Category Archives: Opinion

How Was My 6 Month Rate Prediction and How About the Next 6 Months?

I have to brag a little. I’m on fire with my rate predictions! Every 6 months I have a rate prediction for the next 6 months. 6 months ago Freddie Mac’s survey showed 30 year rates at 4.12% paying .6 points. I said rates would fall. What are they today? Freddie Mac’s survey says 3.92% paying 0.5 points. I also correctly predicted the previous 6 months (Dec 2013 -June 2014) when rates stayed flat. So, now it’s time for the next 6 month prediction. I predict rates will rise slightly.

What is my reason?

I’ll keep it simple. The government is finally waking up a bit when it comes to the housing market. I believe a strong housing market is one of the most important elements in having a thriving economy (in general, the better the economy the higher the rates). There’s been a few real problems with the housing market over the last 2 years. First, the regulations have become way too tight. There was an over correction to the mortgage collapse and the government is finally starting to see that and the process of loosening up has begun. Second, the government basically took the first time home buyers out of the equation. Other than Rural Development loans, there really are no good options for first time homebuyers. FHA has become ridiculously expensive and conventional requires 5% down. That’s a ton of money to come up with if you are buying your first home. But this week Mel Watt is announcing that Fannie and Freddie are reducing their down payment requirements to 3%. That’s a start. I predict the regulations will continue to loosen and the government will continue to come up with ways to help the first time home buyers get the housing market going.

The housing market will continue to improve with more first time homebuyers getting in the market. This will help improve the economy therefore driving rates up a bit. I don’t see a dramatic improvement in housing right away but I do see the government waking up and by the spring, I believe you will really see the housing market starting to thrive.

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Fannie and Freddie Finally Stepping Up To the Plate For First Time Home Buyers

Since I started my blog almost 1 year ago (November 1st, 2013 to be exact) I have been calling for Fannie and Freddie to step up to the plate and help out first time home buyers. It looks like they are about to do just that! Director of the Federal Housing Finance Agency, Mel Watt,  is expected to announce this week programs that will allow borrowers to put down as little as 3 percent of the purchase price on loans backed by Fannie Mae and Freddie Mac. Currently the only low down payment loans available are Rural Development and FHA. But RD loans have income and property restrictions and FHA is just downright too expensive. While we don’t know the details of Fannie and Freddie’s new programs it has to be better than FHA. For one it’s 3% down instead of 3.5%. Second, we can assume it will not have the 1.75% up front mortgage insurance that FHA has. Third, there is no way the monthly mortgage insurance will be as expensive as FHA’s 1.35% monthly fee. My prediction is that the monthly fee will be based on credit scores and if a borrower has over 740 scores I’m thinking the mortgage insurance will be around .6%. Just a guess of course. I will keep everyone posted and as soon as the program is out I will have a blog with all the details.

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Are There Any Good Lenders Left?

Last week I received a call from a realtor I’ve done business with for years. Her clients had gone to their bank where their money is (I’ll leave that bank un-named) for their mortgage on a new home they were buying. The day before closing the bank called the borrowers and told them their mortgage had been denied. To make matters worse the bank did not give a reason for the denial. The bank said they would put the adverse action in the mail. So the borrowers called me and we started the process. They had great credit, great income, and plenty of assets. I saw no problem what-so-ever. To make matters even stranger, when the adverse action came, the reason for denial was insufficient income and assets. What? Not only was it baffling, the bank also didn’t even try to save the mortgage by asking questions as to whether the borrowers had any additional assets or income. By the way, the borrowers did have additional assets. Guess where? That’s right. In their very own bank that was denying them!!

So, what’s going on out there in the lending world? Are there any good lenders left? That’s a tough question and the answer is coming. There are 2 things driving the mortgage world right now. QM (Qualified Mortgage) and ATR (Ability-To-Repay). What that means is all lenders have to play by the same rules to avoid buybacks and penalties. No lender gets to bend or warp the rules to gain an unfair advantage over the rest of the lender universe and every lender offers up the same mortgage approval gauntlet. It also means that lenders are going to scrutinize the files like never before. The lenders will make sure the borrowers actually file their income taxes by checking with the IRS. The lenders will want to know where any large deposits came from. Was it a gift, was it a loan, was it terrorist activity money? The lenders will double check the borrower’s employer before closing to make sure they are still on their jobs.  The lenders will double check to make sure the borrowers are not using a fake social security number. They will re-pull the borrower’s credit before closing to make sure they have no new debts. You get my drift. Whatever trust there was before is now gone. On top of that add in the over-the-top compliance now in effect from the Dodd-Frank bill and you have an atmosphere like never before. In my 27 years in the mortgage business this is the worst I’ve ever seen it.

Now, back to my question. Are there any good lenders left? Answer…….NO. The only thing left are good loan officers and support staff. And if you don’t have them you’re in trouble. Good loan officers and their support staff get as much information up front as possible. They also see potential issues and address them up front. They also look at the approvals and deal with meeting the conditions long before the day of closing. The lenders are all basically the same. The condition sheets and the rules will be similar. The days of using any bank and any loan officer are over. If you can not immediately get your loan officer and support staff on the phone then don’t use them. If they are out of town, don’t use them. If they are inexperienced, don’t use them. If they are not recommended by someone, don’t use them. Buying a home is one of the biggest decisions and experiences in your life. Make sure you make the right decision. Don’t choose by bank, choose by loan officer.

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Why Is The First Time Homebuyer Market Struggling?

Why Is The First Time Homebuyer Market Struggling? There are numerous reasons and below are a few:

1) Buybacks. It seems like the authorities are now forcing buybacks and fines over relatively minor errors, and as a result, lenders are refusing to extend credit to low-income / low FICO borrowers. Many first time homebuyers fall into the low-income / low FICO category. Of course the Administration continues to exhort the industry to loosen standards at the same time it announces record settlements.

2) Tougher on credit scores. Most first time homebuyers are young and nearly 70% of individuals under age 30 have FICOs less than 680. Lenders are tougher on lower credit borrowers, therefore hurting many first time homebuyers.

3) Tight lending standards have discouraged borrowers with low credit score from applying for mortgages. In the last year borrowers with FICO scores below 680 were rejected 6 times the rate of those with FICO score of 760 or above. This has caused a fear and a feeling of ‘why bother’ in many first time homebuyers.

4) The Qualified Mortgage Rule under Dodd-Frank. The Qualified Mortgage standards regulate borrowers’ total debt load can’t climb above 43% of their monthly income without being backed by Fannie Mae, Freddie Mac or a federal housing agency. This has taken some first time homebuyers out of the market.

5) Lack of excitement with appreciation. Prior to 2008 many first time homebuyers would follow the advice of their parents. That advice would be to buy a house. Even if they were only going to have it a short time the general feeling was it was a quick way to make some money. Prior to 2008 parents were much more willing to gift or lend their children money for a house, knowing it would be a great investment. Now that feeling has changed. Buying a home now is more of a long term investment and when many first time homebuyers are not sure how long they will be in a particular area, their excitement of owning a home declines somewhat.

So why is it important that the first time homebuyer market picks up? In a normal healthy housing market the first time homebuyer rate is roughly 40% of total housing. It currently stands around 30%. This hurts the whole housing market. Without the first time homebuyer the move up buyer is stalled, therefore affecting the entire housing market. If the housing market is not healthy the whole economy is negatively impacted.

What can be done to turn things around? Time will help. The further we get from the housing crisis the more things will improve. There has been a major over reaction from the government and this will let up eventually. It’s also a supply and demand issue. With all the refinances basically gone banks need more loans. Therefore, credit will loosen and new programs will become available.

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Monday Morning Tidbits!

The percentage of all cash transactions in the U.S. housing market in December of 2013 was 47%, up from 27% a year ago. According to Michael Simonsen, co-founder and CEO of Altos Research, less of these transactions were by big institutions on Wall Street and more were from cash-rich consumers buying a second or third property.

Credit scores are easing for FHA mortgages but not conventional. The average credit score for FHA loans this year has been dropping steadily while conventional loans are roughly the same as 2013. The average score for conventional loans is currently 755.

New regulation stemming from the financial crisis has cost the six largest U.S. banks $70.2 billion as of the end of last year, according to a new study from policy-analysis firm Federal Financial Analytics Inc.

The number of appraisers dropped Nationwide to $80,500 down from $90,500 in 2010.

Freddie Mac has officially declared that the refinancing boom is over.  The company’s Refinance Report for the second quarter of 2014 said that the longest refinance boom in the 24 years since it started keeping records officially ended in the second quarter.  That occasion was marked when the share of mortgages originated for refinancing fell below 50% for the first time since the third quarter of 2008.

The number of loans from $1 million to $10 million to buy single-family homes in the 100 largest metropolitan areas surged to more than 15,000 in the second quarter, the highest ever, according to property data firm CoreLogic.

Fannie Mae and Freddie Mac have changed their large deposit rule. Borrowers now have to source deposits that are 50% or more of their qualifying income. The old requirement was 25%.

There was talk before the Friday jobs report that rates would rise because the jobs report would be awesome. Didn’t happen. The report was a bit worse than anticipated therefore keeping rates down again for at least another month.

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Freddie Mac Loosens Up on Large Deposit Rule

One of the biggest pains of the mortgage business is asking our clients to document their deposits. When you hear from family and friends what a hassle it is to get a mortgage this is usually one of the biggest complaints. I get it when the lender ask the borrower to document a $50,000 deposit. The lender wants to make sure it’s not a loan or not from the seller. Makes sense. But when the lender wants the borrower to document a $200 deposit then it’s gone too far. It got so bad last year that we would dual submit the same loan to 2 different investors just because of this rule. One lender might ask the borrower to source 8 deposits where the other lender would only want 2 deposits sourced. It was extremely frustrating for everyone. Well, finally Freddie has heard the complaints and is changing their rule.

Freddie Mac’s guidelines may only require proof of large deposits when those deposits are more than 50% of the borrowers monthly gross income. 

I believe this is just one sign of the mortgage industry loosened up some. The industry got in trouble by being too lax and making too many loans that should not have been made. But it also went overboard the other way and made it way to difficult and cumbersome to obtain a loan. We are now getting back to the middle ground.

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HARP! Take Advantage If You Haven’t Already

What is HARP? It’s the Home Affordable Refinance Program. It lets you refinance your mortgage even if you owe more than the home is worth. Your current loan has to be owned (not serviced so don’t get that confused with owned) by Fannie or Freddie and it had to be originated before June of 2009. Clink on the link below to see all the mortgages in the State of Virginia that are still HARP eligible.

http://www.harp.gov/Default.aspx?Page=363

That’s just an amazing stat! over 18,000 loans in the state of Virginia that are still HARP eligible. And according to the web-site all these loans have a rate of at least 5.61%!

The government started a major campaign yesterday in Chicago to get the word out about HARP and encourage eligible borrowers to take advantage of the program. Although I applaud the idea, it is puzzling that the government hasn’t expanded the program to include more borrowers. One of the parameters is that your loan had to be originated prior to June of 2009.  Another parameter is that you can use the program only once. Why? I don’t get the logic here. Expand the program to include all mortgages owned by Fannie or Freddie regardless of origination date. Also, make it so you can use the program as many times as you wish assuming it makes financial sense. I’ve been hoping that the government would make this change but it looks like it will not happen.

In any event, if you are eligible then take advantage!

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Mid-Year Update, Local Realtors Not Quite as Optimistic

In March I surveyed 100 of the top realtors in Charlottesville asking if they thought 2014 would be stronger than 2013. Overwhelmingly, the answer was yes. So last week, almost half way through 2014, I asked the same question. While a large number of realtors still thought 2014 would be stronger than 2013, the overall tone has changed. Below are a few of the responses I received;

“I think people were more hopeful last year, but now see that things aren’t really getting any better.”

“I have concerns re economy if our leaders don’t get responsible soon.”

“I think that there will be a slight improvement over 2013 based on the first half, but don’t think it will be a big increase as I think people aren’t feeling very positive about our government right now.”

“I see the local market moving from remaining the same to slowing (especially in rural areas).  Lack of inventory (reasonably priced homes in good condition) remains low.  Consumer confidence also remains low (renter unsure about committing to a 30 year mortgage and staying in central Virginia for employment so they continue to lease instead of buy even with higher rents).”

“About the same as last year.  The job market doesn’t seem to be improving that much and there are no programs to assist 1st time buyers to get into a home.”

“Stronger but not by much.  Good buyer activity in March & April but slowed down except in downtown/Belmont.”

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To be fair, there were some realtors that were very positive. A couple of quotes;

“It feels a lot of Sellers have been waiting for prices to rise before putting their houses on the market.  It now appears that more of them are deciding that the market has rebounded to a point where it makes more financial sense to sell.  Therefore, more quality houses are coming on the market.  In addition, there seems to be more of an appetite by Purchasers, and part of that may be that the type of homes they have been waiting for are finally available.  This, combined with the low interest rates, makes it a quality time to get the houses they want.”

“I am absolutely slammed and this year so far (if the pace continues) will exceed last year transaction numbers.”

I believe there are 2 major factors at play in the market right now. One is the lack of low down payment loans for first time homebuyers. I have been harping on this for over a year. Fannie and Freddie need to come up with a zero down payment loan with low monthly mortgage insurance. Make sure the borrowers have excellent credit as well as good job histories. Plus, make sure their income-to-debt ratios are strong. The first time homebuyer market is really struggling. There are tons of first time homebuyers that qualify but they just do not have the down payment. If Fannie and Freddie would come up with this program it would have a domino effect on the move up buyers and we would see a real boost to sales.

The second factor is something that will just take time to overcome. Prior to 2008, owning a home was considered a smart financial investment. Even if you over extended yourself a bit, the home would still appreciate enough to make money. Now, with values from 2008 to 2012 nose diving, consumers are looking at home ownership in a different light. You have more people that will bypass home ownership and just rent. It will be more of a long term investment instead of a two or three year stint.

Once again, much thanks to all the realtors for participating!

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My Interest Rate Prediction for the Next Six Months

Every 6 months on my blog I put out an interest rate prediction. In November I predicted rates to remain close to where they currently are now. How was my prediction? In November of 2013 the average rate from Freddie Mac’s weekly survey on a 30 year fixed rate was 4.16% paying .8 points. Last week Freddie Mac’s survey showed rates at 4.12% paying .6 points. Basically, that’s the same rate. So, pretty good prediction, thank you very much!

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So where will rates be at the end of the year? I believe rates are going to fall. Why? Below are all my reasons:

1) The Economy. The economy is not getting stronger and I don’t believe it will get better the rest of the year. It’s June and the pundits are still blaming everything on the weather. Enough already.

2) Housing. Housing is slow. Take out all the Wall Street cash buyers and the numbers are just not good. Too many people are under water, there are not enough first time home buyers, and wages are not increasing while home prices continue to increase. Something has to give. One thing that will help is lower rates. Another would be a low down payment mortgage for first time home buyers. I’m predicting both will happen.

3) Decreasing Mortgage Production. Mortgage production is at a 17 year low and by the end of the year it might be at a 25 year low. Low mortgage production is bad all around. It’s bad for most major bank’s bottom lines. It’s bad for all the lay-offs in the mortgage industry. It’s bad because less people refinance meaning less money goes into the economy. And it’s bad because it means there are less purchases which effects numerous areas of the economy in a negative way.

Put all these factors together and rates have to fall. I predict June and July economic numbers to remain weak. Blaming bad winter weather will no longer be an option.

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Former Wells Fargo CEO: US Risks Becoming a Nation of Renters

Former Wells Fargo chairman and CEO Richard Kovacevich told CNBC on Thursday,  “The United States is at risk of becoming a nation of renters because of the totally unnecessary constraints that continue to prevent lenders from giving out mortgages.” I couldn’t agree more. Kovacevich blames two factors, the Dodd-Frank financial overhaul act and the buy backs banks are incurring from Fannie and Freddie.

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Dodd-Frank

Kovacevich said, “the litigation risk … says we should not make any loan that a borrower can’t repay.” Kovacevich joked that he didn’t know there was such a thing. And I agree. In theory that’s a great idea. But realistically, it’s impossible. It’s almost like if you need a mortgage you can’t get one but if you do not need a mortgage Fannie and Freddie have no problem loaning you money. I’m being facetious but you get the idea. I don’t want to go into specifics and bore you about how our business has changed but lets just say that the Dodd-Frank bill is over the top. You need rules and regulations but when they become so over bearing that the housing industry suffers, then it’s time to come to a middle ground.

Buy-Backs

What is a buy-back? Basically, it’s when Fannie and Freddie make the bank buy back the loan that Fannie and Freddie bought from the bank when the mortgage was originated. It used to be for good reasons, mainly fraud or negligence. Now it’s for anything and everything. That’s the main reason consumers are so annoyed when they get a mortgage. The documentation and paperwork that the borrowers have to sign and supply is beyond ridiculous. The banks are scared that Fannie or Freddie will make them buy the loan back so the bank over documents the file and underwrites the file super super conservatively.

Kovacevich says that for the economy to get going again that housing needs to get going. He states for that to happen the Dodd-Frank bill and Fannie and Freddie’s buy back policies have to change. Standing ovation for Mr. Kovacevich.

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