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

To FHA or Not To FHA…That Is the Question

The other day a Realtor friend of mine sent me a Purchase agreement and had marked the loan type as FHA.  The borrower had a great credit history and was putting down 10% of the purchase price.  I called my friend and asked him to change the loan type on the purchase agreement from FHA to Conventional.  At this point my realtor friend asked me, “Why?  What’s the difference?”  Well, as my grandpa used to say, the difference is in the details. 

FHA is a great program.  Here are some of the Pro’s for using FHA:

·         FHA will lend money to borrowers with lower credit scores, down to a 640. 

·         FHA also has great interest rates, Below 4% last week

·         FHA offers lower down payments, 3.5% of the purchase price

·         FHA can be used with Indian Housing to subsidize down payment (restrictions apply)

·         FHA has lower time restrictions on Bankruptcy and Foreclosure, 2 and 3 years respectively

What’s the catch you ask?  Ok, here is the Con:  FHA Mortgage Insurance is higher.  A lot higher.

Mortgage insurance is money that borrowers pay into a pool to cover the losses incurred should their loan go into default.  For FHA the borrower will have to pay 1.75% of the purchase price in up front mortgage insurance and 1.25% per month in mortgage insurance premium. 

For example, let’s say a borrower is buying a house for $100,000 and using an FHA loan.  The down payment would be $3,500 (3.5%) and the Base loan Amount would be $96,500.  The FHA Up Front Mortgage Insurance would be $96,500 x 1.75% or $1,688.756.  FHA will roll this into the loan so you add the upfront mortgage insurance to the Base Loan Amount of $96,500 to get a total loan amount of $98,188.75.

On top of this the borrower will have to pay the monthly mortgage insurance premium of 1.25%, or $102.28.  This amount must be paid every month for a minimum of the first 5 years.

Compare this to Fannie Mae (FNMA).  For FNMA you need 5% down payment.  In the same scenario with a purchase price of $100,000, that would be a $5,000 down payment and a $95,000 Loan Amount.  There is no upfront mortgage insurance with FNMA, only monthly.  The monthly mortgage insurance amount can vary, but I would expect it to be around .96%.  So the borrower would only owe $59.37 per month.  The monthly mortgage insurance obligation can be dropped at any time once the borrower has reached 80% loan To Value.

From the comparison it is easy to see that FNMA is a better deal.  So why would you ever use FHA?  There are several reasons.

·         Credit- FNMA requires a minimum 680 credit score.  If you are below this you must use FHA

·         Down payment- If you do not have 5% down payment you must use FHA

·         Bankruptcy and Foreclosure- If you have had either within the last 5 years you must use FHA

Those are the main reasons you would use FHA.  It is a great program if you fall into one of those categories.  Sure the cost is a little higher for the borrower, but the risk is higher for the lender.  In the end it evens out and makes home ownership a possibility for many people.

If you have questions about either program, and how your scenario fits in, please call me at any time.

 

Jon Hayes, NMLS#: 130501

Mortgage Loan Originator

Hallmark Home Mortgage

9000 Keystone Crossing, Suit 1050

Indianapolis, Indiana 46240

Phone:  317-430-3105

jonhayes@hallmarkhomemortgage.com