Wednesday, January 30, 2008

Foreclosure Business Booming

I couldn't make this up if I tried:
We won't debate the ethics or morals of the situation. But, many people could have avoided doing business with this company had they been proactive by refinancing before they were underwater or selling at the market price instead of chasing the market down, never getting an offer and falling behind with an adjustable loan. We live in an age of complex risk and not paying attention to your mortgage can lead to financial ruin.
That's just wrong on so many levels . .

FED Cut no help to jumbo fixed rates.

The Federal Reserve key interest rates another half-percentage point. The move was expected after last week’s surprise cut in an emergency session failed to rally markets and quiet recession chatter.

The central bank has lowered rates five times for a total of 1.75 percentage points since September, including the aggressive 0.75 percentage cut last week - the first time the Fed lowered rates in between meetings since the 2001 terrorist attacks..

The Fed’s decision to cut rates further Wednesday afternoon comes on the heels of disturbing economic reports published hours earlier. The reports indicate a sharp slowing of the economy.
U.S. economic growth slowed to a rate of 0.6 percent in the last quarter of 2007. The increase in the gross domestic product (GDP) fell short of economists’ expectations by half and many believe the GDP will be in the negative this quarter. Two straight quarters of negative GDP equals a recession.
Fixed Jumbo Mortgage rates have been rising steadily this week in anticipation of the Fed cuts. We have seen a slight improvement in the 5Y and 7Y jumbo loan arm rates for highly qualified clients with equity or large downpayments.

Tuesday, January 29, 2008

Conforming loan limit increase, two steps away.

Rates for some long-term mortgages are at their lowest levels in four years, the Federal Reserve is expected to cut some short-term interest rates Wednesday and proposals in Congress may soon allow thousands of jumbo loan borrowers to qualify for loans with lower interest rates.
The industry has not seen demand for jumbo mortgage loans at these levels since 2003.

Should you refinance?
The answer depends on a variety of factors: your' current loan terms, how long they plan to stay in your home, how much equity you have, your credit scores and more. It's deeply important to sit down and understand how all the pieces play together.

Help for the jumbo loan client is on the way. Economic stimulus legislation approved Tuesday in the U.S. House of Representatives includes a provision that would temporarily allow government-sponsored mortgage finance companies Fannie Mae and Freddie Mac to increase the conforming loan limit up to $729,750. The new conforming loan limit change is being anxiously awaited by all market participants as it is seen as the best part of the stimulus package. People are not excited about a check for a few hundred dollars when the prospect of not being able to refinance is real for millions of prime borrowers in adjustable rates who have little to no equity. The new requirements at most banks is to have at least 10% equity at the time of purchase or refinance. The new conforming loan increase would allow up to 100% loan to value.

Traditionally, the gap between conforming and jumbo loan rates has been narrower. What the credit crunch has done is led to, effectively, a buyers' strike among investors that buy jumbo mortgages because they are not backed by an implied government guarantee like conforming loans. Until more investors opt to purchase bonds backed by jumbo loans, the wider-than-normal gap in rates will remain. The best rates are available within the 5 and 7Y fixed jumbo mortgage rate programs. Thirty year fixed money remains higher as investors don't have the appetite to lend large balance loans on a fixed basis in this environment. Investors believe rates should and could be higher in the future so they are offering ARMs. Many banks don't offer any 30Y fixed as a result of the interest rate risk.

The short-term rate-cut the Federal Reserve was expected to announce Wednesday would not have any direct effect on long-term jumbo mortgage rates, although it will affect rates for things like home equity lines of credit and consumer credit cards. Nonetheless, news about Fed actions often prompts homeowners to take action. This is especially important if home values have been soft or falling in your area as equity is more important in a refinance than FICO score for most large balance scenarios.

If Congress makes that change, possibly by mid-February, banks and investors will be inundated with refi business, we have seen a dramatic increase in applications since the Bush gave his economic stimulus speech two weeks ago and the stock market tanked following MLK Jr day. There is a window that's going to be there; we don't know how long it's going to be there and are advising clients to lock at these levels. Don't get greedy by holding out for a rate that may never come as falling values create a situation where clients rates are substantially driven by their lack of equity. Get a package in place right now. I would not wait. Good candidates for refinancing: having equity in your home.

With property values declining in so many markets, the main thing to look for is whether the equity is there. Those who have at least 20 percent equity in their home - that is, their loan balances are equal to 80 percent or less of their home's market value - will have the easiest time refinancing. In areas that some lenders have designated as "soft" or "declining" markets, where home values are sliding, borrowers must have even higher levels of equity before lenders will approve a loan.

Also factoring into the "to refi or not to refi" conundrum this time around is whether borrowers measure up to the newly tightened underwriting guidelines. The most competitive rates are available to those customers with credit scores of 720 and substantial verified assets in bank/brokerage accounts. Borrowers these days also need to be prepared to provide proof of their income and assets, and sometimes tax returns.

Refinancing might not be advisable - or possible - for homeowners with impaired credit, or those who can't provide documentation of their income, or who have little equity and live in what can be determined as a declining market. It is far better to know your choices now than to procrastinate and find out that recent home prices and lending guidelines prevent you from refinancing your jumbo mortgage. Look for the Senate to vote and Bush to signoff by mid Feb.

Saturday, January 26, 2008

Conforming Loan Limit Increase and other ways to revive the patient.

It's always nice to take a step back every once in a while and try to see the bigger picture of what has happened in the past, and where we are right now. In my mind, when I do this I see so much stimulus injected into US economy and institutions and we aren't even in a recession yet, at least not in the minds of the organization that will ultimately declare it; the NBER. On a positive note, with the latest stimulus package there will be a temporary increase in the conforming loan limit for homebuyers; a positive incentive for those who both intend to purchase and can afford to purchase a home, especially here in Southern California where 50% of all jumbo loans are found. These jumbo loan changes should help affordability and ultimately help reduce record setting inventory in formally hot markets. Everything and anything can sell at the right price, econ 101.

Lets just list what stimulus we have seen since late 2007:

a) 175 basis points of cuts to fed funds rate; 1.75%

b) Cash injections into Merrill & Citigroup

c) Buyout of Countrywide Financial; whose stock price today is trading below the buyout price

d) Mortgage Rate Freeze Plan

e) Talks of Bond Insurer Bailout Plan; $15 Billion to cover Hundreds of Billions in potential losses, think of the failed Super SIV rescue plan that also boosted banks when announced

f) In Europe, bond bailout of Northern Rock by gov't to incentivize private takeover

g) Economic Stimulus Plan For Housing; make mortgages easier to get & cheaper

h) Economic Stimulus Plan For Biz; tax breaks

i) Economic Stimulus Plan For Tax Payers; checks to 117 million Americans

I'm sure I am missing a bunch of other cash injections to individual banks/brokerages, but am I missing any other major stimulus thus far? I think I got most of it. Now, again, there is still a debate about whether we are in a recession or not right now as chances are we won't find out until later on anyway. But forget that for a moment. Look at that list above! Are we really to believe that the economy is in fine shape with all this stimulus going on? How could we simply ignore the reasons for all this stimulus in the first place!

It's encouraging to see things happening, but will it all work? Will it stop defaults from rising? Will it cause more bubbles? Will it encourage a moral hazard and future reckless behavior? Will it stop housing from falling? Will it fix the credit markets? Will it fix the toxic waste holdings held on the books of financials? Will it really save the bond insurers? Will it stimulate consumer spending and consumption? Will it bail out those who made awful decisions? So many questions. So little answers!

With all this stimulus, it's not surprising that equity markets are bouncing here; but what I'm interested in is will this fix the problems we face without causing any future bubbles/inflation problems? Is this delaying the inevitable washout? All open for discussion as I wont give any predictions with so much uncertainty out there.

On a side note, the conforming loan limit increase moves the limit from $417,00 up to $730,000 until December 31st! The number varies per area based on 125% of median home values. The median in Los Angeles for example is just south of 500k. I think this is overall a good thing for client's but it does come with some question marks. Here are my thoughts:

POSITIVES: cheaper jumbo loan mortgages & cheaper fees for those serious buyers who have every intention of buying a new home. May increase purchase price budgets a bit with savings from taking on non-jumbo loan; hopefully with caution by the buyer not to exceed affordability. The experience of all the foreclosed families may prevent reckless buyers who decide to purchase based on this incentive alone but cant really afford it.

NEGATIVES: incentivizing homebuying by cheaper loans, how is this any different than what got us into this mess to begin with (no doc loans, option ARM's)? What happens if someone who is on the cusp of affording to buy, gets convinced to purchase due to this temporary offer? Will this setup future problems of distressed sellers should we indeed enter a recession? Will it really bring MORE buyers into our marketplace OR convince prospective buyers to increase their budgets dramatically thus rendering the investment unaffordable?

Overall, I would have think this is a positive for our marketplace. Since most people put max 20% down, and most condo buyers like to put only 10% down, we are looking at a target group of sub $785,000 for single family homes, and $695,000 or so for condos.
It will help those that have every intention of buying to 'pull the trigger'; hopefully without upping their budget too much! That's the only downfall I can see; over leveraging via a higher loan amount due to the projected 1% savings on the rate of the new conforming loan limit increase.
Where are we at in the real estate cycle and overall credit cycle?

Or is this the chart?:

Tuesday, January 22, 2008

FED Hits Panic Button. Jumbo Loan Rates at Historic Lows.

On my way into work this morning, I heard that Ben Bernanke and the Federal Reserve Board cut the target rate for banks’ short-term lending to 3.5%. This makes it more worthwhile for banks to take on more risk with their money, lending it out in cases where they’ve been tight lately. The Fed announced this change between meetings, not at a meeting as normal announcements, in response to the free-fall that the world financial markets seem to be experiencing.

It will be interesting to see how the market reacts today. You could argue that if the U.S. stock market doesn’t drop 5% as it was expected to do today without the emergency rate drop, investors don’t think that this move by the Federal Reserve will help solve the economic problems.

When the Fed rate drops, so do interest rates on savings accounts and jumbo loan rates drop as well right? Well not exactly, here is a chart of the FED Funds, Prime Rate and the Fannie Mae 30Y Fixed. Conforming loans generally move in lockstep with jumbo mortgage loans so they act as a good indicator.

I see a loose correlation but nothing that suggests that we will see mortgage rates below 6% on a 30Y fixed jumbo mortgage anytime soon. Of course if the sky does indeed fall then all bets are off. Rates are excellent by all historical standards and refinances should be considered especially into long term fixed loans and 10/1 ARMs. Have a prosperous day.

Monday, January 21, 2008

Let's use the US Government Credit Card.

The latest topic swirling around is the Bush proposal to put checks in the mailboxes of every taxpayer to stimulate the economy. That is equivalent of using the government HELOC to once again bail the republic out of the latest crisis. The government is 10 TRILLION dollars in debt now. That is what we all owe as of now. The recession could move into a depression and that is what Washington and Wall St are trying to avoid at all cost.

The check in every mailbox reminds me of Hebert Hoover who won election in 1928 on the slogan, "a chicken in every pot and a car in every garage." Seven months after his inauguration the 1929 crash occurred and the country went into the great depression. Any parallels? Winston Churchill said, " A nation that forgets it's past is doomed to repeat it." I am an optimist by nature but the fiscal meltdown that is occurring throughout the economy coupled with our mind numbing future obligations to Medicare and Social Security make me wonder when the party will end and the bill finally come due. Sober up and watch this video from 60 mins:

Friday, January 18, 2008

Don't cry over all the foreclosures.

That’s been my take for quite some time. MBA announced a report today on 3rd quarter loan performance. I found some very telling information in the report.
…foreclosure actions were started on approximately 384,000 loans, but of those foreclosures, 63 percent were cases where the borrower did not live in the home, the borrower did not respond to repeated attempts by the lender to contact them, or where the borrower failed to perform on a repayment plan or loan modification that was already in place.

They broke the data down further in the report. Approximately a third of that number is made up of investment properties. The others are empty homes. The report leaves open that it’s possible that these homes were owner occupied, and now abandoned. When is the last time you heard of someone just abandoning their home before closure proceedings were initiated? A few maybe, but my bet is that the bulk of these abandoned homes were never occupied in the first place. They were investor homes secured through occupancy fraud.

The biggest problem with just about any study that tries to quantify our market situation is that it either tries to explain how sub-prime lenders over extended themselves, or how fraud is rampant, but I never found anyone who tries to show how both of these factors work together.

Hundreds of billions lost. Your gain?

The End is Near! The sky is falling! George Bush said things are great so it must be true. Ben Bernanke isn’t sure whether things are great so keeps lowering interest rates and crushing the dollar in the process. Your friendly banker knows things are not great. Your above average Foreclosure/Short Sale Investor is buying foreclosure properties at prices that are phenomenally low and feels like this foreclosure craze is the start of something big.

Who is right? Maybe all of them and maybe none but I tend to side with the foreclosure investor. Not since the Great Depression has the housing market seen this many foreclosures and taken a hit like it is currently undergoing.

Great fortunes were made in the Great Depressions and greater fortunes were lost. The goal here is to be one of the winners not one of the losers. Buy when the blood is in the streets is an old Wall St saying that is very true is today's real estate deflationary blood bath.

Foreclosure investing is a skill that is quickly coming into its own as a legacy-building vehicle. By this I mean if you properly plan your strategies now you can be building wealth that will endure into the future. Opportunities like this only come about once in a lifetime. Being in a position to capitalize on it will make you on of the “lucky ones” that comes out of this downturn with a big smile on your face and a lot of friends dying to get some of your tips.

Tuesday, January 15, 2008

Waiting for the FED to refi? Your loan options might be gone.

If your mortgage is more than 3 years old, it's really likely that your mortgage rate is higher than it needs to be. It may be time to refinance. Don't wait for the FED to drop rates as we often hear from fence sitting clients. As you can clearly see from the chart the FED has little if any influence on mortgage rates.

Relative to any point in time since August 2005, mortgage rates are extremely low. If your mortgage is being professionally managed for you, your loan officer has already called you to start the refinance process. If he hasn't called, it may be time to find a new loan officer. But besides low rates, though, there's another major reason to check in with your loan officer.
In a down market, product innovation stops and the process of contraction begins. Mortgage lenders are constantly eliminating "fringe" mortgage products .
Now, "fringe" is a non-specific word because its definition changes constantly. What was "fringe" in 2005, for example, is somewhere in the nightmares and the enormous losses of the banks. This is why a home loan that gets approved today is not promised to be approved tomorrow.
And today's low mortgage rates don't mean a thing if you can't get a mortgage that uses them.

The Mortgage Fringe List is growing along with the number of mortgage defaults nationwide. More defaults = bigger list and as of January 2008, the list includes:
1.Mortgages that don't verify income and/or assets

2.Jumbo mortgages where the applicant's credit scores is below 660

3.Special mortgage products for low-income or first-time home buyer programs, including HomePossible and MyCommunity programs

4.Mortgages on investment properties with less than 20% equity in the home

This is a very different-looking list from the one of Summer 2007 which included home equity lines of credit to 100% and 90% investment property mortgages. These loans have since been discontinued and cast away by investors.

And, like those that inhabited the list before them, the mortgage products on today's Fringe List are very near to the same fate.

This is terrible news for a lot of people including:

1.Homeowners with adjusting ARMs, especially jumbo loans.

2.Home buyers with a 6-9 month time frame

3.Home sellers in declining markets

4.Homeowners in condominiums

5.Homeowners with "life changes" requiring mortgage planning

By Spring 2008, mortgage investors will have already added more restrictions on what they will lend and to whom. Some of the members of the Fringe List will be discontinued; many more will be added to it. Today's fringe borrower is tomorrow's mortgage market casualty so the best time to get a move on is now. If for no other reason that to hear about your options.

Left alone, homeowners will ignore their mortgage. It's the Law of Inertia. Unfortunately, that can have devasting results in a down-turning economy. By the time the homeowner recognizes a need for a new mortgage plan, many will discover the unpleasant truth that mortgage markets no longer serve them.
Mortgage rates are low and it's a terrific reason to check in with your loan officer. While you're on the phone, ask if you're "fringe" and -- if it makes sense -- take steps to protect yourself.

Friday, January 11, 2008

What will happen to jumbo loan rates in 08?

Broadly, jumbo loan mortgage rates fell in 2007. It's befuddling because there are two major reasons why mortgage rates should have increased in 2007:
The U.S. dollar took a precipitous decline against world currencies, devaluing mortgage bonds
Inflation ran beyond the top of the Fed's comfort zone for most of the year, devaluing mortgage bonds
When mortgage bonds get devalued, there should be less demand for them. But that wasn't the case. If mortgage rates are lower now than they were a year ago, it means that demand for mortgage bonds must be higher.
There is an inverse relationship between the demand for mortgage bonds and mortgage rates. As demand increases, mortgage rates fall. As demand wanes, mortgage rates increase.
So, in 2007, mortgage rates fell because global investors' desire to hold U.S. mortgage bonds outweighed their desire to sell them -- despite the constant drag against their value.
We can hypothesize that mortgage rates would have fallen much, much more had the dollar been stronger, or inflationary pressures been weaker.
One way to envision this is to think of a runner with a parachute apparatus attached to his back.
The athlete is moving forward but the parachute is adding a tremendous amount of drag. Once the parachute detaches, the athlete picks up a lot of speed.
In this sense, a stronger dollar or weaker inflation could dramatically drop mortgage rates in 2008. It would be like cutting the parachute loose and letting mortgage markets run at full-speed.
The U.S. dollar is another hot spot. A weaker dollar should discourage foreign investment in mortgage bonds. In this sense, the U.S. dollar represents the parachute and the weaker it gets, the larger the canopy.
The "Recession versus Inflation" should be a hot topic through June 2008.
With every sign that recession is winning, expect mortgage rates to fall. When inflation grabs the lead, expect mortgage rates to rise. And watch out for world events that can change the landscape in an instant.

Friday, January 4, 2008

ARMs, I have one. How do they work?

Possibly one of the most popular, yet misunderstood forms of alternate financing is the adjustable-rate mortgage. Usually referred to as an ARM, its popularity with borrowers is due to a lower interest rate than a fixed-rate jumbo loan. It is popular with the lenders because the ARM shifts the risk of interest rate fluctuations to the borrower.
Although borrowers would rather have the security of a fixed-rate loan provided the rate is not too high, the ARM has maintained its popularity in the market despite competitively priced mortgage loan rates.

An ARM is a loan that allows the lender to adjust the interest rate so it reflects fluctuations in the cost of money more accurately. However, with an ARM, the borrower is the one who is affected by interest rate movements, not the lender. If interest rates rise, the borrowers payments also go up - if the rates fall, the borrowers monthly payments will drop along with the declining rates.

The borrower’s interest rate is determined by the cost of money at the time the loan is made. Then the rate is tied to a recognized index your lender is currently using for this loan. Your future interest adjustments are then based on the upward or downward movements of this index. An index is a reliable statistical report that reflects the approximate change in the cost of money. Some examples of this would be the monthly average yield on three year treasury securities, or the national average mortgage contract rate for purchases on previously occupied homes. The rise and fall of your payments will fluctuate with the index preferred by the lender for this loan program when your loan was made.
To insure that the expenses of administration and profit are included in the payments to the lender, it is necessary for the lender to add a margin to the index. Different lenders use different margins which explains the variation in interest rates offered for the same loan program. Margins range from 2% to 4% and are added to the index to come up with the interest rate you pay (margin + index = interest rate). It’s the fluctuation of the index rate that causes the borrowers interest rate to increase or decrease.

Lenders generally use an index that will be responsive to fluctuations in our economy - usually a Treasury security or the LIBOR index. The treasury index and the LIBOR index generally move together, but opportunities go come about to lock in a better rate on one index.

The margin is the difference between the index rate and the interest charged to the borrower. The margin doesn’t change throughout the loan term.

A “teaser rate” is a reduced, first-year introductory interest rate designed to attract borrowers to ARM’s. In the past, lenders were losing money on fixed-rate mortgages because these loans were yielding less than the prevailing cost of money. Offering the adjustable-rate mortgage allowed lenders to insulate themselves from these losses and increase earnings by passing the risk of interest rate fluctuations on to the borrower. To make the ARM attractive to borrowers, a low beginning interest rate was offered and through time these introductory rates became known as “teaser rates”. The interest rate would then rise at each rate adjustment period until the rate equaled the index rate + the margin. For example, let’s say that the introductory rate (”teaser rate”) for your adjustable-rate loan started at 4.5% interest and would adjust upward 1.0% every six months. If your index for this loan was 5.0% and the lenders margin was 3.0%, then the interest on your loan for the first six months would be 4.5%. Six months later, it would increase to 5.5% and so on until the fully-indexed rate was reached. To find the fully-indexed rate, you would add the index to the margin (5.0% + 3.0%). After the fully-indexed rate was reached, your loan would then fluctuate with the index on your loan. If the index goes up or down, your payment would increase or decrease with the rise or fall of the index on your adjustment period change date.

The borrowers interest rates on an adjustable-rate mortgage are allowed to be adjusted at certain intervals during the loan term. Depending on the type of adjustable loan you have, this interval could be six months, one year, three years or more.

There are limits on just how much your payments can go up if you have an ARM. Usually these caps are in the form of interest rate caps and/or payment caps. An interest rate cap determines the maximum number of percentage points your interest can increase over the life of the loan.

The mortgage payment adjustment period is the agreed upon intervals at which the payments of principal and interest are changed. The lender can either adjust the rate periodically and adjust the mortgage payment to reflect the change, or the lender can adjust the rate more frequently than the mortgage payment is adjusted. For example, the loan agreement may call for the interest to be adjusted every six months, but the payment to be adjusted every three years. This scenario could be a problem. If in the interim between payment periods (3 years), interest rates have gone up or down too much, there will have been too much or too little interest paid on the loan by the borrower over that period of time, and the difference will be added to or subtracted from the loan balance. When unpaid interest is added to the loan balance, it is called negative amortization.

A mortgage payment cap is the maximum allowable interest rate the lender can charge on your loan regardless of what happens in the market. Depending on your particular loan program, this is a percentage (usually 5% to 7.5% annually) that can be added to your fully indexed rate if the market warrants moving that high. For example, if your fully indexed rate is 8% and your annual cap is 6%, your loans life cap would be 14%.
Mortgage payment caps were designed to limit unrestricted increases by lenders and keep the borrowers payments at a manageable level. Some lenders impose payment caps, some impose interest rate caps and some lenders use both.

A negative amortization cap limits the amount of negative amortization that can be reached on a loan. When the cap is reached, the loan is re-amortized to a level sufficient to pay off the loan over the remaining term of the loan. These are also known as pick-a-pay.

A conversion option on an adjustable rate mortgage is called a Convertible ARM. A conversion option gives the borrower the option to convert their adjustable-rate mortgage to a fixed-rate loan. Convertible Arm’s normally have a higher initial interest rate (even the converted fixed rate will usually be higher). You will usually have a time frame in which to convert the loan to a fixed rate. For example, you might have to make your decision to convert the loan sometime after the first year and before the fifth year ends. In most cases, there is also a conversion fee imposed on the borrower (for instance 1% of the total loan amount).
There are many different ARM programs to choose from with many available options. If you are considering an adjustable-rate mortgage, we will be happy to explain your options to you and make sure you have the right program to meet your needs.