How are Mortgages So Low and Can it Continue?

Just Stop Waiting for the Perfect Rate

We speak to dozens of folks that are some way or the other waiting for rates to get lower than the 5% 5Y or 5.75% 30Y Fixed 2 million dollar jumbo they were quoted. Of course, who doesn't want a lower cost on something. Especially a budget item that represents roughly 20-30% of household income. But several factors could make waiting a disaster.

1. Home values continue to fall and your equity is diminished thus resulting in cash required to close. Primarily because loan to value levels in general within the jumbo mortgage market require at least 20% or more equity. Depends on the loan amount and the city/state.



2. The dollar and US based interest rates start to move higher because of a global view that the US is a riskier place to invest/lend. This has started to happen in the last few weeks. The US Dollar vs a global basket of other curriences has started to fall:

The value of the dollar rose nicely after the currency was viewed as a safe haven in Jan till March. Then the full breadth and scope of the recession(newpression?) plus the enormous costs of the bailouts investors(our creditors) began to move away from holding dollars and investing funds in US invesments.

3. The third largest risk is that all the government borrowing by countries around the world crowd out and soak up funds that normally would be put to work in the mortgage market. Here is the chart for what the US Treasury 10Y is currently going for:

Now, this isn't a disaster yet but today the US Government is having to pay 3.35% for ten year money vs about 2.50% range less than eight weeks ago. The enormous stimulus that congress passed has to be paid for right? The US goverment doesn't have any money. We basically have a line of credit with the rest of the world sitting at 11-12 TRILLION dollars owed now. This works out to about 37k for every man, woman and child in this country. See more here.

If investors/lenders decide that the US is a big credit risk then regular mortgage borrowers could be painted with the same brush and see much higher mortgage rates in the future. If you don't believe me and you want someone with some weight how about the manager of the largest bond group in the world? They manage about $750 billion.

If you don't want to play the jumbo mortgage rate casino game anymore with your house, Contact our office or another mortgage professional and get something done. It is better to lock and be wrong than to ride the interest rate rollercoaster in the coming years and regret it.

Does your FICO make the cut?

Credit Score requirements on New Mortgages are on the Rise in 2009 thanks to tighter underwriting standards and a big jump in refinance activity, the average credit scores associated with getting a new mortgage are rising this year. According to numbers compiled by Inside Mortgage Finance, the average FICO score found on a new mortgage in early 2009 was above 700 – one of the highest levels ever recorded. For new Fannie Mae and Freddie Mac loans, which accounted for roughly 60 percent of all mortgages made in the first quarter of this year, the average FICO score was a whopping 760. This was up from an average FICO of 748 in 4Q08.

Even FHA, which is know for accommodating A minus type credit and has no minimum credit score requirement, reported an average FICO of 694 in February. This is well above the 660-670 level found in the latter part of 2008. The average FICO on a jumbo loan was 738 in the first quarter. This is up from 710 in the fourth quarter of 2008. Current minimum FICO levels are generally 680 or 700 depending on program and other factors. This is up substantially from six months ago when 650 was allowed.

To keep these numbers in context, a person can go from a 780 to a mid to high 600 level with one late payment on a credit card or if they have their credit limits reduced. This is common as the credit card companies have projected they will eliminate 2-3 trillion dollars of available credit on cards over the next year.

Listen:Option ARM Time Bomb is Ticking

We have discussed these toxic loans over the last two years as the real wave that will wash over the country ultimately resulting in massive foreclosures in CA, NV, FL, WA, OR, AZ etc. These products were pushed like nothing else by WAMU, INDYMAC and Countrywide. Notice anything about that list of banks? All gone, taken over by other institutions. These loans blew up the banks. No one would merge with them without MASSIVE government support.

These loans are very toxic. They were used as an affordability product or a speculation tool. Various programs allowed for 10% down payments or equity in a property. Landlords would buy homes and rent them out only covering the negative amortization option ARM payment or maybe the interest only. These loans are all resetting over the next few years. They will reset to a fully amortized payment which are hundreds or thousands of dollars higher per month. I believe this is the real cancer sitting on the bank balance sheets. The impact on the middle to high end of the housing market will be dramatic that is why jumbo loans are only going to 75-80% loan to value in these markets. the industry risk managers believe these areas of the country have much more to fall in this segment of the housing market. Time will tell as they say.

How do we get out of this financial mess?

Now Everyone Is Crying. Even Richie Rich.

Hamptons Home Prices Drop 23% on Wall Street Firings

Home prices in the Hamptons, the oceanside getaway of celebrities and Wall Street financiers, plummeted in the first quarter as the financial crisis cut demand for vacation properties.
The median price fell 23 percent from a year earlier to $675,000. Sellers offered average discounts of 11 percent off their asking price, up from 9.6 percent in the year-earlier quarter, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today in a report.
“The primary reason is linkage to Wall Street,” said Miller Samuel President Jonathan Miller. “You’ve got job loss, anticipated job loss, as well as lower compensation and anticipated lower compensation. There’s less of an urgency for people who aren’t affected by that to buy.”
About 23,300 Wall Street employees lost their jobs in the year through February as banks worldwide posted losses and mortgage-related asset writedowns of $1.3 trillion. The credit crisis that claimed Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Bear Stearns Cos. also pushed bonuses down 44 percent in 2008, state Comptroller Thomas DiNapoli said.
The number of homes for sale in the Hamptons, about 100 miles east of New York City, rose 15 percent to 1,673 properties in the first quarter, the largest year-over-year increase since Miller Samuel began keeping records in 2004.

Cutting Prices

The Hamptons are known for multimillion-dollar beachfront estates and homeowners there have included comedian Jerry Seinfeld, real estate developer and publisher Mortimer Zuckerman and billionaire Ronald Perelman. The area is comprised of more than a dozen towns and villages including Amagansett, Water Mill, Bridgehampton and Sag Harbor.
Damon Liss, a Manhattan interior designer and real estate broker for the New York-based Corcoran Group, has been trying to sell a three-bedroom East Hampton cottage since January.
Liss renovated the house, added a swimming pool and new oak floors and then listed it for $1.33 million. In April, he cut the price almost 10 percent to 1.2 million.
“The lower the price the more likelihood it’s going to sell,” he said.
Motivated sellers will follow, Dottie Herman, chief executive officer of Prudential Douglas Elliman, said in an interview.
Dead Market
“In January and February there was basically nothing going on,” Herman said. “There are probably people in the financial sector that really have to cut back.”
In the three months ended March 31, transactions declined 54 percent to 145 properties in the Hamptons. Prudential’s data covers the South Fork of Long Island from Westhampton to Montauk.
In neighborhoods that are close to the ocean where properties sell at a premium, the median home price dropped 45 percent to $637,500 from the year earlier quarter, Miller Samuel said. That’s the biggest decline among all Hamptons neighborhoods and is known as “south of the highway.”
Homes north of Route 27 declined 8.7 percent to $685,000. The median price of homes east of the Shinnecock Canal declined 37.6 percent to $760,000.
Not Happy
The overall drop in sales is the biggest decline since at least 1992, said George Simpson, owner of real estate data company Suffolk Research Service Inc.
“It’s not a very happy place out here,” Simpson said in an interview.
The dollar value of all Hamptons transactions in the first quarter plunged 62 percent form a year earlier to $298 million, according Suffolk Research.
In the luxury market, the top 10 percent of all sales, the median price slid 25 percent to $4.09 million. The number of sales fell to 20 from 40 in the prior year and there were 470 luxury properties on the market in the first quarter.
In a separate report issued today, Miller Samuel and Prudential said the median sales price in New York’s Nassau and Suffolk counties fell 13 percent to $355,000.
The number of sales declined 18 percent to 2,872 and homes stood on the market 134 days before being sold. The data excludes the Hamptons. In Nassau county alone, the median price fell 12 percent to $396,000 and in Suffolk it declined 13 percent to $315,000. To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net.

Finally Some Good News Out Of The Golden State

Calif. approves nation's 1st low-carbon fuel rule
By SAMANTHA YOUNG

California air regulators on Thursday adopted a first-in-the-nation mandate requiring low-carbon fuels, part of the state's wider effort to reduce greenhouse gas emissions.
The California Air Resources Board voted 9-1 to approve the standards, which are expected to create a new market for alternative fuels and could serve as a template for a national policy that has been advocated by President Barack Obama and Democrats in Congress.
Gov. Arnold Schwarzenegger said the rule would "reward innovation, expand consumer choice and encourage the private investment we need to transform our energy infrastructure."
"I think we're creating the framework for a new way of looking at automotive fuels where no longer will gasoline derived by petroleum be the only game in town," board chairwoman Mary Nichols said.
The rules call for reducing the carbon content of fuels sold in the state by 10 percent by 2020, a plan that includes counting all the emissions required to deliver gasoline and diesel to California consumers -- from drilling a new oil well or planting corn to transporting it to gas stations.
Transportation accounts for 40 percent of greenhouse gas emissions in the state.
"The emissions from this sector have traditionally grown in California at a rate that exceeds even our growth in population," Nichols said before the vote. "It has led to a host of environmental problems."
Representatives of the ethanol industry have criticized the rule, saying state regulators overstated the environmental effects of corn-based ethanol. They also have criticized the board's intention to tie global deforestation and other land conversions to biofuel production in the United States.
The board has said Brazil converted rainforest into soybean plantations as a result of the growth in corn-based ethanol in the U.S. A formula being considered by the board would take into account the destruction of forests and grasslands elsewhere to grow fuel crops for U.S. demand.
The ethanol industry also said it was unfair to penalize it for agricultural land changes abroad.
"We are not convinced expansion of ethanol in the U.S. has caused or will cause land use changes," said Geoff Cooper, vice president of research at the Renewable Fuels Association.
John Telles, the dissenting board member, said before the vote that he had a "hard time accepting the fact that we're going to ignore the comments of 125 scientists" who questioned the agency's decision to estimate the emissions tied to land-use changes.
"They said the model was not good enough," he said.
Representatives for BP PLC and Chevron Corp. said their companies supported the new standards, with the caveat that the board periodically review the standards. The air board agreed to ensure that the most up-to-date science is incorporated into the rule and that the alternative fuels have become available as expected.
Under the low-carbon fuel standard, petroleum refiners, companies that blend fuel and distributors must increase the cleanliness of the fuels they sell in California beginning in 2011.
The petroleum industry warned that the state was moving too quickly without assurances that the alternative fuels they will be required to sell would be available for the market. Representatives asked the board to delay a decision until next year.
"It's frankly unclear to us how we will comply with this regulation," said Catherine Reheis-Boyd, chief operating officer of the Western States Petroleum Association.
The statewide efforts come two years after Schwarzenegger directed air regulators to develop a rule that would boost the amount of renewable fuels sold in the state.
Nichols said Thursday that a low-carbon mandate would reduce California's dependency on petroleum by 20 percent and account for one-tenth of the state's goal to cut greenhouse gas emissions by 2020. From Businessweek.

I am not an environmental nut job but I have gotten out of the BAD habit of using plastic bottles and no longer us my private jet to fly to China for good food. Seriously, this vote and policy is a great move forward for clean energy. Take care and make it a great day.

Times Certainly Have Changed

Take heed of these signs. Noticed the dramatic change in advertisements toward value and saving money? They are only reflecting the public sentiment. In fact, many of your favorite sitcoms have now had episodes were part of the major theme revolved around how bad the economy is. Heck, even the Simpsons made light of this when Homer’s annual Mardi Gras party comes home to roost after financing the celebrations on home equity lines of credit:

Simpsons Season 12 No Loan Again, Naturally.
After too many years of financing Homer’s annual Mardi Gras party on home equity loans, Homer and Marge’s adjustable-rate mortgage skyrockets.

Bailout Line Gets Longer

The endless bailout line gets longer -- and why we're going about this the wrong way

The seemingly endless line of companies looking for taxpayer-funded bailouts just keeps getting longer, and the folks in Washington show no sign of forcing anyone out of it. This morning, we've learned that life insurance firms will receive aid from the TARP.

From the Wall Street Journal:

"The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies, helping an industry that is a lynch pin of the U.S. financial system, people familiar with the matter said.

"The department is expected to announce the expansion of the Troubled Asset Relief Program to aid the ailing industry within the next several days, these people said.

"The news will come as a relief to a number of iconic American companies that have suffered big losses made worse by generous promises to buyers of some investment products. Shares of life insurers have fallen more than 40% this year. Their troubles led to a string of rating-agency downgrades that, in a vicious cycle, made it more difficult for some insurers to raise funds.

"The life-insurance industry is an important piece of the U.S. financial system. Millions of Americans have entrusted their families' financial safety to these companies, so keeping them on solid footing is crucial to maintaining confidence. If massive numbers of customers sought to redeem their policies, it could cause a cash crunch for some companies. And because insurers invest the premiums they receive from customers into bonds, real estate and other investments, they are major holders of securities. If they needed to sell off holdings to raise cash, it could cause markets to tumble.

"The decision by the Treasury Department adds a third industry to the banks and auto companies that have already received bailouts from the government. While American International Group Inc. is a major insurer and is the biggest recipient of government money, its problems weren't caused by its life-insurance operations, but derivative bets that went bad."

You know what my biggest problem with all these bailouts is? No one seems to be denied! Money is given to almost anyone and everyone. What we SHOULD be doing is what nurses and doctors do in the ER -- triage. Figure out which institutions are too weak to survive and euthanize them. Deny them bailout money. Let them fail. Then let their stronger competitors pick over their carcasses. Bolster those stronger companies with aid if need be.

Washington isn't doing that, though. Take the banking industry "stress test." Policymakers have already said that if any institution fails the test, they'll get time to raise money or will be injected with government capital. Huh? What's the sense in that? Why aren't we weeding out the weak, allowing them to fail and parcelling up their businesses to their stronger, surviving brethren?

It's like having two people showing up to get their driver's license -- one of whom gets a 100% on the computer-based test and passes the driving portion with flying colors ... and another who shows up drunk, crashes into the curb twice, and spends the rest of the time hitting on his instructor. Should both people really be given a license? Wouldn't it make more sense to pass the good guy and fail the other -- or send him off to jail? I just don't get this attitude where every institution is above average (or treated that way). By the way,(cue:shameless promo music) the line to get a jumbo mortgage is long but folks are locking in low 5% on 5Y and 7Y ARMS and mid 5% 30Y Fixed jumbo mortgage rates. Have a great weekend.

Why can't I get a 5% 30Y Fixed Jumbo?

The Current Recession/Depression Impacts All Borrowers

Jumbo mortgages, typically loan amounts above $417,000, are defaulting at a rapid pace as the economic crisis affects borrowers at all income levels. Bloomberg is reporting that jumbo mortgages, typically associated with higher income home owners, are becoming the next black hole for the banking and housing industry echoing concerns we have seen in our segment of the 1m+ jumbo market.

(Bloomberg) — Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest. About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off. Most of the mortgage defaults do not appear to be caused by poor loan underwriting but rather by growing job losses among high income earners. Due to the higher level of defaults, investors are becoming very reluctant to make jumbo mortgages for either purchases or refinances. Since Fannie Mae and Freddie Mac will not buy or insure jumbo loans, the lending bank must assume all the risk, keep the loan on their books and set aside additional reserves for possible losses. All of these additional risk factors are reflected in the higher jumbo rates and strict loan underwriting guidelines.

The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 40 basis points for several decades. The difference between the jumbo interest rate and the prime conforming rate was 150 basis points on Feb. 27, according to Bloomberg data.

Conforming Loans At 7%?

An interesting point to note is that the size of a mortgage loan is not the determining factor for the interest rate. Mortgage rates are based on many factors but the primary reason for higher rates on jumbo mortgages is the lack of a government agency guarantee. This implies that without price support from the government, conforming mortgages would also be in the 7% range to reflect the actual risk of mortgage lending in today’s environment.

No Relief In Sight For Jumbo Mortgage Homeowners

Given the higher risk on jumbo mortgages due to the factors cited above, homeowners who have high rate jumbo mortgages are unable to refinance to lower rates. In addition, the proposed mortgage plans meant to help distressed homeowners provides no assistance for jumbo mortgage homeowners.

While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That’s the lowest volume ever tracked by the trade publication, which has figures dating to 1990.
We have a few dozen investors that are now boosting originations, though they require a minimum 25% equity/down payment in the most expensive housing markets, up from 15-20% earlier last year. For condos, requirements can be as high as 45% equity/down payment.
If you have been able to … save for a down payment, that to us speaks volumes about your character.

Equity and cash is KING in this enviroment. FICO scores and income are great but they don't protect the investor in the unfortunate event of a default.

Some excellent 30 year fixed jumbo rates are available in the mid to low 6% range but they require a minimum of 25% equity and we find about 50% of the people that apply don't have any equity because they are in very distressed housing markets.

Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. “The million-dollar-and-above market is sinking like a lead weight,” Pasadena Luxury Homes guru Mr. Rivas says of Coldwell Banker.

Jumbo Mortgage Rates Reflect Lending Risks

Jumbo borrowers are discovering the meaning of “pricing for risk”. Mortgage lending has become a very high risk business due to the continuing decline of real estate values, the high risk of default due to economic conditions, principal impairment and/or rate reductions from loan modifications, the risk of bankruptcy court cram downs and government supported foreclosure moratoriums. Some may incorrectly believe they are entitled to a low rate mortgage regardless of risk factors. This peculiar belief by both banks and borrowers helped to create the destructive credit crisis we are now experiencing. The banks/investors are doing what they need to do with jumbo mortgages- setting rates to properly reflect risk.

The New Boston Tea Party!

Mortgage Meltdown:The Next GIANT Wave

The foreclosures on the market now are from loans that began to go bad over a year ago. This is largely before the recession began. Now, think logically about the current financial situation of layoffs at Intel, Boeing, Starbucks, Macy's, Wal-Mart etc. The unemployment rate has almost doubled nationally in a year. These are not just folks making your morning drip or checking you out at Macy's. These were the $50k+ variety that drive the housing market. As of Dec 08, 9% of jumbo loans were at least 60 days late. I think this number can only go up over the next two years. The resets will start in full force this year and next. This is the latest chart from Credit Suisse:

If this all makes you sick to your stomach, I highly recommend a pint of: