Watch The Mortgage Apps
Monday, June 22, 2009
As mortgage professionals, we are often in the position where market forces impact what happens on a week in, week out basis. We see rates jump and we go from working all weekend to having more free time than we planned.
Or worse, we end up with urgency imposed by the market that though we tell our clients, suppliers and lenders they don't always share. This can cost in terms of lost rate locks for customers and revenue opportunities for our company.
The bottom line is that interest rates, and mortgage rates in particular, matter a great deal.
A great story on how this impacts everyone involved in the mortgage process as well as the economy as a whole is here.
Labels: current market
posted by Dylan Kramer @ 8:31 AM,
Here's A Conundrum for You
Monday, June 15, 2009
When we look at the so-called subprime mortgage crisis - if we look at it deeply enough - what we see suggests a difficult principle that we might call the "true cost" of debt.
Let's say that the "true cost," for lack of a better term, is today's real price for borrowing money at a fixed rate, with no bells and whistles and shortcuts written into the loan. Thus, if the markets are pricing, say, the ten-year Treasury note at about 3.8% and demanding a 2% spread over that if fixed mortgages are to be acceptable to investors, then about 5.8% is the moment's true cost of financing a home purchase.
Trouble is, we often reach the point where 2% over the 10-year note isn't affordable for a great many buyers, so we - viewing their problem with compassion, and with a desire to make further origination fees - develop loan programs that, one way or another, fudge on the "true cost" principle. (We also have to deal with hikes to the 2% spread when investors shun fixed-rate mortgages.) The early VA and FHA loans, writing in the value of government guarantees, seemed to lower the "true cost" for borrowers. The early adjustable rate mortgages were first invented because there was no way borrowers could afford the true cost in the early 1980's (when a fixed-rate loan bore an interest rate of about 18%).
We developed loans of temporary expedience, based on the reasonable idea that interest rates would come down some day. For example, I once had a loan whose effective rate (far from the true cost) was 13%. That was the interest rate my monthly payments were based on. But the true cost at the time, as I mentioned, was about 18% - so the unpaid interest ("negative amortization," a term only its mommy could love) was folded back into the loan, which grew rather than being paid down.
There isn't room here to trace the history of the many loan programs that we've developed with the specific intention of overriding the "true cost" principle somehow and allowing a borrower to afford a loan - at least temporarily - but readers will realize that this was indeed the way most subprime programs operated.
The conundrum that I see before us now is simple... and we may have to come back to it repeatedly as we follow what is and is not working in today's loan market. Specifically: what do we have if a government program alters an existing loan to give a borrower, temporarily, a lower monthly payment but maintains the existing loan balance? Sounds like another evasion of true cost to me. So, in fact, does any other of the many ways the government is currently trying to make today's loans (and therefore homes) even more affordable than they already are. A salient example - thankfully retired, at least temporarily - was the $7,500 tax break that you get today but have to repay over the coming fifteen years.
Clearly, the true cost represents the real value of a home today. Could it be that we continue to create the same old credit problems - excessive foreclosures, tentative and temporary home ownership, and currently, debilitating fears of entering a real estate transaction at all - with our manipulations of true cost? And could it be that the only genuine answer is for real estate values to come down to what may be considered their true value, given current conditions in the credit markets, rather than trying to lower the true cost from the financing end, a task that seems always to employ smoke and mirrors, eventuating in generally unforeseen future problems and crises? Or - who knows - perhaps we could invent a new standard home mortgage and let the 30-year fixed-rate fade. Hmmm.
by: Bill Fisher
Labels: current market, loan modification
posted by Dylan Kramer @ 7:14 AM,
Why the refinance boom is over...
Monday, May 18, 2009
Here at America's Mortgage Choice, we pride ourselves on being customer centric. Understand your options, make good choices and get a great rate. These are the things we want to deliver to every customer. It has helped keep us very busy over the last several months as rates have gotten down to 5% and we have been glad to be that busy.
However several things have gotten us to the point where we think that the end of the refinance wave is at hand. First, rates seem to have bottomed out. There may be a new wave that starts IF and when they fall to 4.25% or lower. I think it's very, very unlikely that will be the case and rates are as low as they will be. Second is that foreclosures are through the roof and killing refinancing opportunity in the process. In fact is has been said that for every one property that banks have dumped on the market as a foreclosure, there are another two in inventory coming to market. This will further depress prices and values in the very near future.
This is critical because lenders are demanding that opinions of value, otherwise known as appraisals, be "backed up" with facts. By facts they mean actual closings. Just this morning a loan was rejected with 790 credit scores, great debt to income ratio and a borrower with savings of over one year's income in the bank. Why, you might ask? It was because they lived in a great neighborhood that is minimally impacted by the foreclosure crisis. No homes have been sold in the area over the last 9 months. In fact, things are fine in the area. The zip code has 2 foreclosures in the last year and thus, people are staying put. No financial distress means no distressed sales. But the bank needs "current evidence" of market value and rejected the loan. Literally rejected the loan because the neighborhood has stable schools and is the type of place where most people put 20% down and get fixed rate loans. The area is too good at avoiding the foreclosure crisis so is now being punished by not being able to refinance.
The bottom line is it is getting harder to refinance, not easier. If you have not done so, do it now. By month end, AMC and many other lenders will have turned attention to home buyers not refinancers. The fact is buyers are now easier to approve, since they are buying foreclosures, and rates will not be spurring refi demand. It's time to act, or not act. Either is OK, but it is time to choose!
Labels: current market
posted by Dylan Kramer @ 2:14 PM,
More changes happening that impact your mortgage.
Monday, April 13, 2009
So do you want the good news or the bad news this week? It seems that every time something positive happens in the business, we have a new hurdle or challenge to handle as well. This week is no different.
First here is the good news. Several large national lenders have rolled out their guidelines to refinance consumers impacted by a drop in their homes value. The "Obama Plan" allows folks who have an eligible mortgage to secure financing when they, to date, have not been able to take advantage of the low rates out there today.
To be eligible, your mortgage should not currently have PMI and you have not likely been able to refinance due to a drop in value. Though previously you would not be able to refinance and because your loan would now require PMI, you will not have to add it through the "Obama Plan". This program has quite a few hoops to jump to take advantage of it so expect a 60 day rate lock and it's likely to be a little more challenging than your last refinance. But it is available and the professionals at America's Mortgage Choice are ready to work to help you get the new mortgage and relief you deserve.
Now, here is the bad news part of the story. On May 1st, mortgage brokers will not be able to order an appraisal of your property from an appraiser that they have a relationship with. Effective May 1, all appraisals must be ordered "blind". Central repositories are being set up and will take your appraisal order and generate the order randomly to a licensed appraiser.
This is being done to avoid pressure being put upon appraisers to "hit the number". However, the consumer impact could backfire. Today, appraisers tell brokers up front to "forget it" any time the value of a home makes it unlikely that a loan would get approved. This courtesy saves the consumer $300 bucks. Now appraisals will likely be closer to $400 and there is no way to gauge the risk the consumer is taking. The appraisals are likely also take longer to deliver. So you could wait six weeks (versus one) for an appraisal that could kill your home purchase or refinance.
So in a nutshell, appraisals will take longer, be more expensive and there is going to be less communication between the consumer and the appraiser about the prudence of even trying to do the deal. The message is clear, if the numbers make sense to refinance, do it right away and avoid more expense and delays after May 1.
Labels: appraisals, current market
posted by Dylan Kramer @ 7:02 AM,
Crazy Things Happening in the Mortgage Business!
Monday, April 6, 2009
Word is the mortgage business is busy. And to a degree, it's true. We are in a situation where rates are down and the phones are ringing off the hook. If you are one of the lucky ones who can secure a mortgage at today's rates, get it done though. The landscape continues to change and there is no reason to think that the pendulum will swing back toward "easy lending" any time soon. Combine that with a short staffed industry working at full, albeit reduced capacity you have a recipe for challenges.
Sure we are swamped, the phones keep ringing and everyone wants to get take advantage of today's lower rates. However, it's not that simple for us and more importantly the customers. We have told dozens of people who would love to refinance, "Sorry, we can't get you approved". Any one of several factors can prevent you from getting a loan. First, changing guidelines are an issue. Last week on one day notice several lenders reduced the amount of cash you could take out of your home to consolidate debt or raise cash by ten percent of the property value. This was done by email and effective immediately. Also, if you live in a condo, you have a "risk adjuster" that makes it impossible to get the lowest rate in the market unless you have 30% equity in your property. Finally, speaking of equity, most people we are talking with have a drop in property value making it challenging if not impossible to secure these rates.
Add to this the customer service challenges. Brokers, lenders and others that support the mortgage process were all struggling to survive in 2008. With that they all have lost money and are often not willing to "staff up" to meet current demand. This has caused the standard 2-3 days in underwriting to balloon to 2-3 weeks and longer. In fact, as of this writing on March 28th one of our lenders is working on loans submitted to them on February 16th. This is causing customer service problems through out the industry, especially related to rate lock periods, and purchase closing deadlines.
Finally, getting the lowest rate is the final hurdle. Every week there is a great interest rate survey published. The most recent one's results can be found here. Read it carefully though, it gives not only the average rate from last week and mortgage rates change every day (rising and falling). Additionally, the survey always mentions the average amount of points being paid (yes, points). Points can now financially make sense and we are seeing many people run the numbers. A further discussion of points will come to this blog soon.
The bottom line is this. If you have not tried to secure a mortgage since early 2007 or before but are thinking of it, the rules have changed. The interest rate market is in your favor but the lending environment is not. Get your loan up and running sooner rather than later, even if you don't lock the interest rate in right away. This way, you can manage all the other headaches that exist in getting a new loan approved and get the low rate you want.
Labels: current market, mortgage truths
posted by Dylan Kramer @ 8:03 AM,
Urgent news in the mortgage market
Thursday, March 19, 2009
The US Government announced today that they are effectively pouring capital into the mortgage market. Find out how this affects your mortgage!
Labels: current market
posted by Dylan Kramer @ 8:07 AM,
Capitalize on Term Reduction
Monday, March 16, 2009
Once you have been in the mortgage business a while it dawns on you that it's not a cliche. For most folks their mortgage is the biggest debt they will ever have and the house is the biggest single investment most customers will make. This realization combined with today's low rates allows an interesting reassessment of refinancing for most customers in today's low rate environment.
The traditional thought over the last few years has been to take every drop in rate as an opportunity to save money monthly. The usual strategy has been simple; a drop in rates equals a drop in monthly payment. Most folks who have had more than one mortgage in their lives have followed rates down into the low 6%s or high 5%s.
This drop in interest rates is different though. The financial statements we see from customers every day have several negatives compared to those of a year or two ago. The retirement accounts are smaller and the value of the property has dropped, reducing the average equity in the home. Combine this with adjustable rates and the stereotypical 30 year fixed refinance may not make sense.
This combination has caused people to reasonably reassess the remaining time on their mortgage. If you have been paying a loan for five or ten years, going back out to 30 years can often not be a worthwhile trade for $100 per month in savings. Many clients are now opting for 20 or 15 year fixed loans with the modest increase in payment being worth it for the long run savings.
How much savings you may ask? Well the answer depends on a combination of the interest rate, balance and length of time the current loan has been in place combined with the interest rate for the new mortgage. This calculation should be done though and a sample of how it should look can be found here.
In simple terms though a $200,000 30 year fixed at 6% that has been in place for 3 years can be refinanced to 5.25% on a 30 year fixed today. This refinance would drop the payment by $95 per month. With 324 payments remaining the life time savings of the loan would be just over $30,000. However, moving to a 20 year fixed would reduce the available rate to 5.125%. The monthly payment would increase by $133 per month over the current payment. This is a nominal amount for most family budgets.
This additional investment would eliminate the mortgage seven years earlier than the current plan and ten years earlier than refinancing. The elimination of seven years of payments at $1200 per month would save this family over $100,000.
For most families this strategy is a winner on two key fronts. The additional principal pay down can help rebuild equity lost in the housing crisis. The elimination of years of payments on the back end of the loan can help retirement or college planning.
The changes in our finances over the last couple of years mandate that we look at our mortgage in a new way. Run the numbers and see if taking advantage of today's interest rate market and reducing your term could work for you.
Labels: current market, term reduction
posted by Dylan Kramer @ 8:43 AM,
Federal Foreclosure Initiative Review
Wednesday, February 18, 2009
Interesting announcement from President Obama today on the foreclosure crisis don't you think? I believe that if executed correctly, this could be a winner and get us on the road to recovery.
In case you missed it there are four key points to the plan and the biggest point made is that "everyone will not be saved". There are homes that will go to foreclosure, especially investors, speculators (both borrowers and lenders), folks who were pretty sure they could not make the payments but took the loan anyway will not likely benefit much.
But for many, this program will be a lifeline. If the program can be executed and that execution accomplished quickly, that is. Let's break down the four big objectives.
- Four to Five Million upside down mortgages may be eligible to refinance. If the mortgage loan is owned or guaranteed by Fannie Mae or Freddie Mac.
This is huge because currently there is no way for people to take advantage of lower rates available today. This will save people hundreds of dollars per month and lower payments will create an incentive to stay in the home. - Incentives to Modify. The government will be setting loan modification guidelines. This appears to be a statement to the banks who to date, have not shown a willingness to book losses through modification to get with the program. Federal guidelines limiting payments to 31% of existing income will force lenders to step up. Borrowers will have accountability. These guidelines will be official in the next two weeks and I will post them here.
- The government will keep rates low. This promise may be the toughest one to keep. With the admission that up to $200B of the Federal TARP funds may be dedicated to the purchase of Mortgage Backed Securities, the administration is making a statement that they want people to be able to secure mortgage financing at low rates. The question is, will the market agree and keep rates down?
- The threat of the Bankruptcy Cram Down. The carrot, or stick depending on your point of view is legislation allowing bankruptcy judges to "write down" principal balances on mortgages. It appears that this is currently only a threat but if the efforts to modify loans that banks are making don't improve, we will see this enacted and it will not have good results for the banks, or home buyers going forward as rates would rise because of it.
Overall, this effort is rather impressive. The program seems to address some of the critical issues out there today creating an opportunity for people to improve their situation. Also appreciated is the accountability tone. Too often in the foreclosure/housing debate borrowers, banks, investors and Washington have been pointing fingers instead of trying to find a solution. This program could be a great step in the direction of true solutions and answers.
Watch the full announcement right here, on AmericasMortgageBlog.com
Labels: current market, government announcement
posted by Dylan Kramer @ 12:20 PM,
The Death of the No Closing Cost Loan
Monday, February 2, 2009
If you have financed more than one mortgage in your lifetime you are likely aware that one of the marketing "tools" that those of us who sell mortgages have had is the no closing cost refinance. It has been a tried and true method of managing your mortgage if you are a consumer and managing your database of closed clients if you sell mortgages.
If you are not familiar with the no-cost refi, or need a refresher, let me explain it briefly.
Your mortgage is a liability to you but is an asset to the bank or broker that is creating it. The asset is the right to collect your payments, which is sold at the closing. If on any given day, a mortgage rate is 5.5% with zero points and $2000 in closing costs, there used to be a rate of 5.75% or 5.875% available with no closing costs as illustrated in the chart below.
So what happens to the costs in a "no cost" loan? The short answer is nothing. The costs remain but the broker pays them. The title company, appraiser and other third parties do not waive their fees. The bank also collects an underwriting or funding fee on every loan. None of the service providers waive their fees for the consumer.
The way that the broker pays the costs is to increase in the fee paid to the broker for the right to collect the payment called the Yield Spread Premium (YSP). Simply put, using the sample we gave before, the broker sells the loan at the higher rate to the bank. The bank pays roughly $2000 more for the loan at the higher rate. The broker uses the $2000 to pay everyone the closing costs and the mortgage now is "no cost" to the consumer. The broker nets the same amount for their work in securing the mortgage so they are happy to make this deal.
The choice for you as the consumer was do I take the lower rate and pay the fees or do I take the higher rate and payment but pay nothing up front. In the example above, do you take the $40 per month higher payment and save $200 in cash, which would take 50 months or over four years to break even? Usually it made sense for most folks to take the no cost option as rates were falling and the option of refinancing multiple times over the course of a year or so was made prohibitively expensive because the closing costs had to be paid in cash each time. This is also known as financing the costs into the rate.
This brings us to the death of this loan and the trouble it is causing in todays' busy mortgage market. Banks have stopped paying any significant amount of YSP to the broker for the right to collect the payments. Here is a sample comparing a rate sheet from last spring when we had a very brief drop in rates to one since from last week with similar rates using the same $250,000 loan example.
This drop in what banks are paying for mortgages can be attributed to several factors.
First is that more loans than expected are going to foreclosure. With the uncertainty in today's economy, you may feel comfortable about your income prospects but lenders don't. It's not personal; they feel that way about everyone. Second, if rates drop more later, (a big "if" that I address here) banks will get crushed because all of the loans that they are spending money to purchase today will pay off long before the collect many payments. Third is that after two years of falling profits and rising losses on mortgage portfolios banks are overwhelmed by refinance demand. Just like any business, if you can sell all you have at today's prices, why would you cut your prices (or pay more for them).
As you can see by the chart, it is now difficult if not impossible for brokers to do what they did before: pay the closing costs from the extra YSP if you wanted a 5.75% rate instead of 5.5%, the YSP would only provide an additional $250 toward your closing costs. To get anywhere close to the YSP needed to pay all the closing costs on a loan, the rate needs to rise to 6.375% where it would not likely make sense to refinance.
In today's market, the reality is that the best deal is likely to include the customer paying their closing costs. It is a shift in mentality but one that each consumer must understand is critical to getting the best deal to secure their financial future.
Labels: current market, mortgage truths
posted by Dylan Kramer @ 9:16 AM,
Critical Alert: New Fannie Mae Adjustments
Tuesday, January 13, 2009
New Fannie Mae price adjustments will go into effect on 1/15/2009!
These adjustments will affect most homeowners looking to refinance. If you are even considering refinancing to take advantage of today's lower rates, it is imperative that you call your America's Mortgage Choice loan officer TODAY before these changes go into effect!
Labels: current market
posted by Dylan Kramer @ 9:07 AM,
The Folly of Four and a Half Rates
Thursday, December 11, 2008
Over the last week, those of us in the mortgage business have been overwhelmed by questions from borrowers, potential borrowers and prior borrowers that all want to know the same thing, "how do I get the 4.5% interest rate for my mortgage that I am hearing about". It's a tough one to answer because, though there may be a day in the future, even perhaps, the near future, that a 30 year fixed mortgage at that rate is easily available to everyone, it's not likely anytime soon. In fact, this attempt to "fix" the market is likely to have the exact opposite effect.
2008 has been the year when everyone got caught up in the challenges existing in the economy. The mortgage business, however, started seeing problems in mid 2006 (effectively chronicled here). Everyone else just got welcomed to the misery party those of us in the mortgage industry have lived through for a couple of years now. We have thankfully seen bad companies and bad loan officers go out of business previously. But in 2008 good people got washed out of the industry because there just not enough loans for everyone. Since Thanksgiving week though, and thanks to a big drop in rates from 6.25% to about 5.5% we are overwhelmed with business and could write more business in November and December (if rates stay low) than the rest of the year combined.
Well if the business is overwhelmed by the number of people interested at 5.5%, what would happen at 4.5%. If that rate was gerrymandered into the market by the government, demand would be tenfold what it is today. Estimates are that capacity in the mortgage business has shrunk by 50-60 percent since 2005 when it seemed like everyone had a relative, college buddy or neighbor who "jumped in" to the mortgage industry. It would be impossible to get everyone in and closed.
Two things would happen as a result. First is that to slow demand, the big banks would RAISE rates. This would mean that again the American consumer/taxpayer would not see that savings flow to them. The banks would keep it. Second is that only the best customers would get the best rates. With the "declining market costs" Fannie Mae has put into the market over the last two years, the salespeople will focus on the need "get borrowers/customers through the system". This means that most salespeople will focus on borrowers with credit scores over 720, property values that ensure the loan is lower than 80% of the value, and standard W2 wages that eliminate the need to underwrite the self-employed or those who have a large portion of their income made of commissions or bonus. How this will help solve the problems that plague the housing market is beyond me, though I welcome being really busy again.
Ultimately it is impossible to guess where interest rates are going. The market will have a lot more to say about where they go than the government. Even if they do go lower, it will be challenging for anyone who does not have all three of the following to secure a mortgage at the lowest rates: Easy to understand W2 income in excess of that needed to make the payments, 720 credit scores and plenty of equity. The bottom line is that you just never know if there will be a better deal tomorrow. Even if there is, you may not be able to get it. If you can justify refinancing by recovering the cost to do so in a reasonable time, do so today.
Labels: current market, mortgage truths
posted by Dylan Kramer @ 9:19 AM,