The Mortgage Blog

Breaking News! Fannie and Freddie are changing the rules on how payments on existing primary homes are treated when a buyer is purchasing a new home and plans to rent out the old house. In the past, we have been able to offset the payment on their existing home by showing a lease for the house and counting the rental income to cover the house payment.

Under the new rules, this will only be possible if there is a minimum of 30% equity in the existing home. So, if the house had a $200,000 mortgage on it, then it would have to be valued at over $285,000 to be acceptable as a rental conversion. Otherwise, the buyer has to be able to qualify with both house payments and has to have 6 months of house payments in reserve after closing. Ouch . . . . . .

This change in guidelines appears to me to be directly related to a new phenomenon; people buying a new house and then letting their old home go into foreclosure after closing on the new house. I have been reading about this on the web. The idea is if you owe more than your home is worth then you go out and buy a new home at a great price. You indicate that you are going to be renting the old house out. After closing on the new house you stop making the payments on the old house which has negative equity and it goes into foreclosure. Sure your credit is wrecked but you already bought a new house and your bank loses all of the money on the old house. Some great scam eh?

I don’t know who comes up with these ideas but it is bad for everyone. Forces home values down further and adds to the steep losses which are seriously undermining the banking industry in the U.S. Whatever happened to the idea of living up to your obligations?

The bottom line is that the effort to close up loop holes like this is making it harder for legitimate buyers to keep their existing homes, rent them out and buy a new house. Stay tuned. The currents are changing on a daily basis and I’m just trying to keep you informed.

previously posted at the hot spot for southeastern michigan real estate info

I don’t have to tell you the extent of trouble the mortgage industry is in right now. The real cause of the problem though, is not ARM loans adjusting; it’s declining real estate values. Conventional “A” paper ARM borrowers who are adjusting today are getting new rates in the 5% range and even most sub prime borrowers are adjusting to the 8’s and 9’s. Most ARM loan adjustments this year will be close to the rate the borrower had previous to the rate adjustment. This is clearly not going to push anyone out of their home. Declining values are the main culprit behind the current problems.

Dropping real estate values have also created a huge problem for second mortgage lenders. In the event of a foreclosure a second mortgage is by definition second in line behind the first mortgage to collect from the proceeds of an auction or sale of the property. In many cases the second mortgage debt is wiped out and the second lien holder gets zero. Ouch.

Over the past 6 months some of the largest wholesale home equity lenders – Chase, National City and Fifth Third Bank have all exited the business. I actually can’t name a single bank that we can broker a stand-alone equity line of credit to right now. The absolute highest available second mortgage I know of today is to 90% of the homes value and can only be done in combination with a new first mortgage through the same bank.

The trouble has also extended itself to people who have existing home equity line of credit loans. Many banks have decided to reduce available credit limits and or freeze new advances on existing borrowers. This can come as quite a shock if you have a loan in place and were planning to make some improvements to your house using the line and suddenly you get a letter stating you can’t borrow on it anymore! I have been a long time proponent of the equity line as a handy tool for short term financing needs and frequently have recommended my clients open one. If you aren’t using it it generally isn’t costing you anything, but if you happen to need it it sure is handy.

I’ve had a number of clients call me and ask if the lender can just arbitrarily freeze or reduce the available credit on their loan. The answer is yes if the loan documents that were signed allow it. In most cases this is something that is possible if the lender chooses to exercise it. Reducing the available limit on a line of credit is one way for the lender to protect themselves from further losses and ensure that adequate equity remains in the property.

The problems we are facing in real estate and mortgages are only going to resolve themselves as the number of foreclosures reverts back to historical levels. This will ease the downward pressure on home prices and allow the real estate market to stabilize. As we enter the second half of 2008 it appears that it’s still going to be a little while before we see that materialize in many parts of the nation, however, I do believe we are at or near the bottom here in southeastern Michigan and should start to see the light at the end of the tunnel as we enter into the 2009 selling season. Stay tuned . . . . . . . .

There’s been a lot of bad press over the past year about real estate values declining, home loans being hard to get and foreclosure troubles with homeowners and lenders. I have to admit it’s a very challenging time in the mortgage lending business. In times of trouble there are also opportunities that present themselves and this market is certainly presenting some outstanding opportunities for luxury home buyers in Oakland County, Michigan.

• Great opportunities for buyers - I have seen some luxury homes transact at prices not seen in the past several years. It’s my opinion that we are at or near the bottom of this market and buyers are starting to realize this, so recently we’ve witnessed an increase in activity. Remember the old adage of “buy low, sell high.”
• Oakland County, MI still highly desirable location - Recently www.Luxist.com rated the most expensive zip codes across the nation. Bloomfield Hills, MI was No. 6 in the Midwest Region with a median home price of $1,180,000. Remember the old adage of “Location, location, location.”
• Real Estate Values have Trended Higher - Luxist also reported that values have risen 113% in 48304 since 1990. Even with the recent downturn in values real estate has been a good investment with values climbing an average of almost 7% over the past 17 years!
• Jumbo Home Loans are Alive and Well – There have been a lot of rumors floating about which claim that jumbo loans are no longer available. That simply is not true. What is true is that the secondary market for jumbo loans has become a lot more conservative and that has impacted rates on some products. Many lenders are not able to offer competitive rates on jumbo loans right now and there are some really wide variations in rates for the same type of loan from different lenders. However, there are still some great rates out there. For instance, Oxford Financial is currently offering a 7 Year Arm with a rate of 5.875% and it’s possible to borrow up to $2,000,000 with a 70% loan to value! Like everything else, it pays to have the right contacts.

So, the bottom line is that there are some great buys out there on very desirable properties and sound financing options available to put the deal together.

previously posted on mioaklandcounty.com

I have heard a lot of politicians and news media talk about how mortgage brokers created the problems that are plaguing the mortgage industry. That is a bunch of baloney! I am a mortgage broker and lender and here is my side of the story.

Mortgage brokers can only work within the framework of guidelines set up by the investors (banks) who buy loans from them. The bank sets down rules for minimum credit score, max loan to value, documentation requirements, etc. Mortgage brokers do not approve loans. They fit customers into programs that investor banks offer.

If a client comes in with a 600 credit score, no documentable income and no money for a down payment the mortgage brokers job is to look around the universe of wholesale mortgage programs and see if there is a program the client can fit into. If there is, then the broker puts the loan together per the program guidelines and submits the loan to the bank for approval. The bank underwrites and approves the deal if it meets their requirements. If this loan goes into foreclosure who's fault is it? The mortgage broker? I don't think so. As long as no fraud was committed on behalf of the broker then it's the bank's fault for creating a loan program that is ridiculous. Zero down, no income documentation for someone with weak credit? You're kidding right? No - these types of loans were being made routinely up until the end of last year.

Are there loans out there that went bad because of a mortgage broker? Absolutely. These are the loans where the mortgage broker did something fraudulent to make it appear the borrower met the banks guidelines and duped the bank into approving the loan. That is the fault of the mortgage broker and, like every business, there are bad people in this industry. This is a small percentage of the loans that have gone bad but there are certainly those out there.

Big banks and Wall Street greed are the true causes of the current mortgage crisis. Between 2000 and 2006 there was a huge amount of money made on sub-prime mortgage lending and some giant players entered the arena, like Morgan Stanley. They have all been bitten badly though as the reality of these subprime borrowers showed itself in the form of large numbers of non-performing loans. Now the collapse of subprime lending has bled over to the prime credit markets and to the U.S. housing market in general. Many homeowners who have lost the equity in their homes due to declining values are choosing to walk away from their homes. I have heard the words "I'm going to give it back to the bank" too many times in the past year. There is an irresponsible attitude out there right now that is adding to the problem as some people who could make their house payment choose not to because their home has lost value. If they hang in there they may yet get it back. Right now the single biggest cause of foreclosures is declining values.

The bottom line is that the mortgage industry and it's various players created the problems we are facing by relaxing credit standards to a ridiculous degree and lending money to nearly anyone that had a pulse. The good news? Over the next year or so we should see the bulk of these loans move through the system and be sold and both the real estate market and the lending industry should start to heal.

I hovered over my crystal ball all night last night trying to figure out what the universe has in store for Southeast Michigan real estate. That darned thing was cloudy until about 3am but by that time I had had about 3 martini’s and things started to happen (besides the headache and blurred vision!). The ball said I should layoff the liquor! It also told me what’s happening now in real estate and what to expect over the next year.

It seems there are 2 main factors affecting today’s market – Distress Sales and Opportunism:

Distress sales, of course, are foreclosures and short sales. We’ve learned a lot about these over the past year – a lot more than I ever wanted to know! The fact is that these sales are ruling today’s market. In the past 6 months most of the sales activity in our market has come from distressed sales and it’s been a real drag on market values.

Opportunism comes in the form of buyers who “want to get the best deal.” They are making ridiculously low offers on numerous properties until they find a seller who’s dangerously close to a financial disaster, or a bank that has to unload a property. They are, in many cases, buying a home that is missing the appliances, has not been properly maintained and is in need of significant repairs. In a lot of these cases the end result is that after spending the money to bring the house back up to snuff the buyer will have just as much money invested in the home as they would have had they bought a house that was in excellent shape. The reason? All homes are selling at a significant discount right now and homes in excellent shape are also selling “cheap.”

These are the things affecting the market but what does the future hold? Well, after wiping the crystal ball clean of slobber I found that over the next 12 months distressed sales will be fewer and fewer as the current wave of problem properties are pushed through the system and sold. Just yesterday The Detroit News reported that January foreclosure data shows that in the Metro-Detroit area foreclosure filings dropped between 10 and 30% (depending on specific area) compared to last year! That’s the best news I’ve heard this year. After the number of distressed properties drops to more historical norms and the market is driven by quality homes sold by the homeowner, then we’re going to see a slight bump up in sales prices and a return to stable real estate values. Yahoooooo! We may even get a mini real estate boom because there is so much pent-up demand right now. Gotta love that crystal ball. So stay tuned and optimistic because those real estate professionals that survive are going to prosper. You homebuyers out there better get off the fence and take action because the prices you are seeing now will not last. Next time I have to remember to ask that darned ball for a winning lottery number!

originally posted on The Oakland County Real Estate Blog

Great News! Mortgage rates are as low as they’ve been in over 2 years!! 30 Year Fixed rate loans have been as low as 5.875% this week for conventional loans up to $417,000 with zero points (2 points would buy you down to 5.375%). Some of you will also be thrilled to hear that Jumbo rates have also made a huge leap downward! Jumbo 5 Year ARM rates had been over 7% for the past few months but have moved down into the low 6’s in the past couple of weeks.

All you home buyers now is the time to make a move! Mortgage rates are down as a direct result of weakness in the US economy. Soon the Federal Reserve Board will start to reduce the federal funds rate in an effort to stimulate the economy. The reason rates are low is because the economy is slow, so, when the Fed gets serious about putting some fire back in the economy mortgage rates will go up. Nobody gets this – mortgage rates can actually go up when the Fed reduces the federal funds rate!

PS: We are still doing 100% financing at great rates!

One topic has gotten a lot of press lately and it’s how everybody is in foreclosure. I have heard some of the craziest statements made as if they were fact; “1 in 5 homes in Southeast Michigan are in foreclosure.” “25% of SubPrime loans are delinquent.” “25% of home purchases are funded with SubPrime loans.” People read or hear this stuff from sources that may be totally misinformed or are incorrectly quoting other sources.

Obviously, it’s ridiculous to imagine that 1 in 5 homes are in foreclosure. Look around your neighborhood – are 5 people on your block in foreclosure? I don’t think so. The delinquency rate of Prime mortgages right now is, on average, a little over 2% of total prime loans and these loans account for the vast majority of all home loans in existence. The delinquency rate of SubPrime loans is higher at approximately 18%. So, it’s true, a lot more Subprime loans are in trouble right now and that means foreclosures in this arena are also up.

The question is do foreclosure rates effect home values? The answer, of course, is yes. Homes that are in foreclosure are generally in worse condition and sell for less money than competing homes in the marketplace. Banks, although not giving homes away, are likely to sell a home they are carrying for less than it may have sold for if not in foreclosure.

In a report from the Fannie Mae Foundation they estimate that “each conventional loan foreclosure within a 1/8 of a mile of a single family home results in a 0.9% decline in the value of that home. Certainly, there is a correlation between home values and foreclosure rates.

There is a factor here that no one is really talking about though. It’s the idea that what could really impact home values is a significant reduction in available credit via a tightening of credit standards. A reduction of loans being made is also a reduction in buyers to make purchases and this results in lower sales prices because there are fewer buyers in the market.

Credit standards have tightened up this year primarily in the SubPrime arena where some crazy loans were being originated last year. A buyer who has bad credit, can’t document their income and has no down payment has no business getting a mortgage! These loans, which never should have been made, are no longer going to be available. However, there are still a host of great loan programs which have not changed and are still available for no money down and bruised credit borrowers. It doesn’t look like there is going to be a significant change in credit standards that would have had a negative impact on home values.

I believe that the current run of foreclosures and credit tightening is going to be contained and normalize over the remainder of 2007 and that home values are stabilizing. There is reason for optimism and I suggest everybody stop listening to all the negative talk they see on the news, hear on the radio and see on the web! Keep in mind – Your own positive thinking impacts the world you operate in so be a positive influence on it!

The Federal Reserve Board is meeting today and reduced the Federal Funds rate by ½ % but what does that mean for mortgage rates? The Federal Funds Rate is the rate of interest that banks are charged for short term loans and has a direct impact on the Prime Rate. Many variable rate credit cards and home equity line of credit loans are based on the Prime Rate and these loans will get cheaper after the Fed makes its move. If you have an Equity Line at Prime +1%, then you are currently paying 9.25% to borrow against it (Prime Rate was 8.25% and will go down to 7.75%). The Fed reduces by ½% then your rate will go down to 8.75% next month. That’s a good thing!

The question is will mortgage rates also go down by ½%? The answer, unfortunately, is no. The Federal Funds rate is a short term rate and affects other short term rates. Mortgages are long term instruments and are less affected by changes in short term rates. Plus, as you’ll see below, the mortgage market is more efficient than the Fed in making adjustments.

The Fed is reducing the rate in an effort to keep the economy from going into a recession and all interest rates are directly impacted by the general strength, or weakness, of the overall economy. So, when the economy is booming interest rates will be higher and when the economy is slow interest rates will be lower. The Federal Reserve is reacting to general weakness in the economy and is lowering the rate in an effort to stimulate business.

The good news is that mortgage rates have come down over the past 3 weeks because of the same reasons the Fed is now lowering the Federal Funds Rate. Fixed rate mortgages were at 6.75% a few weeks ago and have moved down to the 6.25% range today! Mortgage rates were not waiting for the Fed to take action but had already moved down over the last 3 weeks.

originally posted on the number one site for info on Oakland County Michigan Real Estate

Getting a mortgage loan can be very confusing and a lot of Lenders like it that way. They get you lost in the numbers and make you believe that you’re getting a better deal when they are the one who’s benefiting from making more money on the loan. The Good Faith Estimate (GFE) is the document the lender gives you and it spells out the closing costs, monthly payment and type of loan & interest rate they are offering you.

Let’s take a look at 2 crucial areas of the Good Faith Estimate (GFE) that you should know about and they are Closing Costs, Junk Fees & Points, and Pre-Paid Items & cash to close.

1) Closing Costs, Junk Fees and Points

Closing costs consist of appraisal fee, credit report, underwriting, and flood certification, land survey, closing fee, title insurance, recording and courier fees. These are all charges that are being paid directly to a 3^rd party for work they have done to help get the loan to closing - otherwise known as being necessary to the deal. Junk fees are things like application fees, origination fees, mortgage broker fees, processing fees and these are not necessary to the deal but are charges by the lender to increase fee income. Points are paid to obtain a lower interest rate. Paying 1 Point generally lowers the interest rate on your loan by ¼% (1 point is 1% of the loan amount - $1,000 on a $100,000 loan).

Watch out for Junk Fees. Some lenders will offer you a slightly lower rate than everyone else but they are charging hundreds of dollars more in junk fees. What you have to compare is the amount of the extra fees compared to the difference in the monthly house payment. If you’re paying $900 extra in fees and your house payment is going to be $25 lower it’s going to take you 36 months to break even (900 divided by 25). You don’t save a nickel until after the third year. Considering the average life of a mortgage is only about 5 years your lender is more likely to benefit from this arrangement than you are.

Paying points amounts to the same thing. You pay higher closing costs to obtain a lower rate. The best thing to do is to calculate the break even period by dividing the difference in the house payment into the amount of the extra fees. As an example, if you borrow $100,000 @ 6.25% your payment is $616. Paying 1 point reduces the rate to 6.0% and your payment is $600. The 1 point cost you $1,000 at closing. Dividing the reduction in payment of $16 into the cost of $1,000 leaves you with a break even at 62 months. That’s an awful long time to wait just to get the thousand dollars back!! It generally does not make sense to pay a lot of extra fees or points to get a slightly lower rate. Look for the best rate combined with lower fees.

2) Prepaid Items and Cash to Close

Prepaid items consist of property taxes, home insurance and prorated interest. Sometimes lenders will underestimate prepaid items because it will make it seem like you need less money to close. This will result in a surprise at closing time when the real numbers are released. When you purchase a home in Michigan and your mortgage has an escrow account for taxes then you will pay a full year of property taxes at closing. You will also be required to pay the first year of homeowners insurance and interest will be calculated for the days remaining in the month of closing. The GFE should include all three of these items or it is understating the true amount of cash needed to close.

The Good Faith Estimate can be a great tool to compare costs of different lenders but it’s very important to compare apples to apples and to be sure that both GFE’s include all of the costs associated with closing the deal! Don’t be fooled into paying a bunch of extra money at closing to get a rate that only reduces your house payment by a few bucks a month. Keep that money and use it to do something worthwhile!

Originally posted on the blogging queen of real estate at Oakland County Real Estate Blog