Oh The Times They Are A Changing

     Several Changes are coming to the mortgage market soon.
     First, effective 11/16/2013, FNMA will no longer allow a maximum LTV (Loan To Value) ratio greater than 95%.  Currently, they will allow a 3% down payment for borrowers with great credit.  After 11/16 all borrowers will have to have a minimum down payment of 5% to get Conventional Financing (FNMA and FHLMC)
     Secondly, effective January 10th of 2014, all borrowers will be subject to the CFPB (Consumer Financial Protection Bureau) Qualified Mortgage Guidelines that will mandate that the maximum Debt To Income Ration for any borrower will be 43%.  This can currently go as high as 55% for FHA and VA loans.
     What does all this mean?  The line for marginal borrowers has been moved.  If you are borderline with either of these regulations, then you should plan to purchase soon.
     If you are interested in the full report on the changes being implemented by the CFPB, or if you just have trouble sleeping, check out their web site at: http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/ .  Happy Slumbers.

Buy Now, Buy A Lot

OK, ok…I admit it.  I have been pessimistic about our economy and our recovery.  Maybe it’s all the sunshine and blue skies outside, but I am I’m starting to feel a little more optimistic.  While I’m not ready to jump on the official band wagon, I am starting to see signs of improvement. 

The naysayers keep saying that production is down, unemployment is high and Europe is still a mess. They say our economy is only moving along because of the money the Federal Reserve is pumping into it to keep it alive and that this money will eventually bankrupt us.

This may be the case.  As I’ve said before, I’m an idiot.  But, I am also an observant idiot.  I read all of this doom and gloom and then I look outside my door and see a Norman Rockwell painting.* 

Most of my neighbors have jobs, cars, own a house, have a little extra spending money, etc.  That’s not to say that some are not under employed, or may not have as much discretionary spending as they had in the late 90’s early 2000’s, but outside of the top 20% of income earners who does?

What I am saying is this; when I listen to the naysayers, I expect to look outside and see a collapsing society, and instead I see things running along at a good clip.  Here are the reasons I think our economy is accelerating and why you can expect inflation over the horizon:

1.       Birth Rate verses Death Rate- While our overall birthrates are slightly lower, people are living longer.  That means every day there are more people in this country needing to buy things. 

2.       Pent Up Demand- Spending has been down for the last 6 years.  People have not been buying things.  Consumers and corporations alike have been hording money and putting off spending.  Everyone is ready to buy something.

3.       Increased Liquidity- Banks have been hording their cash.  They do not make money when they are sitting on it.  They are ready to lend.  As they put more cash, in the form of loans, into the economy people will start borrowing and buying more.

When you put all of this together, I think we are poised to see the economy take off and I think we can expect to see inflation.  We have already seen demand for housing increase over the last 16 months and I think this will continue as rents increase as well. 

Interest rates are going higher.  We have seen this over the last 4 months.  More people want loans (increase in demand) and more people will invest in stocks versed Mortgage Backed Securities (less supply).  When demand for mortgages is high and supply is low, you can expect the rates to rise.

Think that $200,000 house with the 4% mortgage seems expensive now?   Think how expensive it will be in 1-2 years- $220,000 and 6%?  Maybe.  This also goes for cars, tv’s, carpeting and any other durable goods you may need.

Inflation is looming so buy now and buy a lot.

* I am not ignoring the under privileged and under paid portion of society.  I recognize there are too many poor communities and this needs to be a focus for all of us.  This is in no means a socio-economic discussion on classes.  If you want to have that discussion, buy me a beer.  This is meant only as an observation of my surroundings.

Closing Costs Are On The Rise

          While interest rates were at their all time low this past spring, lenders slowly increased their closing costs.  Look for this trend to change.  As rates move higher, lenders will start cutting their closing costs to be more competitive. 

     Nationwide, closing costs averaged $2,402 over the past year, up 6% from $2,264 in 2012, according to a survey by Bankrate.com. The estimates were based on a $200,000 mortgage for buyers with good credit and a 20% down payment.
 Origination fees, also called underwriting fees, rose 8% to $1,730. Meanwhile, third-party fees, which include the cost of an appraisal and credit check among other things, ticked up 1% to an average of $672.  (~ Excerpt from article: http://money.cnn.com/2013/08/06/real_estate/closing-costs/index.html?iid=HP_LN)

                 
Stay tuned, as everything in the mortgage industry is subject to change.

To Rent Or To Buy

To Rent Or to Buy...that is the question.

Allow me to answer.

Mortgage Interest Rates have been on the rise for the last 8 weeks.  During this time we have seen some of the largest short-term increases in a history.  However, IT IS STILL A GREAT TIME TO BUY A HOUSE!  Yes, I am screaming this…because I believe it.  Here’s why:

When the housing market contracted in 2007 many people lost their homes.  Due to this and to caution on many peoples part, a lot of consumers are either unwilling or unable to buy a house right now.  The result is that the demand for rentals has exploded.

As I look around the north side of Indianapolis and other cities I have traveled to in the last 6 months, I see a ton of apartment buildings going up.  Additionally, I know from talking with my Realtors that there are a lot of investors buying up houses right now to turn into rentals.

The result is that Rental Rates have increased well beyond what monthly mortgage payments would be.  Check this out-

In a slide titled "The After Math Of The Housing Bubble," JP Morgan Funds' David Kelly offers a chart of monthly rent versus monthly mortgage payments to capture an imbalance in the housing market.  Here's the chart illustrating the evolving trends:

  Census Bureau, J.P. Morgan Asset Management. Monthly mortgage payment assumes a 20% down payment at prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage payment based on asking price.

Do the math, if you are renting you are paying a premium, and you are creating wealth for someone else.  If you can buy, it is still a great time to do so.  Rates are higher than 3 months ago, but they are still historically low.

IT IS A GREAT TIME TO BUY A HOUSE.

Any Time, All The Time

I had lunch today with Mr. Westfield, Curt Whitesell with WKRP Indy, and he said something I have heard a couple of times lately.  He said, "Rates change once a day, right?"
Au contraire mon fraire.  Mortgage Interest rates change with the market and are subject to change at any time, just like the price of a stock. 
Since early May the market has gone up and down like a Yo-Yo, and so have interest rates.  It has not been uncommon for rates to change 3-4 times a day.  So, when your Mortgage Professional says, "Lock now!" you should jump before the market changes.

Nothing lasts Forever

Nothing Lasts Forever

We have heard it before and still we hate to see when it happens again.  So goes the historically low interest rates that have spurred the housing market for the last year.

Since the early summer of 2012, interest rates for a 30 year fixed rate mortgage have hovered in the mid 3% range.  Over the last 2 weeks, they have soared to over 4% and the long term perspective is that they will go higher.  Why?

Nothing lasts forever.

I have had several clients on the fence about either locking an interest rate for a purchase loan or pulling the trigger on a refinance.  We were all losers last week because of the volatility in the market.  I have explained the reasons to several clients and co-workers and will share this with you as well.

The biggest reason rates are going up is that no one in the financial markets is making any money with the 30 year rate at 3.5%.  The bond market works like this: 

1.       The Borrower takes out a 30 year fixed rate loan with the local mortgage company.

2.       The mortgage company then sells the obligation to one of the large mortgage Guaranteeors- Fannie Mae, Freddie Mac, VA, FHA or USDA.  We call these GSEs.

3.        The mortgage company retains the servicing rights and collects the monthly payments from the Borrower.  We thus call the mortgage company the Servicer

4.       The GSEs puts all of the mortgages they have bought together in a pool and securitizes them- meaning they sell large blocks of these Mortgage Backed Securities to Investors on the open market.  The Investors are large investment companies, insurance companies, governments, retirement funds, etc., who buy these securities because they are safe investments.

5.       Every month the Borrower makes their payment to the Servicer, who takes out a small percentage of the interest as a fee and then forwards on the rest of the interest to the GSE.  The GSE also takes a percentage of the interest.  The remaining interest is paid out to the Investors who own pieces of the mortgage backed securities. 

Here is an example of how it works (not exact but close):   Let’s say the interest rate is 3.5%.  Every month the borrower pays that interest to the Servicer, who takes out 1% for their costs.  The remaining 2.5% is forwarded on to FNMA (the GSE) who also takes 1% for their costs.  That means they are forwarding on 1.5% to the Mortgage Backed Security bond holders or Investors.

That means if you have a $100 million dollars to invest, you are only earning 1.5% on your investment.  The inflation rate in February 2013 was 1.98%.  That means that every month you are losing money when adjusted for inflation. 

Why would anyone invest at those rates?  -Because they have to put the money somewhere. 

When the economy is good, these organizations invest their money in the stock market, where they can make larger returns.  When the economy is bad, they put their money into bonds where the investment is safe.

Over the last year, our economy has been struggling.  There has been uncertainty about unemployment here in the U.S., coupled with the uncertainty concerning the European Union and what impact their economy would have on the global markets.  For all of these reasons, the Federal Reserve has been buying up Mortgage Backed Securities, as part of QE3, to artificially lower mortgage rates and thus stimulate the housing sector.  Their belief is that an active housing sector will boost the economy.  I.E.:  If you refinance to a lower rate, you will spend the savings on other stuff (cars, toasters, trips, etc.).  If you buy a house because rates are low, the realtor, title company and lender will all make money which will be spent in the economy.  Also, home buyers do things like, buy furniture, hire movers, painters, landscapers, buy insurance, etc…all of this stimulating the economy.

Sounds like a good idea, but the government can’t afford to do this forever.  Over the last month the economic news has become better.  Unemployment numbers are down, Europe is stabilizing, housing numbers are up, consumer sentiment is up, etc.  All of this has led to a more robust stock market.  When the stock market is strong that is where you will make the largest returns on your investment. 

With a stronger economy and stronger stock market, Investors are pulling their money out of bonds and putting it in stocks.  The Fed has said they are going to pull back and eventually quit buying Mortgage Backed Securities.  All of this lessens the demand for bonds.  When no one wants to buy bonds, the GSEs have to offer a higher return on the investment- I.E. They have to raise interest rates to stimulate demand, which is exactly what is happening now.

Nothing lasts forever.  Mortgage rates have been artificially lowered over the last 4 years due to the economy and government intervention.  The economy is improving and the government is stopping their intervention.  Rates have to go up and will.  No one is making money with a 3.5%, 30 year fixed rate.

For the short term, you should remember that nothing goes straight up or straight down, so there will be some small intervals with improving rates.  But overall interest rates are on the way up.  I think we will see rates in the 4.5%- 5.0% range by the end of the year.

So, for your clients, I recommend locking for the long term.  4.0% or 4.25% is going to look really good by the end of the year. 

Whether you are a Borrower hearing the chorus of “The Parties Over” or an Investor hearing “Mo’Money, Mo’ Money!”  Remember, nothing lasts forever.

 

**Author's Note:  I have been and frequently am wrong about which way interest rates will move.  When I become good at predicting rates, I ill get out of the Mortgage Market and into the Bond Market were I will make a fortune-  Analysis is based on experience but does not guaranty future performance.

 

Jon Hayes

NMLS: 130501

The Foreclosure Blues

Over the last months, I have had at least five different clients come to me and tell me they were going to by a Foreclosed Property.  All five clients had two things in common; First, They were all first time home buyers with limited disposable cash, and second, they all had unreasonable expectations.

So here are a couple of things to keep in mind when you consider buying a Foreclosed Property.

1.       Banks Are Smart-  A lot of people think they are going to buy the home for 40-50% of its value.  It ain’t gonna happen.  The bank has had an inspector and an appraiser out to the property.  They have a market analysis and know exactly what price they are going to sell it for.  And, depending on the scope of work needed to make the house habitable, they are going to list it at 70-80% of its value.  Several realtors have told me horror stories about clients that only want to put low-ball offers in on foreclosures, and 12 months into it they are still writing offers.  It’s not a lottery and it’s not free money.  The bank didn’t get to be a bank by giving anything away, ever.

2.       Garbage In Garbage out-  The house is going to need work and the bank is not going to do it for you.  So often when people have their home foreclosed on, they quit taking care of it.  When they move they take the light fixtures and switch plates and the appliances.  In several instances I have seen the furnace and carpeting ripped out too.  Not to mention vandals taking all of the copper piping (I’ve seen this 3 different times).  As the potential borrower, you will have to fix this prior to getting a loan (the bank will not), or you will have to get a construction loan to make the repairs.  Construction loans are a different beast.  They require a larger down payment, have tougher underwriting guide lines and are more expensive.  Construction loans do not usually allow Sweat Equity either.

3.       Sweat Equity Kills The Passion-  Although the thought of buying a house and generating 20% equity in it instantly might be romantic, nothing will kill the passion in a new marriage like living in a construction zone.  I have seen this time and time again as both a lender and as a General Contractor (in my old life).  If it will take a professional crew 2 weeks to get the work done, it will take you 6 months, if you are diligent.  Face it, you are going to work all day (8-9 hours), then you still have to raise kids, run errands, make dinner, mow the grass, etc…  It is hard to find the time to be a construction worker too.  Living in that mess will create tension in a marriage.  I’m not Dr. Phil, I’ve just seen it happen a few times.

So, with all of that being said.  Let’s go look for a Foreclose Property!  There are bargains to be had.  But remember, those bargains come at a price.  Make sure your expectations are in line with reality.  At the least, I would not recommend a first time home buyer, newly married couple buy a foreclosed property.  Save that for your second home.

Jon Hayes

NMLS #: 130501

Hallmark Home Mortgage, NMLS#: 53441

317-430-315