| “Be Nice to the Countries That Lend You Money” I am not a doom and gloom person but you should be watching the value of the US dollar and the cost of our debt over the next few years to see if the mighty American Empire is burning or dropping to an also ran status like France, Italy or Great Britain. |
Four times annually, the Federal Reserve surveys 84 banks around the country regarding their general lending standards.
One of the survey questions asks about current mortgage lending standards and whether it's getting harder, or easier, to get approved for a home loan.
In the most recent survey, 75 percent of the banks said they're making it harder for "prime" borrowers to get a home loan.
That means you, Mr. Lawyer. And, Dr.Doctor.
A six-figure income with A-plus credit won't get you carte blanche with the bank anymore. Lenders stopped fighting over the right to collect your interest payments months ago.
Today, they're more worried about you defaulting. Something about 250k bank and finance jobs toasted in the last year and the deep recession makes investors a little worried. No ONE is immune from the big waves sweeping over the credit markets.
The first wave of lender tightening eased into the books earlier this year. Most changes were focused on the borrower's individual credit characteristics including income, assets, and credit score.
The second wave of tightened, however, has been completely out of the mortgage applicant's hands. It's collateral -- the fancy bank term for "what your home is worth". Banks are very concerned about collateral.
Mortgage lenders read the papers, too, and they know that home values are falling or are flat in most neighborhoods. There's a recovery underway, but it's not going to be immediate.
Therefore, many banks assume that the 80 percent home loan made today will be a 85 percent home loan sometime in 2009 and having less than 20% equity in a home is not where the banks want you to be -- especially with joblessness on the rise and a loads of unanswered questions about the economy.
For homeowners with jumbo or super-jumbo mortgages, this loan-to-value change will resonate deeply. Just this morning, for example, one of the country's largest niche lenders dramatically lowered its maximum LTV ratios for prime borrowers.
Look at how it changes the borrowing landscape for a condo buyer in Chicago with strong income and excellent credit:
In other markets, where home values are more dubious, like California, downpayment requirements can be even higher.
Now, this isn't to say that prime borrowers won't get approved for home loans -- it's just meant to tell the street-level story of what's going on. There are a lot of people in cities like Chicago or Cincinnati that were first-time home buyers between 2002-2006. For those homeowners, the only mortgage approval system of which they know is one that's based on them -- their FICO, income and ability to fog a mirror.
Today, it's The Triangle + Rock Solid Appraised Value.
This is why prime borrowers are finding it harder to get a mortgage -- it doesn't matter what you look like on paper, it's what you and your home look like on paper.
The market will likely to tighten further in the near-term so the best way to prepare for is to ask good questions in advance of your actual needs. A proactive plan always works better than a reactive one.
If buying a home or refinancing one is in your plans for December 2008, or January-March 2009, reach out to your loan officer to find out how changing guidelines for prime borrowers can impact you. Especially if you're a jumbo or super-jumbo borrower. Also, we are very excited to have added a niche portfolio lender that can do a 30Y Fixed Jumbo throughout the country in the low 6% range for the solid "money good" credit client. Contact our office to check out our jumbo mortgage rates for your home purchase or refinance. As always, no pressue and no obligation beyond a short chat.
Unlike past revisions in which Fannie Mae tightened debt ratio and credit scoring requirements, however, the newest underwriting updates home equity and home buyer downpayments.
This is consistent with the emerging underwriting philosophy that Collateral is King.
No home equity, no downpayment, no loan.
Effective December 13, 2008, Fannie Mae will enforce the following single-family residence restrictions:
Each bullet point represents a 5 percent tightening over the previous guidelines.
Now, to be clear, Fannie Mae isn't the only source for mortgage money. The others are comprised by the FHA, the VA, and an innumerable amount of portfolio lenders. To date, these groups have yet to announce similar loan-to-value restrictions.
But, because Fannie Mae (along with Freddie Mac) guarantees almost half of the nation's home loans, it does swing a big stick. Historically, when Fannie Mae gets tight with its money, the other groups tend to follow.
Starting 45 days from now, qualifying for a conforming mortgage will require more home equity than at any time since 2003.
Now, there are a lot of people sitting around right now, waiting for mortgage rates to fall before buying or refinancing their home.
I'd offer a more prudent idea: Just get on with it already.
None of us can predict what where mortgage rates will go. Recession, inflation, whatever -- it's a big mystery. But, we do know with 100% certainty that guidelines will tighten effective December 13, 2008, and it will prohibit Americans from getting access to mortgages.
We know this because Fannie Mae published it on its Web site.
If you're buying a home or in need of a refinance, consider moving up your timeline. If rates fall after-the-fact, you can always try to refinance into something less expensive. But if guidelines shut you out, there's nothing you can do about in hindsight.
If you know you need a conforming mortgage or a jumbo mortgage, just take care of it. Great low rates don't mean a thing if you can't get qualified. And starting December 13, 2008, the qualifying hurdles are going to be raised.
With the London Interbank Offered Rate (Libor) at record levels, thus hurting short-term borrowing, as well as blowing up many jumbo mortgages linked to the floating rate that have begun to adjust, it's useful to remind yourself how exactly Libor works. Click image to enlarge.
I’ve been seeing quite a few agents and lenders using the $7,500 1st Time Buyer “Credit” in their promotional materials aimed at first time buyers. Be careful out there as many people “explaining” this “credit” to first time buyers are not including the part where it has to be repaid. The first payment of $500 begins two years after you receive the “Credit” and continues for 15 years. If you sell the property at a profit before the $7,500 is paid back, the balance is due when you sell. On the bright side, it does appear that if you do not have enough “profit” to repay the interest free loan of $7,500…it is forgiven.
Excerpted from FAQ’s On the $7,500 1st Time Buyer “Credit”:
“ …Because the tax credit must be repaid, it operates like a zero-interest loan….The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.”
“…the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale…if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed.”
“…this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales.”
It’s not that I’m against a stimulus package for increasing homes sales, but you have to wonder how many people see CREDIT and understand LOAN? They really should call it a $7,500 1st Time Buyer Interest Free LOAN. And for all you mortage and real estate professionals, maybe we understand why the government has to call it a TAX CREDIT, but to be sure your clients know the amount has to be repaid, you should call it an interest free loan when explaining it to your clients. As always consult a CPA or accountant for further clarification.
With jumbo mortgage rates moving faster than anytime in recent history, let's take a few minutes to recap what's going on, and what's causing rates to be so volatile.
First, the bailout.
Late Sunday, Congress drafted the Emergency Economic Stabilization Act of 2008 bill and it goes to vote sometime today. The key provision in the bill that's helping mortgage rates is on Page 110.
The passage reads, summarized:
Because of how the bill is worded, the U.S. Treasury can't go spending taxpayer money willy-nilly, lessening the likelihood of inflation nationwide. This is good because anytime inflation pressures ease, mortgage rates stand to benefit and this is one of the catalysts for today's rate drop.
Another reason why rates are falling is death of banking giants Washington Mutual and Wachovia.
It's no coincidence that these two institutions shut down within 3 days of each other. Both were heavy pushers of the now-famous Negatively Amortizaing Mortgage, the time-bomb assets of which clogged the banks' respective balance sheets.
Consider: When Washington Mutual was rescued bought by JP Morgan Chase & Co. and the buyer devalued WAMU's portfolio by a massive $31 billion, it forced investors to reassess Wachovia's mortgage portfolio, too.
Within minutes, Charlotte-based Wachovia lost a quarter of its value and was a Dead Man Walking. Then, before even a weekend could pass, Wachovia had been packaged and sold to Citigroup with the help of the U.S. government, leading to another $42 billion in mortgage portfolio writedowns.
That's $73 billion in mortgage losses practically overnight.
Surprisingly, this is good news for mortgage borrowers because each time a bank acknowledges losses like this, the mortgage market as a whole gets one step closer to discovering what an individual home loan is really worth on Wall Street.
In fact, it's this exact conundrum that defines the mortgage market domino chain, dating back to July 2007. If markets could just accurately answer "What is a mortgage worth?", this little credit mix-up thing would be over.
WAMU and Wachovia hitting the showers brings us one step closer, and at least for today, brings mortgage rates down.
(Image courtesy: The Wall Street Journal Online)
How do you avoid paying jumbo mortgage rates on a jumbo-sized mortgage?
You avoid taking your mortgage to a Wall Street lender, that's how.
It's pretty simple when we break it down.
The word "jumbo" is a Wall Street-specific term for home loans larger than $417,000. In certain "high-cost" areas, the number is $729,750.
Lately, rates on jumbo mortgages have been terrible compared to its cousin, the conforming mortgage. Plus, jumbo mortgages carry higher loan fees.
The price disparity is even worse for so-called "Super Jumbo" mortgages. A super jumbo mortgage is similar to a jumbo mortgage, but bigger.
But the thing is, the terms "jumbo mortgage" and "super jumbo mortgage" -- these are conventions of a Wall Street-bound loan. Just because your loan size is over $417,000 doesn't mean that you have be subject to the jumbo and super-jumbo rules.
To avoid them, just make a choice avoid Wall Street mortgage lenders when your loan size exceeds your local conforming loan limits. This means bypassing your neighborhood Big Bank retail branches in favor of a niche banks that harbor no allegiance to Fannie Mae or Freddie Mac.
Finding banks like this isn't always easy, but it's worth the effort. This is because when a lender makes its own rules, its mortgage rates tend to be lower, its downpayment requirements tend to be smaller, and its underwriting process tends to be smoother.
These are all good things when your mortgage is greater than $417,000.
Consider these mortgage scenarios from a sampling of local banks. Each example carries a corresponding mortgage rate in the low-to-mid 6-percent range:
Now, compared to what Wall Street lenders are offering, not only are the small bank rates up to 2 percent lower, but they're not accompanied by discount points, either. And that's even giving Wall Street the benefit of the doubt -- most Big Bank lenders won't hardly touch a jumbo or super jumbo mortgage with a 10-foot pole anymore.
The irony here is that wealthiest Americans often have private banking relationships with firms like Chase, Bank of America, and Citi among others but their private banking relationship is ill-equipped to handle the mortgage needs of a high net worth client anymore.
In 2005, the banks performed admirably for their wealthy clients. Today, not so much.
So, the best way to avoid paying jumbo mortgage rates on a jumbo-sized loan is to get out from Big Bank mentality and get your mortgage funded from somewhere other than Wall Street.
Jumbo mortgage rates are expensive. Niche, local bank mortgage rates are not. If you're a jumbo homeowner and you have a local banking relationship, it may be wise to call your branch to get a better rate quote.
And, if you don't have a local bank to call, know that you can always call or email me. I lend in 42 states and have niche banking relationships in all of them. If you can't find low rates for yourself, I'm happy to find them for you.
Hey maybe have an enormous sale:
This is the current for sale inventory of existing single family homes in the U.S.:
from our friends at Calculated Risk.Maybe the millions of sellers should pore a huge cup of coffee and wake up to today's market. But, who am I to judge that asking prices are too high? Maybe these sellers are aware of 5 million wealthy Asian and Arab buyers that are dying to move in and pay full sticker price. Sure and Santa Clause hangs out with the tooth fairy in the Cayman Islands during August summer break.
The way this standoff resolves itself is with declining prices to meet the available buyers or staying stuborn and waiting for the market to rise up to the current asking prices. Homes are selling every day... that are priced right. And now for a laugh from my favorite newspaper comic when I was a kid. Calvin and Hobbes.
Larger Version of comic.
When a homeowner buys a new home, he has 3 options of what to do with his current residence:
The most common action plan is the first one -- sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".
Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy.
Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.
Among the highlights of Fannie Mae's Changes:
Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.
If it seems like mortgage rules are getting strict, that's because they are. And they're expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.
Mortgage rates may rise through 2009, or they may fall. We don't know. But what we do know is that borrowing money to buy a home will be tougher.
If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead. Guidelines for jumbo mortgage programs are likely to follow as Fannie/Freddie set the tone for the overall market. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.
Various client's have discussed the housing bill signed into law two weeks ago. Below is a great summary. A few items will have a slight impact on housing. The biggest benefit is for borrowers that are in danger of foreclosing and first time home buyers. The FHA created a program which is a loan write down and shared equity participation with Uncle Sam for 50% of the future appreciation. My first economics teacher Dr.Lamb burned into our brains, that there is no such thing as a free lunch. Various elements of this bill bear that out. The bill is not sexy so I had to throw in a picture of Heidi Klum to liven things up. Enjoy your weekend.-Mr.Mortgage
Key provisions of the Act include:
New agency created to regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks: The Act creates a new regulatory agency, called the Federal Housing Finance Agency, to oversee and regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The agency is charged with the responsibility of monitoring the portfolio holdings of the entities it oversees and ensuring they maintain sufficient capital to operate healthy national housing finance markets.
FHA Program updated: Effective January 1, 2009, the FHA loan limit for conforming loans increases to as much as $625,500 in the most expensive U.S. markets. This affects both home equity conversion mortgages (reverse mortgages) and jumbo loans. Down payment requirements on FHA loans increase from 3 percent to 3.5 percent.
The Hope for Homeowners Program: The Act creates a new Federal Housing Authority (FHA) program designed to help borrowers in danger of losing their homes to foreclosure. Eligible homeowners may be able to pay off their original (foreclosing) lenders with a fixed-rate, 30-year-term mortgage for up to 90 percent of the appraised value of the property. Eligible homeowners are those who originated their loans before January 1, 2008, spend more than 31 percent of their monthly income on their mortgage, and are currently in danger of foreclosure. Borrowers would have to share future equity with the FHA. The program is completely voluntary; banks may elect not to participate. The program begins on October 1, 2008 and ends in September of 2011.
Temporary mortgage foreclosure protection for servicemembers: The Act provides mortgage foreclosure protection for members of the U.S. Armed Services by temporarily increasing (through December 31, 2008) the maximum loan guarantee for VA loans. The period a lender must wait before initiating foreclosure proceedings after a service member returns from service is extended from 90 days to 9 months. Increases in mortgage interest rates above 6 percent are suspended during the period of service and for one year after a service member ends service. This provision will sunset on January 1, 2011.
Temporary tax "credit" for first-time homebuyers: First-time homebuyers of a principal residence purchased after April 8, 2008 and before July 1, 2009 may take a refundable tax credit of 10 percent (up to a maximum of $7,500; $3,750 for married persons filing separate returns) of the purchase price of the property. The credit is phased out for individual taxpayers with adjusted gross incomes (AGIs) ranging from $75,000 to $95,000 ($150,000 to $170,000 if married filing jointly). However, taxpayers must repay the credit taken over 15 years in equal installments as a surcharge on their annual income tax return.
Temporary standard property tax deduction for non-itemizers: For 2008 only, taxpayers who do not itemize their deductions will be allowed to take a real property tax standard deduction (in addition to the standard deduction) of up to $1,000 if married filing jointly ($500 for all other filers).
Reduced homesale exclusion for nonqualified use: For sales and exchanges of a principal residence after December 31, 2008, the $250,000 ($500,000 if married filing jointly) homesale exclusion won't apply to the extent the gain is allocated to periods (not including any period before January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer's spouse.
Temporary increase in low-income housing credit: For 2008 and 2009 only, the Act provides a 20 cent increase in the low-income housing credit per-resident cap, and increases the small state minimum by 10 percent. The technical rules relating to the credit have also been simplified.
Expansion of the rehabilitation tax credit: The Act taxpayers to qualify for the full amount of the rehabilitation credit so long as less than 50 percent (up from 35 percent) of the rehabilitated building is leased to state and local governments or other tax-exempt entities.
Repeal of AMT limitations: on tax-exempt housing bonds, low-income housing credit, and rehabilitation tax credit. Generally effective after December 31, 2007, interest on tax-exempt housing bonds are not subject to the alternative minimum tax (AMT), and the low-income housing credit and rehabilitation tax credit can be used to offset AMT liability.
REIT modernization: The Act liberalizes the rules for real estate investment trusts (REITs) by clarifying that they can earn foreign currency income associated with real estate activities, increasing the permissible size of REIT investments in taxable REIT subsidiaries, modifying the REIT safe harbor for dealer sales, and extending the special rules for lodging facilities to health care facilities.
Election to accelerate recognition of historic AMT/R&D credits: The Act allows taxpayers to elect to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits in lieu of the bonus depreciation tax benefit allowed under the Economic Stimulus Act of 2008. The amount taxpayers can receive is calculated based on the amount invested in property that would otherwise qualify for said bonus depreciation. This amount is capped at the lesser of 6 percent of historic AMT and R&D credits or $30 million.
Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.
Effective today, the rule book just got a little bit tougher.
According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.
The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.
Second Home Guideline Changes
Previously, there was no minimum reserve requirement.
Investment Property Guideline Changes
Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.
Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.
This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:
Less demand and more supply places downward pressure on home prices.
Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.
On the wave of a two-day rally, mortgage rates improved last week overall. This despite a Friday reversal that had caused rates to tick higher just before weekend house-hunting began._1216129796.gif)
Rates move back to the 2006 or 2007 levels and you are at 7-8%+. In order to stop inflation central banks(i.e. the FED) raise rates. Don't be shocked to see HELOCs at 8% in two years and LIBOR at 6%. Why should a person put money in a CD at 3% when inflation is really 5-7%. Do you buy gas or food? Enough said. Rates will go higher to compensate.
The market above 1m had become restrictive in the last few months moving to a fully documented income, 720 minimum FICO playing field for most loan scenarios. Lending to the wealthy seemed stable. Then this weeks major crack in the 2m+ market which we specialize in, we knew another shoe had dropped in the credit meltdown. Granted 1-20m property finance is a niche within the 10 trillion dollar mortgage industry. But, the changes forecast major declines in luxury markets as this further decreases the available pool of buyers and will pressure prices.
Program loan to value limits were cut between 5-10% at most investors. We received dozens of calls from brokers, realtors, and loan officers across the country desperatly searching for 20-25% down financing for their purchases that now require 30-35% down or millions in reserves which most clients don't have. Programs are available to put 20% down on property up to 6m but they require 1-3m plus in liquid assets beyond the down payment. It will take a few weeks for this meltdown to be seen in asking prices as housing markets move VERY slowly. Not like your gas station that changes prices every afternoon right before you pull up to fill the tank on the weekend.
As proof of the credit market distress I would like you to consider the 1Y USD LIBOR chart below. 
This is May 1st 2007 to May 1st 2008. With hundreds of billions that the European Central Bank and FED Central Bank action in March we had a great move down in LIBOR as they flooded the market with cash in exchange for illiquid securities from banks. Now we have spiked up again and the market is saying that their is huge demand for money and supply is constrained. Lenders are afraid to lend so they are increasing the price. So econ 101 dictates prices must rise hence we have moved up about .75% in the last 30 days. Every borrowing cost is rising yet the FED just cut rates on Wednesday and the market is not responding. Remember the FED rate cuts only matters to banks who can borrow at the window or for your HELOC which is based on prime. The majority of corporate borrowing and 80-90% of adjustable rate mortgages are based on LIBOR. The LIBOR movement has a direct impact on what rate someone gets today and if someone is adjusting now they will move up or down based on LIBOR every 6 months per their jumbo loan contract.
If you wonder why jumbo mortgage rates for all borrowers have increased in recent months at major banks it's because we are in a real deal Holyfield CREDIT CRUNCH. No fooling around, every major financial institution around the world has had to go cap in hand to shareholders or international wealth funds for money. All the money that went into bad loans needs to be replenished and the cost of capital is going up for everyone. Classic supply and demand. As a mortgage banker we saw this meltdown coming years ago and created relationships with insurance companies, pension funds and small banks in order to provide jumbo mortgage financing outside the Wall St blood bath. After you call your bank give us a call you will be impressed if you have solid credit, income and have equity in your property.
UPDATE: Lehman Wants Repayment For Alleged Loan Scam: Reports
March 31, 2008: 12:44 AM EST
HONG KONG (Dow Jones) -- Lehman Brothers Holdings Inc. is expected to file a lawsuit in a Tokyo court Monday seeking repayment from Marubeni Corp. of $350 million in funds its says were misappropriated in a loan fraud carried out by two former employees of the Japanese trading house, according to news reports.
Lehman last year granted loans to a fund run by a medical consulting firm owned by LTT Bio-Pharma Co. in Tokyo, according to The Wall Street Journal.
The funds were to be used for the purchase of medical equipment and were secured with certificates bearing Marubeni letterhead and a seal of a Marubeni board member, the Journal reported, citing a person familiar with the matter.
The New York-based investment bank later found the board member's seal was forged, the report said.
Marubeni said it is a victim of identify fraud and that the documents involved in the transaction were forged. Marubeni said in a weekend statement an internal investigation showed it had no involvement in the forgery of documents used to secure the loans and had no obligation to compensate Lehman's for its losses.
Reports said a minimum of two meetings to finalize the deal were conducted at Marubeni's Tokyo headquarters.
Lehman entered into the transaction with two Marubeni employees who were at the time senior staff with the Japanese firm's life care business. The two employees have since been sacked, although Marubeni has not said why they were terminated.
Shares of Marubeni (MARUY) were down 7% at the midday recess in Tokyo trading Monday.
A Lehman statement cited in The Journal report said the investment bank "was closely working with authorities to seek full recovery of funds it believes to have been frequently misappropriated."
The funds weren't repaid at the end of February, prompting concern at Lehman. The unit of LTT Bio-Pharma filed for bankruptcy protection on March 19.
Lehman said that it has investigated the situation and filed a criminal complaint with Japanese police.
Both companies are cooperating with Japanese authorities, the Journal reported.
Lehman Bros. (LEH) shares fell 2.2% Friday to close at $37.87.So these are the banks that we need to bail out? Did they "lend" $300 million to a couple of Modern Day Ocean's 11 style financial heist crew? They realized there was a problem when they didn't get the payment?! Maybe they should have examined a little more than two executives and some letterhead. Mr.Mortgage's opinion regarding your tax dollars is NO BAILOUT!
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