Saturday, October 25, 2008

Mortgage Industry will say NO more often.

In a move that will stymie thousands of would-be home buyers and homeowners, Fannie Mae announced another round of mortgage guidelines changes a few weeks ago that will have a huge impact.

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:

  • Primary residence, "cash out" refinances are limited to 85% loan-to-value

  • Second home, cash out refinances are limited to 75% loan-to-value

  • Investment properties cannot be refinanced without a 25% equity position

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.

Fannie Mae and Freddie Mac Market ShareStarting 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.

Thursday, October 9, 2008

LIBOR: The Driver of Jumbo Rates.

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.

Wednesday, October 8, 2008

First Time Buyer Credit: Really a 0% Loan

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.

Friday, October 3, 2008

Financial Crisis Has Hit Main Street

Jumbo Mortgage rates moved up sharply over the past week as the credit markets ground to a halt. Borrowers with good credit and a 20% down payment today could qualify for a 30-year fixed-rate mortgage at 7.625% with a one-point fee. That's up from 7.25% on Friday of last week.The rate has been trending upward from 7% since the financial meltdown gained full speed in the last few weeks. Investors are pricing in the increased default risk and the national decline in home prices. No area is immune as noted by the latest Case-Shiller numbers. The move by the US government to pass the mother of all bailouts has been awaited anxiously by the entire credit industry. If you can't save housing you can't save the financial system nor the economy from a financial meltdown/great depression scenario.

However, the worst development is adjustable rates have dramatically increased. Bloomberg reports that the international rate banks charge each other for one year loans, known as the London Interbank Offered Rate or LIBOR, moved LIBOR rates to 4.08% as markets were locked up with the meltdown in credit markets. LIBOR was in the mid to low 3% range throughout the summer. If we move to LIBOR rates of 5% range that would push ARMs to about 8%. The meltdown of household names is the best opportunity for people to refinance or purchase as investors want something safe/secure. Nothing is safer in this market than solid credit client's looking for a phenomenal jumbo mortgage rate. Now is the time to refinance as rates are likely to get worse over the next two years and guidelines to get more restrictive. The best rates in a generation are behind us as banks recapitalize and governments work to save a financial system on the edge of complete panic.

About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to LIBOR, according to First American CoreLogic, Bloomberg reported.

Depending on a Bailout: Slide Show

Great slide show on making sense of the mortgage meltdown from a seminar today at the Milken Institute in Los Angeles. They always have the best and most data-rich slides, bar none. Press the easel button in the viewer to blow up it to full screen.

Wednesday, October 1, 2008

Mortgage Rates Falling

The Emergency Economic Stabilization Act of 2008 bill prevents the treasury from borrowing too much money too quickly -- a positive, inflation-containing provisionWith 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:

  • The U.S. Treasury gets access to $250 billion immediately

  • The U.S. Treasury has to ask the President for its next $100 billion

  • The U.S. Treasury has to ask Congress for its next $350 billion

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.

When Washington Mutual sold, Wachovia's balance sheet was transformed into a ticking time bombWithin 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)