Thursday, July 10, 2008

When the Power Goes Out and Other Lessons.



In part of Los Angeles and Orange County we had a power outage that lasted about two hours this afternoon. This isn't Iraq where 40% of the time they have power failures. This is a rare event but it reminded me of the world and people we depend on to go about our daily lives.


Today's home owner or home buyer is experiencing the same level of surprise when they try to get a mortgage loan. Make no mistake about it THIS IS NOT A PROBLEM FOR OTHER PEOPLE. If you are thinking about selling, your buyer has to put 10-20% down now or take a high rate on an FHA loan with a big monthly mortgage insurance payment. It was 0% down two years ago with so-so credit. If you are thinking about refinancing now or some point when you can find the time. Do it now! If you don't have the equity or are 1 point shy on the FICO you are out of luck and stuck with your current loan.


I kid you not, it all matters. The rampant inflation has caused rates to move into the low 6% range on 5 and 7Y ARMs for the most qualified clients with plenty of equity. This is a shock to people that borrowed during the 02-05 period when rates were the lowest level in 50 years. Most of these client's are coming out of 5% rates on adjustables. These adjust against the LIBOR which is now 3.20%. Almost every Prime perfect credit ARM is 2.50% plus the LIBOR index. If you were adjusting today your rate would be 5.70%, not bad but look at this chart and do the math:
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.


Welcome to the new reality of a weak dollar, high inflation, and falling home values. No area in the country is immune to these forces. These winds have a dramatic impact on the loans available even to the most stellar money good borrowers. The new standard for jumbo loans is to have 20% equity minimum. This is for loans that are above the new Fannie Mae "conforming jumbo" limits which differ by area. In most high cost markets it is 729k. Do you have the equity to refinance? Are you close to not having 20% equity in your home? If not you can't refinance unless you bring a check to the table if you are in the jumbo loan market. Otherwise you can have 5-10% equity but now you have to carry mortgage insurance which can run a few hundred hard earned dollars a month.


If you want to check your home value go to realtor.com or redfin.com. Search for a home just like yours. Find similar homes and then find the lowest priced comparable. That is the market. Banks are looking at the lowest comparable home now because it is a falling market. This is called deflation. Home values are deflating like a balloon with a hole in it.


We have seen dozens of client's this month that can't refinance because they don't have the required equity. Their next move is usually to put their home on the market or sit tight and pray to the interest rate gods that their mortgage payment doesn't adjust too high. Don't gamble with your most valuable financial asset and largest liability. Pay attention to your risks and work to get the best possible loan for your situation. If you don't work with our firm, please work with someone competent. Take care and have a great weekend. The American Dream isn't dead we are just having a nightmare scenario. It will pass.


3 comments:

Kaye Thomas said...

This is an excellent article.. sadly few people will "get it". Far too many buyers and homeowners still believe that rates will come back to 5% and they will always be able to refinance to a low interest rate. They can't wrap themselves around the notion that for sure 7% and possibly 8%-10% rates are on the horizon and may not go down for another 50 years.. if then.

ocrenter said...

great blog, linked!

the last few years have been one huge financial aptitude test as well as one big wealth redistribution musical chair.

there will be a huge divide in the quality of life of someone who bought during the boom vs. someone who waited or sold.

as the bottom approach and more folks realize they have unknowingly committed themselves to a lifetime of indentured servitude by buying during the peak, more will walk which further deepens the bottom.

Wadin' In said...

I really like this site. I am a first time visitor and will be coming back. One thought: Can you set up your graphs and charts so we can click on them to open up in a magnified screen? Some of the numbers are so small that they are very hard to read.

It is pretty clear things could get worse over the next 3 years with the Option Adjustable & Alt-A resets. The real question is, how many of those borrowers will be able to keep making their new payments? My experience is most people will stay in their homes if they can afford it, even though the loan amount exceeds the value.