not just one in particular. Arguments floating around include the notion that the bond market participants(traders and such) expect weaker than expected corporate earnings. Right there would explain the recovery.... flight from risk, think fixed income investments, a nice safe return (Americans are all to aware of the pains of falling stock prices and/or below expectation earnings disclosure). Others feel that the bonds markets are deriving their strength from the FED stance and their pointed verbiage on rate policy and anti-inflation, another excellent point to consider......Or,perhaps rates jumped because the notes backing the interest rate market were "perceived" risky, and not unlike lemmings into the sea, did the traders get carried away, and we are now seeing the correction of their over-exuberance? I think it is safe to say, it is a combination of all these factors!
With that said, our mantra has always been float at the lows of the market and lock at the highs. The last weeks have seen some recovery and we are now tickling the highs of the market...it's time to lock! If you are in contract but floating, a 30 day lock might be a good call, at this point there is more to lose if you guess wrong with market direction. Bear in mind, you are not the only ones looking to secure the best rates, or in the case of hedge funds or other market participants...profits, and with the highs being approached, I think it is only fair to assume that there will be profit taking! Till the next market update, look sharp, these rates could be gone by the end of the week.
Understanding Your Adjustable Rate Mortgage (ARM) Program
Adjustable Rate Mortgages or ARMs are a popular financing vehicle for home financing. Despite this, many homeowners that currently have ARM financing really do not understand how their adjustable rate mortgage works. They may have a general understanding - that is after a specific period of time their rate could adjust due to open market conditions, but beyond this they have little or no understanding about their adjustable rate a mortgage.
Point in fact, not all adjustable rate mortgages are created equal, and their face value or designated name does not discriminate between these variances. This article will touch on the major points you should be aware of if you have an ARM home loan, but covering all aspects of adjustable rate mortgages is an impossible task to accomplish in a single post. For this reason here is a link to the CHARM handbook. CHARM is an acronym for Consumer Handbook on Adjustable Rate Mortgages, and is published by the Federal Reserve as a reference for consumers. This is not a short read, but does provide the information borrowers should be aware of if they are seeking an adjustable rate mortgage.
Considering not everyone has the time to review the CHARM handbook in its entirity, this post will touch on some of the major points of ARM home loans that everyone should be aware of if considering this type of financing solution.
Generally speaking most people are aware of the fact that different ARM programs offer different fixed periods. 1 month, 6 month, 1 year, 3 year, 5 year, 7 year, and 10 year are all types of adjustable rate mortgages. The first listed here however ( 1month, 6 month, 1 year) are not prevelant in the marketplace although they are available. Generally speaking ARMs are referred to by their fixed period - so they would be discussed as listed above. Looking for a 5 year adjustbale rate mortgage, most will refer to this program as a "5 year" or 5/1 ARM. This second designation is represented as a fraction. This second number (denominator) refers to the adjustment cycle. That is, when the rate does adjust in 5 years it will adjust once every year. Not all 5 year ARMs adjust once a year, some adjust twice a year which would be represented like this "5/6," the six representing the adjustment occuring every six months. All of the above programs mentioned are subject to this rule. Needless to say a 5/1 is more risky than a 5/6, and a 7/1 is more secure than a 5/1 (longer initial fixed period)... with this understanding we would assume a 5/1 ARM is a 5/1 ARM - this is not the case... ARM programs are identified by their initial fixed period but the details of each program vary. To understand this we must breakdown the interest rate.
Your interest rate for your ARM program is made up of two parts: the margin and the index. The margin can be thought of as the profit margin that rate offers the lender. This is a fixed figure that will not change throughout the course of the loan. Typical margins are in the range of 2.000% to 3.000% with 2.000% being a very good margin and 3.000% being a high margin. As I mentioned above the margin is a fixed number that will not change, it is static. The second part of the rate, the index, is ultimately what is responsible for adjustments in the adjustment phase of the home loan. There are many different indexes or indices (same word different spelling) that your ARM could be tied to, and all are different from one another. Well known indexes are the LIBOR, MTA, COSI, and PRIME. The important distinction between these indexes is the volatility. Certain indexes are more volatile than others. If the index of your adjustable rate mortgage is a volatile one, the chances of large adjustments is larger. Indexes that are more stable result in more moderate adjustments. Choosing an ARM with an index that you are comfortable with is important and something many people do not consider. Regardless this is an importnat aspect of your loan because it speaks directly to the inherent risk that loan carries.
So you know your index and margin, how do you determine your final rate? Simply add the index and margin together and you will have your home loan interest rate... well sort of. The final point we will be dicussing is caps. Caps again vary depending on the program. Not all 5/1 ARMs have the same caps. Caps refer to how much your rate can rise in any given adjustment and how high and low the rate can move. These caps are goingt to vary between lenders and are very important to discuss. If the caps at one lender are not favorable, it is reason enough to find another lender with more favorable caps. Think about it a 1% adjustment cap is very different than a 2% adjsutment cap or a 5% adjustment cap. They speak directly to exposure and future risk. If your rate can only adjust up a maximum of 1% per adjustment cycle... you have a much more secure program than than a program that allows for a 5% maximum adjustment.
Know your caps....
As mentioned above this is a genereal discussion of ARM programs, meant to inform borrowers about some of the finer details that many overlook. For a more thorough assessment of adjustable rate mortgages I highly recommend reviewing the CHARM handbook mentioned above.
In conclusion becuase there are so many varinaces between ARM programs, this is where brokers excel. A broker with significant lenders at their disposal will save you substantial time by going over these details before determining which lender is right for you.
Point in fact, not all adjustable rate mortgages are created equal, and their face value or designated name does not discriminate between these variances. This article will touch on the major points you should be aware of if you have an ARM home loan, but covering all aspects of adjustable rate mortgages is an impossible task to accomplish in a single post. For this reason here is a link to the CHARM handbook. CHARM is an acronym for Consumer Handbook on Adjustable Rate Mortgages, and is published by the Federal Reserve as a reference for consumers. This is not a short read, but does provide the information borrowers should be aware of if they are seeking an adjustable rate mortgage.
Considering not everyone has the time to review the CHARM handbook in its entirity, this post will touch on some of the major points of ARM home loans that everyone should be aware of if considering this type of financing solution.
Generally speaking most people are aware of the fact that different ARM programs offer different fixed periods. 1 month, 6 month, 1 year, 3 year, 5 year, 7 year, and 10 year are all types of adjustable rate mortgages. The first listed here however ( 1month, 6 month, 1 year) are not prevelant in the marketplace although they are available. Generally speaking ARMs are referred to by their fixed period - so they would be discussed as listed above. Looking for a 5 year adjustbale rate mortgage, most will refer to this program as a "5 year" or 5/1 ARM. This second designation is represented as a fraction. This second number (denominator) refers to the adjustment cycle. That is, when the rate does adjust in 5 years it will adjust once every year. Not all 5 year ARMs adjust once a year, some adjust twice a year which would be represented like this "5/6," the six representing the adjustment occuring every six months. All of the above programs mentioned are subject to this rule. Needless to say a 5/1 is more risky than a 5/6, and a 7/1 is more secure than a 5/1 (longer initial fixed period)... with this understanding we would assume a 5/1 ARM is a 5/1 ARM - this is not the case... ARM programs are identified by their initial fixed period but the details of each program vary. To understand this we must breakdown the interest rate.
Your interest rate for your ARM program is made up of two parts: the margin and the index. The margin can be thought of as the profit margin that rate offers the lender. This is a fixed figure that will not change throughout the course of the loan. Typical margins are in the range of 2.000% to 3.000% with 2.000% being a very good margin and 3.000% being a high margin. As I mentioned above the margin is a fixed number that will not change, it is static. The second part of the rate, the index, is ultimately what is responsible for adjustments in the adjustment phase of the home loan. There are many different indexes or indices (same word different spelling) that your ARM could be tied to, and all are different from one another. Well known indexes are the LIBOR, MTA, COSI, and PRIME. The important distinction between these indexes is the volatility. Certain indexes are more volatile than others. If the index of your adjustable rate mortgage is a volatile one, the chances of large adjustments is larger. Indexes that are more stable result in more moderate adjustments. Choosing an ARM with an index that you are comfortable with is important and something many people do not consider. Regardless this is an importnat aspect of your loan because it speaks directly to the inherent risk that loan carries.
So you know your index and margin, how do you determine your final rate? Simply add the index and margin together and you will have your home loan interest rate... well sort of. The final point we will be dicussing is caps. Caps again vary depending on the program. Not all 5/1 ARMs have the same caps. Caps refer to how much your rate can rise in any given adjustment and how high and low the rate can move. These caps are goingt to vary between lenders and are very important to discuss. If the caps at one lender are not favorable, it is reason enough to find another lender with more favorable caps. Think about it a 1% adjustment cap is very different than a 2% adjsutment cap or a 5% adjustment cap. They speak directly to exposure and future risk. If your rate can only adjust up a maximum of 1% per adjustment cycle... you have a much more secure program than than a program that allows for a 5% maximum adjustment.
Know your caps....
As mentioned above this is a genereal discussion of ARM programs, meant to inform borrowers about some of the finer details that many overlook. For a more thorough assessment of adjustable rate mortgages I highly recommend reviewing the CHARM handbook mentioned above.
In conclusion becuase there are so many varinaces between ARM programs, this is where brokers excel. A broker with significant lenders at their disposal will save you substantial time by going over these details before determining which lender is right for you.
Tuesday, April 13, 2010
Paying Closing Costs Up Front
Paying closing costs up front - why would anyone do that when they can get a no cost loan? The answer is simple, you get a lower interest rate when you pay the closing costs of your home loan. Then why have no cost loans become so popular? This is also a simple answer - successful advertising.
No cost loans where the lender pays closing costs are accomplished by selling the consumer a higher interest rate than they actually qualify for. In doing so the lender makes a premium known as yield spread. Yield spread is paid by the secondayr market for the oversold rate. They are willing to pay this premium because they understand that over the course of time the higher interest rate will return a larger profit, so the premium paid up front is justified and business as usual. Where does this fancy footwork leave the consumer who established the new home loan? They have a higher rate than the market truly offers that results in a higher monthly payment for the entire course of the loan.
Point in fact most people do not understand that this is how no cost home loans are accomplished because banks and correspondent lenders are not required to disclose the yield spread made on home loans they originate (brokers are required to disclose this premium), so often times you are sold a home loan without full disclosure of the terms.
Paying closing costs up front ont he other hand results in lower interest rates which result in lower monthly payments. Over time these lower monthly payments will result in savings far larger than the cost of closing you would incur to establish this lower rate. The simple reason this is not discussed in the large financial firms is because they understand their profit margins go up with the sale of no cost loans.
The point of this article is not to deter anyone from a no cost home loan. In certain instances this is a cost effective loan (ie: staying the the home for a short period of time); instead borrowers need to measure their break even points and research all of their options. Do not be opposed to paying closing costs, often times this is the most cost effective solution.
No cost loans where the lender pays closing costs are accomplished by selling the consumer a higher interest rate than they actually qualify for. In doing so the lender makes a premium known as yield spread. Yield spread is paid by the secondayr market for the oversold rate. They are willing to pay this premium because they understand that over the course of time the higher interest rate will return a larger profit, so the premium paid up front is justified and business as usual. Where does this fancy footwork leave the consumer who established the new home loan? They have a higher rate than the market truly offers that results in a higher monthly payment for the entire course of the loan.
Point in fact most people do not understand that this is how no cost home loans are accomplished because banks and correspondent lenders are not required to disclose the yield spread made on home loans they originate (brokers are required to disclose this premium), so often times you are sold a home loan without full disclosure of the terms.
Paying closing costs up front ont he other hand results in lower interest rates which result in lower monthly payments. Over time these lower monthly payments will result in savings far larger than the cost of closing you would incur to establish this lower rate. The simple reason this is not discussed in the large financial firms is because they understand their profit margins go up with the sale of no cost loans.
The point of this article is not to deter anyone from a no cost home loan. In certain instances this is a cost effective loan (ie: staying the the home for a short period of time); instead borrowers need to measure their break even points and research all of their options. Do not be opposed to paying closing costs, often times this is the most cost effective solution.
Monday, April 12, 2010
When To Buy Real Estate
A lot of people ask me when they find out what I do for a living, "when is it the right time time buy real estate?" The question is innocent but often times coupled with the wrong motive - greed - which inevitably leads them down a path that has more inherent risk than a chummed shark tank.
There is one correct answer to this question. The answer is, "when you can afford it." I know, it really does not seem that helpful, and usually I'll get some crooked looks... but this answer inevitably triggers a much more important question which is not always vocal but always apparent in the questioner's eyes, "well how do I know that?"
This is real question you need to answer before you decide whether or not buying a home is the right decision for you. Living house poor, that is spending all your income on home expenses is the sad reality for many people. This is not only mentally straining, it prevents you from being able to save and invest in other opportunities while leaving you vulnerable to unexpected events. Avoiding this is imperative, and something many people really don't take into consideration when getting preapproved. Instead their focus is on how large of a home loan they qualify for which in turn tells them their ceiling purchase price. From here they run out with their agent and begin searching for homes at this ceiling threshold. This action is justified by their understanding that real estate is an investment, a relatively safe investment that over time should appreciate. This vague understanding along with the dozen reverse mortgage commercials has impressed upon them the idea that if you hold onto your home for a long enough period of time, eventually your home will appreciate to a point where it can support your retirement. Let me be clear - this is a fantasy.
Although real estate is a wonderful investment, unless you already own the home you live in, thinking about real estate as an investment as opposed to shelter is the wrong mindset. Real estate first and foremost is shelter, and as long as you pay your taxes (and mortgage if you have one, and insurance to protect it for disasters) your home will remain your property forever, providing you a place of to raise your family that no one can take away from you (excluding eminent domain which you are justly compensated for). Understanding that your home is shelter first, and an investment second is an important mindset because it takes the profit variable out of the equation. Unless you are an experienced investor, the main objective should not be making a profit. Why? Becuase this will help you from falling into bubble buying... because you are not buying for profit you are buying for function the question is not what to buy now, but if you should buy now, and if you don't need it because it serves no function, then you will not buy. Moreover because you are buying for function not profit, to remain functionable the cost must remain inside your budget which will keep you from spending more than you can really afford.
So how do you calculate your budget? Lenders use what is called your debt to income ratio or DTI to determine whether or not a borrower is qualified for a loan. Essentially your DTI takes gross monthly income and divides it by monthly debt obligations (credits cards, car payments, your mortgage, insurance, and taxes, etc...) If the resulting ratio is under 45% they consider you a qualified borrower. Now you could use this formula to determine what you can afford, but realistically the goal is to ensure you remain in a strong financial position and the new home does not absorb every last nickel, so I recommend keeping your personal debt to income ratio under 38% to ensure you are prepared for life's unplanned expenses. What if you debt to income ratio is over 38%? What can you do to reduce it? There are a number of solutions - earn more income, reduce your monthly obligations, borrow less money, and or borrow at a lower rate of interest.
So you have the income, and your debt to income ratio is below 38%, what about assets? Coming in with 20% down is always a good idea if only to avoid having to pay mortgage insurance. How you get this down payment is not the issue (unless it is borrowed, than it is borrowed and not really money down), savings, gift funds, gift of equity, whatever... what you need to focus on is what you will have left over after you own the home and have paid all closing costs.
For conforming loans, most lenders look for two months principle interest taxes and insurance for establishing reserves after closing. For jumbo conforming products this two month requirement becomes six months. For your own planning purposes, you should look to have a minimum of 6 months PITI. If you can, try and have 6 months of expenses (mortgage, credit card, car, food, gas, etc) as your reserves. This emergency fund is not for spending or even investing. It is for security and should be classified as such. Keep it in a liquid interest bearing account that you have access to at any point in time without penalty.
So you have the income and assets, now what does your credit look like? People that have taken the time to evaluate their income and assets as I have broken down above rarely have credit problems, however if you do now would be the time to focus your attention on fixing your credit. Generally speaking you want your credit scores to be in the mid 700s if you hope to obtain the best financing terms. If your credit is a problem fixing it is not a lifelong journey and can be accomplished in a reasonable amount of time. The most important aspects of credit are balances and payment history. Make all your payments on time and keep your balance low. High balance can have an adverse affect on your score even if you pay your bills on time.
With income, assets, and strong credit you are ready to buy a home. Do not fall victim to market games, timing rates, or waiting until the winter. If you find yourself in the market respect the fact that a home is a long term investment that you should not be looking to profit from. Hold this mindset, and profits will follow.
There is one correct answer to this question. The answer is, "when you can afford it." I know, it really does not seem that helpful, and usually I'll get some crooked looks... but this answer inevitably triggers a much more important question which is not always vocal but always apparent in the questioner's eyes, "well how do I know that?"
This is real question you need to answer before you decide whether or not buying a home is the right decision for you. Living house poor, that is spending all your income on home expenses is the sad reality for many people. This is not only mentally straining, it prevents you from being able to save and invest in other opportunities while leaving you vulnerable to unexpected events. Avoiding this is imperative, and something many people really don't take into consideration when getting preapproved. Instead their focus is on how large of a home loan they qualify for which in turn tells them their ceiling purchase price. From here they run out with their agent and begin searching for homes at this ceiling threshold. This action is justified by their understanding that real estate is an investment, a relatively safe investment that over time should appreciate. This vague understanding along with the dozen reverse mortgage commercials has impressed upon them the idea that if you hold onto your home for a long enough period of time, eventually your home will appreciate to a point where it can support your retirement. Let me be clear - this is a fantasy.
Although real estate is a wonderful investment, unless you already own the home you live in, thinking about real estate as an investment as opposed to shelter is the wrong mindset. Real estate first and foremost is shelter, and as long as you pay your taxes (and mortgage if you have one, and insurance to protect it for disasters) your home will remain your property forever, providing you a place of to raise your family that no one can take away from you (excluding eminent domain which you are justly compensated for). Understanding that your home is shelter first, and an investment second is an important mindset because it takes the profit variable out of the equation. Unless you are an experienced investor, the main objective should not be making a profit. Why? Becuase this will help you from falling into bubble buying... because you are not buying for profit you are buying for function the question is not what to buy now, but if you should buy now, and if you don't need it because it serves no function, then you will not buy. Moreover because you are buying for function not profit, to remain functionable the cost must remain inside your budget which will keep you from spending more than you can really afford.
So how do you calculate your budget? Lenders use what is called your debt to income ratio or DTI to determine whether or not a borrower is qualified for a loan. Essentially your DTI takes gross monthly income and divides it by monthly debt obligations (credits cards, car payments, your mortgage, insurance, and taxes, etc...) If the resulting ratio is under 45% they consider you a qualified borrower. Now you could use this formula to determine what you can afford, but realistically the goal is to ensure you remain in a strong financial position and the new home does not absorb every last nickel, so I recommend keeping your personal debt to income ratio under 38% to ensure you are prepared for life's unplanned expenses. What if you debt to income ratio is over 38%? What can you do to reduce it? There are a number of solutions - earn more income, reduce your monthly obligations, borrow less money, and or borrow at a lower rate of interest.
So you have the income, and your debt to income ratio is below 38%, what about assets? Coming in with 20% down is always a good idea if only to avoid having to pay mortgage insurance. How you get this down payment is not the issue (unless it is borrowed, than it is borrowed and not really money down), savings, gift funds, gift of equity, whatever... what you need to focus on is what you will have left over after you own the home and have paid all closing costs.
For conforming loans, most lenders look for two months principle interest taxes and insurance for establishing reserves after closing. For jumbo conforming products this two month requirement becomes six months. For your own planning purposes, you should look to have a minimum of 6 months PITI. If you can, try and have 6 months of expenses (mortgage, credit card, car, food, gas, etc) as your reserves. This emergency fund is not for spending or even investing. It is for security and should be classified as such. Keep it in a liquid interest bearing account that you have access to at any point in time without penalty.
So you have the income and assets, now what does your credit look like? People that have taken the time to evaluate their income and assets as I have broken down above rarely have credit problems, however if you do now would be the time to focus your attention on fixing your credit. Generally speaking you want your credit scores to be in the mid 700s if you hope to obtain the best financing terms. If your credit is a problem fixing it is not a lifelong journey and can be accomplished in a reasonable amount of time. The most important aspects of credit are balances and payment history. Make all your payments on time and keep your balance low. High balance can have an adverse affect on your score even if you pay your bills on time.
With income, assets, and strong credit you are ready to buy a home. Do not fall victim to market games, timing rates, or waiting until the winter. If you find yourself in the market respect the fact that a home is a long term investment that you should not be looking to profit from. Hold this mindset, and profits will follow.
Thursday, April 8, 2010
Wholesale vs Retail
Many people ask me - why would I work with a middle man when I can go straight to the source? It's a honest question that deserves an honest answer. The question boils down to a simple difference in pricing - brokers are offered wholesale interest rates by the lenders that they are approved with; banks on the other hand offer retail interest rates to consumers that come through their doors looking for a home loan. The difference between retail interest rates and wholesale interest rates can be staggering. It is this difference in pricing that makes brokers so competitive.
Additionally brokers have the ability to take your loan to any bank they are approved with which means more options to you. Moreover brokers often times are approved with lenders that do not even offer retail solutions to borrowers. What does this mean to you? Because they operate in only wholesale markets, the overhead associated with these lending institutions is substantially lower than typical banks most people consider for their financing. Because their overhead is lower, they can offer better pricing and still remain profitable. Brokers understand this and are able to use this to their clients advantage.
Another important distinction to make is when you are getting a wholesale interest rate from a broker, the broker is required to disclose all aspects of that rate including any yield spread being made. The same cannot be said for retail operations which can legally refrain from disclosing the yield spread made on a particular loan. What is yield spread? When a lender over sells an interest rate to a consumer, that oversold rate pays additional compensation because the investor understands that in overselling the rate they stand to make substantially more off that loan and are therefore willing to pay a premium. Brokers operating in wholesale must disclose this to their borrowers, retail operations do not have to. Guess how many choose to keep it to themselves? I do not know one lender that chooses to disclose yield spread to their clients when the law does not require them to. In fact lending institutions use this fact as a sales point to attract new loan officers.
This spits in the face of their clients and raises the immediate question - is this type of lending institution really looking out for their clients?
Wholesale interest rates or retail interest rates? What I find incredibly interesting about this question is for some reason people that finally come to understand the difference will still sometime search out a retail product as if their overpaying ensures they will get a better program. Couple of points on this thought. First when dealing with finance, the best program is the most cost effective program - and wholesale costs less than retail. Secondly, the loan officer you talk to in a retail bank is probably not licensed by the Department of Real Estate. Without a DRE license, they have no fiduciary responsibility to you; in fact their responsibility is to the bank, their employer. You may be a client of the bank, but that's like saying I'm a client of the IRS... who isn't a client of a bank these days in some capacity? A bank officer represents the bank, not you. A broker operating in wholesale represents you to the bank. This is a significant difference.
Point in fact if you are considering a home loan and have talked to a bank, now is the time to get in touch with a wholesale broker. You'll be glad you did.
Additionally brokers have the ability to take your loan to any bank they are approved with which means more options to you. Moreover brokers often times are approved with lenders that do not even offer retail solutions to borrowers. What does this mean to you? Because they operate in only wholesale markets, the overhead associated with these lending institutions is substantially lower than typical banks most people consider for their financing. Because their overhead is lower, they can offer better pricing and still remain profitable. Brokers understand this and are able to use this to their clients advantage.
Another important distinction to make is when you are getting a wholesale interest rate from a broker, the broker is required to disclose all aspects of that rate including any yield spread being made. The same cannot be said for retail operations which can legally refrain from disclosing the yield spread made on a particular loan. What is yield spread? When a lender over sells an interest rate to a consumer, that oversold rate pays additional compensation because the investor understands that in overselling the rate they stand to make substantially more off that loan and are therefore willing to pay a premium. Brokers operating in wholesale must disclose this to their borrowers, retail operations do not have to. Guess how many choose to keep it to themselves? I do not know one lender that chooses to disclose yield spread to their clients when the law does not require them to. In fact lending institutions use this fact as a sales point to attract new loan officers.
This spits in the face of their clients and raises the immediate question - is this type of lending institution really looking out for their clients?
Wholesale interest rates or retail interest rates? What I find incredibly interesting about this question is for some reason people that finally come to understand the difference will still sometime search out a retail product as if their overpaying ensures they will get a better program. Couple of points on this thought. First when dealing with finance, the best program is the most cost effective program - and wholesale costs less than retail. Secondly, the loan officer you talk to in a retail bank is probably not licensed by the Department of Real Estate. Without a DRE license, they have no fiduciary responsibility to you; in fact their responsibility is to the bank, their employer. You may be a client of the bank, but that's like saying I'm a client of the IRS... who isn't a client of a bank these days in some capacity? A bank officer represents the bank, not you. A broker operating in wholesale represents you to the bank. This is a significant difference.
Point in fact if you are considering a home loan and have talked to a bank, now is the time to get in touch with a wholesale broker. You'll be glad you did.
Wednesday, April 7, 2010
Rates Creeping Lower Consider Locking
Interest rates this morning are slightly lower than yesterdays published rates sheets, and the market this morning is suggesting better rates to come this afternoon. That is, should the market hold and/or post additional gains we will be due a reprice for the better.
With that said we do have a treasury auction tomorrow for the 10 year note. This could make or break interest rates right now. Point in fact the yield on the 10 year right now is just below 4.000. This is a great opportunity for indirect bidders (foreign investors). If the indirect bid is strong this will have a positive effect on interest rates and we should see pricing improve in the short term.
This post is meant to inform all of you floating interest rates to get ready to lock. If you have been reading this blog you understand that the trend right now is rising interest rates. Regardless the market does not move in flat lines, like any market a chart of the Mortgage Backed Securities market looks like a mountain range. Catching and locking your rate at the right part of this range is critical. Doing so will save you substantially in closing or may even lower your rate.
With rising rates catching these low points is even more critical. Today and tomorrow offer opportunities that we should not overlook.
With that said we do have a treasury auction tomorrow for the 10 year note. This could make or break interest rates right now. Point in fact the yield on the 10 year right now is just below 4.000. This is a great opportunity for indirect bidders (foreign investors). If the indirect bid is strong this will have a positive effect on interest rates and we should see pricing improve in the short term.
This post is meant to inform all of you floating interest rates to get ready to lock. If you have been reading this blog you understand that the trend right now is rising interest rates. Regardless the market does not move in flat lines, like any market a chart of the Mortgage Backed Securities market looks like a mountain range. Catching and locking your rate at the right part of this range is critical. Doing so will save you substantially in closing or may even lower your rate.
With rising rates catching these low points is even more critical. Today and tomorrow offer opportunities that we should not overlook.
Tuesday, April 6, 2010
FOMC minutes released
Well, considering rates are very important to what is happening in our housing markets today, I think it is pertinent to pass along a synopsis of the Fed minutes that were released today at 11am pacific.
Verbiage is very important to note, as it gives direction to the state of the economy and an indicator to traders of the FED direction.
· If trend inflation declines further or the economic outlook worsens, “extended period” of low rates could last “quite some time”
· Members of FOMC believe extended period language wouldn’t preclude prompt policy tightening if needed
· FOMC participants felt underlying inflation likely to stay subdued, and that inflation expectations are “reasonably” well-anchored
· Members are worried about high unemployment, fear recovery won’t be sustained without pickup in jobs
· Constrained household spending due to weak labor markets, tight credit and slow income growth
· Members concerned that the pace of housing activity is leveling off and that foreclosure to remain “quite high”
As this information has just hit the newsreels, It will take a day or two to gauge the market reaction. So far both the bond and the stock markets have responded favorable. It looks like rates are fighting the good fight! Stay tuned
Verbiage is very important to note, as it gives direction to the state of the economy and an indicator to traders of the FED direction.
· If trend inflation declines further or the economic outlook worsens, “extended period” of low rates could last “quite some time”
· Members of FOMC believe extended period language wouldn’t preclude prompt policy tightening if needed
· FOMC participants felt underlying inflation likely to stay subdued, and that inflation expectations are “reasonably” well-anchored
· Members are worried about high unemployment, fear recovery won’t be sustained without pickup in jobs
· Constrained household spending due to weak labor markets, tight credit and slow income growth
· Members concerned that the pace of housing activity is leveling off and that foreclosure to remain “quite high”
As this information has just hit the newsreels, It will take a day or two to gauge the market reaction. So far both the bond and the stock markets have responded favorable. It looks like rates are fighting the good fight! Stay tuned
First Time Homebuyer Credit at a Glance
Over the past year I have received numerous inquiries into the tax credit offered to First Time Home Buyers. After speaking with friends, colleague’s and clients, I realized there was a definite need to clarify the program, as there seems to be incredible amount of misinformation being circulated. I have tried below to outline the most important aspects for reference.
The Worker, Homownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence(the program has been extended to current homeowners as well, but that topic will not be covered here).
First-time home buyers purchasing any kind of home are eligible for the tax credit. To qualify for the credit, the purchase must occur on or after 01/01/2009 and on or before 04/30/2010. The purchase date is the date when closing occurs and the title to the property transfers to the home owner. With that being said, the law also allows home sales occurring by June 30, 2010 to qualify, as long as they are due to a binding sales contract in force on or before April 30, 2010.
For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts. Example: Single individual with income of $132,000 is $7,000 over the 125,000 threshold. Divide the $7,000 by the phaseout range of $20,000 yields (.35). Subtracting (.35) from 1 results in (.65). Multiplying the 8,000(max credit available) by (.65) shows the borrower is eligible for a partial credit of $5,200. This is very general and should only be used as an example. Any tax questions should be directed to a tax professional.
Now listen up! Not everyone gets $8000 tax credit. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
The tax credit is claimed on your federal income tax return. To take the tax credit the homebuyer completes IRS form 5405 to determine their tax credit amount, and then claims this amount on the 1040 income tax form for 2009 returns. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase. In cases where a HUD-1 form is not used, such as for construction of some new homes, you should attach a copy of the certificate of occupancy in lieu of the HUD-1.
I think the most important thing to note about the credit is that it is refundable. This means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes! (Not like a tax deduction) If nothing is owed, the government cuts a check for the amount of the credit, or in the case some taxes are owed, the difference between tax owed and the credit offset!
I hope this has shed a little light on the credit that is on offer through the Worker, Homeownership, and Business Assistance Act of 2009. Misinformation has hindered this program since its inception, and with time of expiration fast approaching and rash actions seemingly more commonplace, pertinent information is necessary to make informed financial decisions!!! Obviously all tax questions should be asked of a qualified professional before moving forward with any purchase. I am not a tax preparer and this is not tax advice, but rather reference material for a perspective buyer. Any particular questions should be directed to your tax preparer. You got 25 days to get into contract. Happy House Hunting!
The Worker, Homownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence(the program has been extended to current homeowners as well, but that topic will not be covered here).
First-time home buyers purchasing any kind of home are eligible for the tax credit. To qualify for the credit, the purchase must occur on or after 01/01/2009 and on or before 04/30/2010. The purchase date is the date when closing occurs and the title to the property transfers to the home owner. With that being said, the law also allows home sales occurring by June 30, 2010 to qualify, as long as they are due to a binding sales contract in force on or before April 30, 2010.
For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts. Example: Single individual with income of $132,000 is $7,000 over the 125,000 threshold. Divide the $7,000 by the phaseout range of $20,000 yields (.35). Subtracting (.35) from 1 results in (.65). Multiplying the 8,000(max credit available) by (.65) shows the borrower is eligible for a partial credit of $5,200. This is very general and should only be used as an example. Any tax questions should be directed to a tax professional.
Now listen up! Not everyone gets $8000 tax credit. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
The tax credit is claimed on your federal income tax return. To take the tax credit the homebuyer completes IRS form 5405 to determine their tax credit amount, and then claims this amount on the 1040 income tax form for 2009 returns. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase. In cases where a HUD-1 form is not used, such as for construction of some new homes, you should attach a copy of the certificate of occupancy in lieu of the HUD-1.
I think the most important thing to note about the credit is that it is refundable. This means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes! (Not like a tax deduction) If nothing is owed, the government cuts a check for the amount of the credit, or in the case some taxes are owed, the difference between tax owed and the credit offset!
I hope this has shed a little light on the credit that is on offer through the Worker, Homeownership, and Business Assistance Act of 2009. Misinformation has hindered this program since its inception, and with time of expiration fast approaching and rash actions seemingly more commonplace, pertinent information is necessary to make informed financial decisions!!! Obviously all tax questions should be asked of a qualified professional before moving forward with any purchase. I am not a tax preparer and this is not tax advice, but rather reference material for a perspective buyer. Any particular questions should be directed to your tax preparer. You got 25 days to get into contract. Happy House Hunting!
New Wave of Foreclosures
There are many people out there that believe the economy has finally turned and we are about to really begin turning around our economy. In short things are getting better, and our economy is recovering. A large part of this recovery is the housing market is stabilizing, and a recent survey completed by Fannie Mae suggests that housing prices are reaching their lows, and 70% of people still believe a home is a safe investment. To top it off you turn on any news channel except Fox and you will hear reporters discussing the recovery and our strong stock market and solid company earnings in my industries.
Yet despite this positive spin, Americans are still struggling to find adequate employment - with unemployment at 9.8%, the question is how can we be recoverying without creating jobs? Couple this with the new program the White House has announced that is suppose to help people currently underwater and unemployed with their housing obligations. This spits in the face of reporters claiming recovery because it essentially tells us that the White House is deeply concerned about unemployed citizens meeting their housing obligations, so much so they are going to subsidize these people in the interim.
Hmmmmm.....
Now let's digress a moment and consider the real estate inventory already on the bank books. It is well known the banks have not listed for sale on the market all the homes foreclosed on in the last couple years. The simple reason for this is because they did not want to flood the market - too much supply without any demand would have compromised the value of these homes and ultimately the underlaying value of the collateral they have supporting performing loans, so they were reuired to slowing list these properties for sale as bank owned homes. This coupled with the suffering economy, job losses, etc... more people have walked away from or been foreclosed on which means more inventory.
Point in fact banks currently have substantial inventory on their books. This inventory is a liability costing them in their bottom line, after all banks are not in the business of holding real estate. These foreclosures have essentially caused a backlog which will lead to another influx of bank owned real estae on the market. How will this effect current home prices? Because these are considered bargain buys, this evolution in housing cannot help our market, although it does present some significant opportunities for people in a position to pick up additional properties.
It seems Fannie and Freddie are preparing for this. Recently we have seen guideline changes allowing for up to 10 financed properties. This is a significant rise from the previous level of 4 which will allow people that previously could not secure financing to be able to.
>>>>>>>>>>>>>>>>>>
Now let's bring this full circle... our economy is recovering according to the News as stock prices rise and companies post solid profits, however real estate is still suffering as a new wave of foreclosures approaches, in addition the White House is deeply concerned about unemployment signified by their new program to help the unemployed stay in their homes. Add all this up - we are not recovering... we are in a state of flux with addition problems on their way (after all we have not even discussed commercial real estate defaults).
Although this is somewhat troubling news, let us keep in mind it is during times like these that real money can be made - after all, the goal of all investors is to buy low and sell high. Buying in this market is half that equation, selling high is simply a matter of allowing enough time to pass.
Yet despite this positive spin, Americans are still struggling to find adequate employment - with unemployment at 9.8%, the question is how can we be recoverying without creating jobs? Couple this with the new program the White House has announced that is suppose to help people currently underwater and unemployed with their housing obligations. This spits in the face of reporters claiming recovery because it essentially tells us that the White House is deeply concerned about unemployed citizens meeting their housing obligations, so much so they are going to subsidize these people in the interim.
Hmmmmm.....
Now let's digress a moment and consider the real estate inventory already on the bank books. It is well known the banks have not listed for sale on the market all the homes foreclosed on in the last couple years. The simple reason for this is because they did not want to flood the market - too much supply without any demand would have compromised the value of these homes and ultimately the underlaying value of the collateral they have supporting performing loans, so they were reuired to slowing list these properties for sale as bank owned homes. This coupled with the suffering economy, job losses, etc... more people have walked away from or been foreclosed on which means more inventory.
Point in fact banks currently have substantial inventory on their books. This inventory is a liability costing them in their bottom line, after all banks are not in the business of holding real estate. These foreclosures have essentially caused a backlog which will lead to another influx of bank owned real estae on the market. How will this effect current home prices? Because these are considered bargain buys, this evolution in housing cannot help our market, although it does present some significant opportunities for people in a position to pick up additional properties.
It seems Fannie and Freddie are preparing for this. Recently we have seen guideline changes allowing for up to 10 financed properties. This is a significant rise from the previous level of 4 which will allow people that previously could not secure financing to be able to.
>>>>>>>>>>>>>>>>>>
Now let's bring this full circle... our economy is recovering according to the News as stock prices rise and companies post solid profits, however real estate is still suffering as a new wave of foreclosures approaches, in addition the White House is deeply concerned about unemployment signified by their new program to help the unemployed stay in their homes. Add all this up - we are not recovering... we are in a state of flux with addition problems on their way (after all we have not even discussed commercial real estate defaults).
Although this is somewhat troubling news, let us keep in mind it is during times like these that real money can be made - after all, the goal of all investors is to buy low and sell high. Buying in this market is half that equation, selling high is simply a matter of allowing enough time to pass.
Monday, April 5, 2010
Interest Rates Moving Higher
Interest rates for home loans are on the rise this morning after the long Easter weekend. This can be credited to weaker treasuries which have resulted in higher yields (in fact we just hit 4.000% on the 10 year) drawing investors away from our Mortgage Backed Securities market. Our weaker market has lead to higher interest rates offered to consumers - at least on today's rate sheet. Will this trend continue? Will interest rates continue to rise?
Depending on who you ask, this is a tricky question to answer. If we consider interest rates for home loans through the remainder of the year, we come to a pivotal date this November - namely midterm elections.
There is no doubt, elected officials still in office will do everything in their power to keep interest rates low for the midterms, but do they have enough clout to really impact the market which is clearly trending into higher interest rates. The climb in interest rates recently can be wholeheartedly attributed to the Fed leaving the MBS market and discontinuing their Mortgage Backed Securities purchase program. In doing so they significantly reduced the monetary backing behind private investors. By removing themselves from this market they essentially removed the safety net protecting these investors. Without the Fed protection (and deep pockets) private investors have been forced to re-evaluate their positions and investment strategies which has led to a climb in interest rates.
Other indicators suggest this trend in rising rates is potentially here to stay. Oil is steadily rising in price, and the stock market is breaking through yearly highs. Even employment numbers this month were positive although their is serious debate over this figure and what it actually means.
Personally I do not think our economy has improved enough to justify higher interest rates yet, regardless they are on the rise, but if I am right we will see rates come back down as long as inflation stays in check. My fear is inflation is the real root cause of this recent evolution in our market.
Stock market at yearly highs - why dollar is weak thereby attracting foreign investors into our market giving us our boost. Gold and oil share the same fate... up in price due to a weaker dollar - the perception is a stronger market when in reality it is simply a weaker currency. Finally the 10 year treasury is at 4.000% currently, although it is likely to fall back under 4 before the end of the day. Regardless this suggests investors, both foreign and domestic are slow to move into this investment. This has lead to higher yields. Generally speaking we look to indirect bids or foreign investing in our treasuries. Recently this indirect bid has been weak suggesting foreign economies are not interested in our bonds right now because they want a higher yield - why - because our economy and our dollar is weaker.
As far as the whispers about the Fed raising the discount rate.... this will not happen. We cannot afford it right now because this recovery does not have the foundation the media is leading us all to believe. The Fed understands the thin ice we are on right now and the weather is warming... we need to get to solid ground before the Fed will begin rising the discount rate.
With rising rates, it is time to take action, don't delay or the 5% offered today that you feel is high will look like a mirace rate when offered rates jump into the 6s and eventually the 7s - quite possibly much much higher
Depending on who you ask, this is a tricky question to answer. If we consider interest rates for home loans through the remainder of the year, we come to a pivotal date this November - namely midterm elections.
There is no doubt, elected officials still in office will do everything in their power to keep interest rates low for the midterms, but do they have enough clout to really impact the market which is clearly trending into higher interest rates. The climb in interest rates recently can be wholeheartedly attributed to the Fed leaving the MBS market and discontinuing their Mortgage Backed Securities purchase program. In doing so they significantly reduced the monetary backing behind private investors. By removing themselves from this market they essentially removed the safety net protecting these investors. Without the Fed protection (and deep pockets) private investors have been forced to re-evaluate their positions and investment strategies which has led to a climb in interest rates.
Other indicators suggest this trend in rising rates is potentially here to stay. Oil is steadily rising in price, and the stock market is breaking through yearly highs. Even employment numbers this month were positive although their is serious debate over this figure and what it actually means.
Personally I do not think our economy has improved enough to justify higher interest rates yet, regardless they are on the rise, but if I am right we will see rates come back down as long as inflation stays in check. My fear is inflation is the real root cause of this recent evolution in our market.
Stock market at yearly highs - why dollar is weak thereby attracting foreign investors into our market giving us our boost. Gold and oil share the same fate... up in price due to a weaker dollar - the perception is a stronger market when in reality it is simply a weaker currency. Finally the 10 year treasury is at 4.000% currently, although it is likely to fall back under 4 before the end of the day. Regardless this suggests investors, both foreign and domestic are slow to move into this investment. This has lead to higher yields. Generally speaking we look to indirect bids or foreign investing in our treasuries. Recently this indirect bid has been weak suggesting foreign economies are not interested in our bonds right now because they want a higher yield - why - because our economy and our dollar is weaker.
As far as the whispers about the Fed raising the discount rate.... this will not happen. We cannot afford it right now because this recovery does not have the foundation the media is leading us all to believe. The Fed understands the thin ice we are on right now and the weather is warming... we need to get to solid ground before the Fed will begin rising the discount rate.
With rising rates, it is time to take action, don't delay or the 5% offered today that you feel is high will look like a mirace rate when offered rates jump into the 6s and eventually the 7s - quite possibly much much higher
Thursday, April 1, 2010
95% Conventional Financing Now Available in CA
For some time now conventional financing in California has been limited to 90% financing. This has forced borrowers looking for conventional financing to either come in with a 10% down payment for a purchase or have at least a 10% equity position in the home they are looking to refinance, if they want to secure conventional financing. If they didn't have this 10%, securing financing meant alternative solutions, namely FHA and VA - both of which have large funding fees associated with a closed loan making these options less attractive. In addition a VA or FHA appraisal is typically stricter than conventional standards making these financing vehicles difficult to obtain when considering bank owned homes that need some fixing, or if their are any deficiencies associated with your current residence. Then there is the general problem of qualifying for FHA and VA... VA requiring a certificate of eligibility, and FHA requiring your income stays within a specific range. If you cannot meet these guidelines VA and FHA were not even options.
That is not the case any more. Conventional financing to 95% financing allows for 5% down or a 5% equity position to achieve financing. This is one loan (not a 1st 2nd mortgage combo) that requires mortgage insurance, but all loans over 80% loan to value require mortgage insurance (except VA loans), so this is not anything to get distressed over. After all once you can prove a 20% equity position you can have the mortgage insurance removed and retain the financing secured. Moreover MI insurance is tax deductible these days...
This new program offers significant opportunities for people that have the income but not the reserves necessary to buy a home. With home prices still low this is an important opportunity to review options... a denial 3 months ago does not mean you cannot qualify today.
Regardless this is a major development for conventional financing. It infers that markets are beginning to find their footing, and home prices are stabilizing in CA. This stabilization should it continue will help loosen guidelines, which this is an example of, which should allow more people looking for financing to be eligible.
Of course if this is something you are interested in. I would definitely recommend reviewing your options as soon as possible. The unreported side of this story in this article is interest rates. Rates are climbing.... more on this later today when the market has time to settle in. YOu should definitely look to secure financing now if you have the option... as rates climb it will be harder and harder to qualify.
That is not the case any more. Conventional financing to 95% financing allows for 5% down or a 5% equity position to achieve financing. This is one loan (not a 1st 2nd mortgage combo) that requires mortgage insurance, but all loans over 80% loan to value require mortgage insurance (except VA loans), so this is not anything to get distressed over. After all once you can prove a 20% equity position you can have the mortgage insurance removed and retain the financing secured. Moreover MI insurance is tax deductible these days...
This new program offers significant opportunities for people that have the income but not the reserves necessary to buy a home. With home prices still low this is an important opportunity to review options... a denial 3 months ago does not mean you cannot qualify today.
Regardless this is a major development for conventional financing. It infers that markets are beginning to find their footing, and home prices are stabilizing in CA. This stabilization should it continue will help loosen guidelines, which this is an example of, which should allow more people looking for financing to be eligible.
Of course if this is something you are interested in. I would definitely recommend reviewing your options as soon as possible. The unreported side of this story in this article is interest rates. Rates are climbing.... more on this later today when the market has time to settle in. YOu should definitely look to secure financing now if you have the option... as rates climb it will be harder and harder to qualify.
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