Market Updates from Arnaud Dufour

Obama’s New Refi Plan

2012-02-06T20:55:00.000-08:00

For many American homeowners, one of the highlight’s of Obama’s State of the Union address involved a “new plan” to bring refinancing options to struggling homeowners. This new plan would help even the most upside-down homeowners take advantage of today’s record low mortgage rates.

Recognizing that many American homeowners are still unable to refinance because they lack sufficient equity to qualify for conventional loans, the Obama administration has implemented prior programs to accomplish this same task. The most popular of these programs has been the Home Affordable Refinance Program (HARP). Although HARP has been popularly discussed, its effectiveness has been extremely limited.

The first limitation is that HARP would only allow refinancing for individuals who owed up to 125% of their property’s value. Any homeowner who was even more upside down on their home than this limit was simply not able to refinance even if they wanted to. The 125% ceiling was recently removed as part of the revised “HARP 2.0” announced in December.

A bigger limitation of HARP is that it is only available for homeowners whose mortgage is currently backed by the Government Sponsored Enterprises (GSE) of Fannie Mae or Freddie Mac. It’s estimated that only 5% of American homeowners have a mortgage that is eligible to take advantage of HARP. The remaining 95% of mortgages are not eligible, primarily because they are backed by a private investor other than Fannie and Freddie. But even many mortgages that do currently carry the backing of these GSEs are still not eligible, primarily because they were not delivered to Fannie or Freddie prior to March of 2009. By default, any mortgage that was originated after this date is ineligible.

Perhaps the biggest limitation of HARP and HARP 2.0 is that the government has absolutely zero control in making the banks implement and offer these programs. Essentially, participation in these relief programs is “optional” for banks. Even some of the banks that do participate make the process extremely lengthy and difficult, often dragging out over months.

Obama’s “new plan” is purported to solve many of these issues. Very few details of the program have been announced to date and what we know is, to date, very limited. Qualifying will require a minimum 580 credit score, the homeowner must have been current on all mortgage payments over the prior 6 months, and the homeowner must be currently employed and able to document sufficient income to support the new mortgage payments. The program claims to not require equity in the property and will be available to all homeowners regardless of who backs their mortgage currently. The idea is to make refinancing options available to just about every homeowner in America.

As details become available, there are two main questions that remain to be answered. First, will the program have loan level price adjustments? Both HARP and HARP 2.0 have this. Under these current programs, the “best” rates are available to homeowners whose mortgage is below 95% of their property’s value. Once that 95% threshold is breached, the homeowner begins to see a tic up in their rate. The more upside-down they are, the more their final rate will be affected. One can only assume that this new program will include similar loan level price adjustments.

But perhaps the biggest question that everyone will be watching for is how to make sure the banks implement these new programs. One particular problem of HARP was that many of the banks that offered the program did not participate all the way up to the 125% limit. Some banks stopped at 105%, and yet others only participated up to 95%. Given that this new program is claiming no equity restrictions, obtaining bank participation will be the largest challenge for this new program.

Despite the headwinds that this program faces, there are many desperate homeowners who have already gained something from the mere mention of this new program. It has brought them hope. Hope that they might finally be able to get out from under a high mortgage rate.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

“Record Low Rates” Explained

2012-01-23T21:08:00.000-08:00

In what’s becoming a recurring headline, Freddie Mac has once again reported “record low rates.” This headline seems to grab the attention of homeowners and prospective homebuyers alike. But what does it really mean? There’s actually quite a bit to it.

First off, Freddie Mac’s report indicated the “average” rate for the prior week. Right away, this means that by the time Freddie Mac releases their report, rates have already moved the following week. This is exactly what just happened. Freddie Mac reported that the average rate on 30 year fixed mortgages was 3.88% for the prior week. Unfortunately, by the time the media was able to get the word out to the public, interest rates had just experienced three consecutive days of rate increases. The movement in rates was relatively mild, but anyone trying to obtain a true “record low rate” came to find that ship had already sailed before they even knew it existed.

Mortgage rates are tied to the bond market, or more specifically, mortgage-backed securities. Since these are traded on the open market every day, there are daily fluctuations in mortgage rates. These fluctuations are trivialized in a “weekly” average. The fact is that there have been a few small windows of opportunity to obtain an even lower rate that what is measured in a weekly average. The all-time record low for mortgage rates only existed for one day on Thursday, September 22^nd, 2011. This was a very volatile week and rates jumped 0.125% by Friday morning and another 0.125% by Friday afternoon. This type of volatility threw off the weekly averages. One of the reasons we’re seeing sustained record low rates is that the market is being held relatively stable by the Fed’s Operation Twist. The Fed’s steady involvement in purchasing mortgage backed securities is keeping markets calm and enabling these low rates to last for more than a day. This is something that didn’t exist back in September.

One other aspect that Freddie Mac releases in their report in the cost associated with obtaining these rates. It’s always interesting that the media seems to conveniently omit this part of the story. According to Freddie Mac, the average homeowner spent approximately $2,000 in fixed costs (title, escrow…) plus three quarters of a point to obtain these record low rates. On a $400,000 loan, that would be $2,000 in fees plus $3,000 in points for a total of $5,000. Again though, Freddie is reporting an “average,” which means some people are getting even more favorable terms. Well qualified homeowners were able to lock in a 30 year fixed rate 3.875% with absolutely $0 closing costs. In other words, these homeowners are able to get lower rates that what Freddie reports as the “average,” and they’re also able to get it with less closing costs: $0 in some cases.

Back on September 22^nd, these same homeowners would have been able to get 3.75% with $0 closing costs, but not if they waited for the media to talk about it. The most effective way to “time the market” and ensure you’re getting the best rate available is to have an open relationship with your mortgage lender. A true mortgage professional will track the bond market in “real time” and be able to provide up to the minute data on current mortgage rates. This type of relationship and open communication can be the key for homeowners seeking the best deal.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Paying for the Payroll Tax Credit

2012-01-09T20:57:00.000-08:00

As the final curtain fell on the political circus of 2011, congress managed to eke out one last dramatic performance and renew the payroll tax cut. The media has made much ado about the political gamesmanship and party line bickering that took place during the fiasco, but what the media has yet to explain is that the payroll tax extension will be paid for by American homeowners.

In order to fund the payroll tax cut congress raised the guarantee fee (or “g-fee”) for all loans backed by Fannie Mae, Freddie Mac, and Ginnie Mae bonds. The impact will hit all conventional, FHA and VA loans, which combine for roughly 95% of all loans being produced in today’s housing environment. Banks that produce these loans obtain a type of insurance protection against losses by securitizing those loans through one of these agencies. The banks pay a g-fee to these agencies for every loan securitized in this manner. If and when a loan goes bad, it is the agency absorbs the losses, not the bank.

Currently the g-fee stands at 25 basis points (bps), or 0.25%. As part of the measure passed by congress, the g-fee is going to increase to 35 bps, or 0.35%. The end result is that homebuyers and homeowners looking to refinance will have to pay a higher rate for future loans, roughly by 0.10%.

There are many programs which currently offer 30 year fixed financing at 3.75%, so let’s use this as an example. A $250,000 mortgage at 3.75% would feature a monthly payment of $1,157.79 for thirty years. After applying the 10 bps increase and recalculating for a 3.85% interest rate, this same homeowner would see their mortgage payment increase to $1,172.02 for the same $250,000 mortgage. Our homeowner in this example is going to pay $14.23 more on their mortgage so that the payroll tax cut can pass and the average American will pay $40 less per month in taxes. Sounds like a good deal, right?

Wrong. The difference is that the payroll tax cut was only extended for 2 months. So the average American will save $80 as a result of this bill. The increase in the mortgage payment for our sample homeowner is $170.76 per year. Given that the average lifespan of a loan is 7 years, this translates to an increase of $1,195.32. If the homeowner actually kept the loan for all 30 years, they would end up paying $5,122.80 more over the life of the loan just to fund this $80 savings. That just doesn’t sound like a good deal anymore – at least not for homeowners.

Now congress is talking about how to extend the payroll tax cut for the full year. Undoubtedly they’ll look for another source of funds to pay for it. Hopefully they’ll look elsewhere for those funds rather than tap into a real estate market that’s already struggling to recover.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

LIBOR on the Rise

2011-12-13T20:56:00.000-08:00

Therecent acceleration of the European Debt Crisis has made a significant impacton the factors which drive mortgage rates. The effect has been to improve fixedterm mortgages, while adjustable rate mortgages have begun what’s projected tobe a steady and prolonged increase. For anyone who still has an adjustable ratemortgage, the stars have all aligned to make right now the perfect time to getinto a fixed rate product.

Fixedrate mortgages are tied to the bond market. More specifically, each fixed rateproduct is tied to an individual mortgage backed security, and these securitiesare traded daily on the open market. As an investment vehicle, mortgage backedsecurities carry relatively less risk than many other financial vehicles. As aresult they are often considered as a “safe haven” trade, very similar to USTreasury bonds. “Safe havens” do especially well when the market is in a stateof volatility. Because these assets are traded in US dollars, they do especiallywell when the dollar strengthens against a foreign currency. As the Euro crisishas deepened, mortgage bonds have benefitted and American homeowners have seenthe rate on a 30 year fixed mortgage drop back below 4.0%.

Ina sharp contrast, adjustable rate mortgages (ARMs) have risen over the sametime frame. This is because ARMs are tied to a different index. Theoverwhelming majority of ARMs are tied to the 12 month LIBOR. Although theLIBOR has historically been the most stable index as compared to all others, itis a European-based index and has therefore risen in response to the Europeandebt crisis.

TheLondon Interbank Offered Rate, better known by the acronym “LIBOR,” is the ratewhich London based banks charge each other to borrow funds within their system.The 12 month LIBOR rate has held steady roughly 0.75% for nearly a year, fromOctober of 2010 through August of 2011. But as the European debt problems haveemerged, LIBOR has begun to rise. First to 0.8332% in September, then 0.9086%in October, and finally reaching over 1.0% in November, this represents a 0.25%increase in a three month time span. For a rate which has been typicallyreferred to as “stable,” a 0.25% increase in three months represents cause forconcern.

Shouldthe European debt crisis spread in 2012 (as many predict it will into Russiaand surrounding countries), LIBOR will have nowhere else to go but up. Sincethe majority of ARMs are tied to this index, those rates will also continue toincrease with each adjustment period. For those who still have adjustable ratemortgages, they might be able to ride out the storm if they plan to sell thehouse before their next adjustment period. But for those who plan to hold theirproperties long term, now would be the perfect time to get into a fixed rateproduct.

ArnaudDufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Stalled in the Senate

2011-11-28T21:38:00.001-08:00

The number one most challenging part of my job is that I can’t help everyone. Every day I speak with homeowners who would like to refinance their home into more favorable terms: terms that will help them and their family regain financial stability. As much as I’d like to help them, my desire alone is simply not enough. As a lender, I am limited to providing loans according to the terms set forth by Fannie Mae and Freddie Mac.

A new hope for homeowners came in January of 2011 when Barbara Boxer introduced S.170 into the Senate. Better known as the “Helping Responsible Homeowners Act,” S.170 would replace the current HARP program and make refinancing into more favorable terms a viable option for a much larger percentage of homeowners – especially those with little to no equity.

The current Home Affordable Refinance Program, better known by the acronym “HARP,” has generated a lot of media attention for Fannie and Freddie. It is currently the only program that allows homeowners in a negative equity position to refinance their home. Homeowners who owe between 80 and 95 percent of their house’s value and are eligible to refinance through other programs will find that the HARP program is the most financially beneficial for them. These points have been discussed in great detail by the media.

Although the benefits of this program have been well discussed, the HARP program has significant shortcomings that have been given little to no media coverage. The largest shortfall is that fewer than 5 percent of American homeowners are eligible to benefit from it. This means that the remaining 95 percent of us need to find other alternatives in an already crunched credit market. Homeowners with little to no equity will find their options to be extremely limited. The most challenged are those who owe more than their house is worth. These homeowners simply have no options to refinance if they are not eligible for the HARP program – which very few are.

Under S.170, many of the restrictions which exist under the current HARP program would be eliminated. The biggest change would be the removal of “loan level adjustments.” Under the current HARP program, homeowners are eligible to refinance even if they owe up to 125% of their property’s value. However, the rates available to these homeowners are not the same as the rates available to those with more equity. Under instructions by Fannie and Freddie, lenders instill these loan level adjustments to provide slightly higher rates to those in a negative equity position.

As proposed, S.170 first eliminates the 125% maximum LTV. This would enable someone to refinance even if the balance on their mortgage was double, or even triple the value of their house. As long as these homeowners had remained current on their mortgage and wanted to refinance, they would be able to under this program. Moreover, S.170 eliminates the practice of loan level adjustments, meaning that this same homeowner would be able to receive the same “best” interest rate afforded to those with more equity.

A second significant improvement afforded by S.170 is the elimination of HARP’s delivery date requirement. Under current legislation, HARP requires a loan to have been delivered to either Fannie Mae or Freddie Mac prior to March of 2009. This effectively means that any loan originated after January of 2009 is ineligible for assistance under the HARP program. The proposed S.170 bill would eliminate this requirement and open the door to all loans owned by Fannie or Freddie regardless of the delivery date.

There are a few smaller changes that S.170 brings, but these two biggies would open the doors wide open for a much larger percentage of American homeowners to refinance into more favorable terms. The benefits would lead to less foreclosures, improved stability in the housing market, and additional disposable income for homeowners to reinvest and stimulate our struggling economy once their mortgage payments have been lowered.

Unfortunately, S.170 is going nowhere. Since its introduction in January of 2011, the bill has been referred to three separate committees and has never been heard from since. It may take a grass-roots movement on the part of the people to get it moving again.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

The 20 Year Fixed

2011-11-14T20:35:00.001-08:00

When a homeowner applies for a refinance, they almost always ask for either a 30 or a 15 year fixed. Most homeowners are surprised to learn that there’s also a 20 year fixed option that they simply weren’t aware of.

With today’s interest rates at record lows, fixed rate options make more sense than any alternative plan. The advantage of a thirty year fixed is that it features the lowest payment of the fixed term loans, simply because it has the longest amortization period. The only downside to this is that it resets the time to pay off the mortgage back to a new thirty year period. Someone who was already 5 years into their mortgage and only had twenty-five years remaining might appreciate the lower rate of their new refinance, but they might not be as excited about “losing” the five years they’ve invested towards getting their house paid off.

This notion is exactly why shorter term loans are gaining in popularity in recent years. With rates at record lows, individuals have been able to lock in 15 year rates that cause only a slight increase in their monthly payments compared to their old thirty year loan, but get the house paid off in half the time.

For those that want to get their house paid off even faster, there is even a 10 year fixed product. The payments are higher to accommodate the extremely short amortization period, but this is an incredibly popular program for those that can fit the payment into their monthly budget.

For most homeowners the 20 year fixed represents the best of both in that it features a lower rate than the thirty year fixed without the significant increase in payment that the shorter 10 or 15 year terms create.

Here’s a quick example. Someone who got a 30 year fixed five years ago would probably have a rate upwards of 5.0%. For our example, let’s look at a $250,000 loan at 5.25% with monthly payments of $1,380.51. After 5 years, this homeowner will have paid off $19,626 of the original principle. The remaining balance of $230,374 is scheduled to be paid over the remaining 25 years.

Refinancing this remaining balance of $230,374 into a new 20 year fixed at 3.75% would create a new monthly payment of $1,365.86. The decrease in monthly payment is $14.65, which adds up to $3,516 in savings over the next 20 years. Of course, the big savings comes after the 20^th year when the mortgage no longer exists. Not having a mortgage payment will save the homeowner $16,566.12 per year, equaling $82,830.60 in savings by eliminating those last five years. This creates a total savings of over $85,000 over the 25 year span. Considering most homeowners who pay off their mortgage do so around the same time as their retirement begins, this is a nice way to add a little extra cushion to your nest egg.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

The New HARP – Will it Help?

2011-10-31T22:31:00.000-07:00

My phone has been ringing off the hook the last few days with people asking if they’ll be able to take advantage of the new revisions to the HARP program which were just announced last week. President Obama’s executive revision of the Home Affordable Refinance program, better known by the acronym “HARP,” has made a lot of headlines. The media coverage has made it seem like this is the magic cure for homeowners who are in a negative equity position and owe more than their house is currently worth. Although this program will help a small percentage of homeowners, the majority of “upside-down” homeowners will find that this program can do nothing to help them.

The primary issue is that the government can only effect change to loans which are part of its own portfolio. The new HARP program is still only available to loans which are backed by Fannie Mae or Freddie Mac. Homeowners who bought at the peak of 2006 and 2007 are likely the ones who are most upside-down today. Unfortunately, they are also the least likely to have a loan backed by a government agency. This same time was also the peak of investment firms’ involvement in mortgage backed securities. Lehman Brothers, Goldman Sachs, Bear Stearns, and even tax giant H & R Block all carried significant mortgage investment as part of their portfolio. Since the government has no control over these agencies, a homeowner with one of these private investors backing their loan was ineligible for assistance under the hold HARP program, and they are still ineligible today. This is the overwhelming majority of mortgages in America.

The second major hurdle to overcome in order to take advantage of this program is the time requirement. Only loans that were delivered to Fannie or Freddie prior to May 31, 2009 are eligible. This means anyone who bought their house or refinanced their existing mortgage after this date remains ineligible. However, having gotten your loan prior to this date does not immediately guaranty your eligibility either. I have actually seen a loan that was originated in 2006, but not sold to Fannie Mae until June of 2009 – three years later! Because the HARP program goes by the date Fannie or Freddie acquired the loan, this homeowner remains ineligible.

So who is eligible? Anyone who’s loan was sold to Fannie Mae or Freddie Mac prior to May 31, 2009 meets the first and most important criteria. This is a three month extension from the old HARP program which required loans to be delivered to Fannie or Freddie prior to March 1, 2009. These extra three months will add some homeowners to the eligibility pool.

A second amendment to the program will help some of the more desperate homeowners. Previously, the program allowed refinancing up to 125% of a property’s value. This means that someone who owed $250,000 on a $200,000 home could get help, but someone who owed $275,000 on that same home could not. Under the new HARP program, there is no maximum. Even someone who owes $400,000 on a home currently valued at $200,000 can, if they would like, refinance under this new program and take advantage of today’s low rates.

This program becomes available December 1, 2011.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Santa Claus (Rally) is Coming to Town

2011-10-17T21:59:00.000-07:00

About this time of year, retailers and the media have us on a countdown to the holidays. This joyous time of year is renowned for family, food and faith. Experienced investors know that this is also the time of Wall Street’s “Santa Claus Rally.”

The concept behind this rally is incredibly simple. Whether you celebrate Christmas, Hanukkah, Quanzaa or even the winter solstice, the holiday season brings about feelings of joy and happiness in all. On Wall Street, there is an overall increase in the collective spirit which fuels optimism towards fellow man. In the investment community, this means putting more faith in companies by investing in stocks. As a result, the stock market generally experiences a lift in the last few weeks of the year. For investors looking to take advantage of this seasonal event, now might be the time to speak with your financial advisor about some potential investment opportunities.

A general rule among financial market factors is that what’s good for stocks is bad for bonds. The additional dollars which are being invested into stocks typically come at the expense of the bond market. As investors shed the safe haven play of treasuries and mortgage bonds for riskier equities, rates go up. The downside to the Santa Claus Rally’s influence is that the pressure on bonds causes mortgage rates to rise.

This means, very simply, that anyone who has a lower mortgage rate on their holiday wish list should move quickly to lock in a rate. As the holidays get closer and the Santa Claus Rally gains momentum, rates are likely to get worse. I guess Santa doesn’t worry about mortgage rates – he must have paid his off a long time ago.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Twisting to Economic Recovery

2011-10-03T21:09:00.000-07:00

Who would have thought that rates on a thirty year fixed mortgage would drop below 4.0%? Although rates bounce around slightly from day to day, this is right about where they’ve maintained the last couple weeks for many loans below $417,000. What makes this recent drop in interest rates most interesting is the Federal Reserve’s policy that served as the primary force to drive rates down.

On Wednesday, September 21^st, the Federal Reserve announced “Operation Twist” as its most recent plan to stimulate economic recovery. Under this plan, the Federal Reserve would diminish its short term holdings and replace them with more long term assets. From a taxpayer perspective, the best part of this plan is that it doesn’t add anything to the Fed’s balance sheet. The source of capital comes from short term holdings that mature as well as principle payments received on the Fed’s entire balance sheet. This trade-off of short term transitioning to long term is where the “twist” comes from.

In some ways, this move by the Fed was largely anticipated and expected by global investors. Announcements from the Fed are rarely secret or surprising. But this time it was a little different. There was a little twist to the “twist.” In an unanticipated move, the Fed announced that it would specifically be reinvesting into agency mortgage backed securities, not just into treasury bonds. This move by the Fed created a surge in demand for these very mortgage backed securities, and with it the added effect of dropping mortgage rates to the lowest ever on record. Within 24 hours of the announcement, rates on a conventional 30 year fixed mortgage dropped to 3.75% with little to no closing costs. This was the market rate on Thursday, September 22^nd.

The record setting rally on mortgage bonds was short-lived, and rates were back up to 3.875% by Friday morning. They pushed further up to 4.0% by Friday afternoon. Since then, the rate on a convention 30 year fixed mortgage has hovered just over or just under 4.0%. The way mortgage bonds are currently trading, it does not appear that 3.75% is going to come back, but 3.875% remains a very attainable rate with little to no cost for well qualified borrowers.

Some homeowners will find it interesting that while the rate on a thirty year fixed mortgage has dropped, rates on shorter term products (10 and 15 year terms) have actually gone up during the same time frame. This may have been the intent of the Fed all along. Short term mortgages carry higher payments that force homeowners to give more money back to the banks, while long term mortgages feature lower payment and allow homeowners to have more discretionary spending money. Our economy is stimulated when consumers spend money. If a homeowner can refinance into a new 30 year mortgage that saves them $200 per month on their mortgage payment, that individual now has $200 additional disposable income to stimulate the economy. Operation Twist is the Fed’s attempt to put more money directly in the hands of consumers.

As we all know, the government already tried to help the economy by giving money directly to the banks. That didn’t work. Instead of making that money available to consumers, the banks used the government money to make acquisitions and shore up their balance sheet at taxpayer expense. It’s along this same reason why the Fed would prefer homeowners not take a shorter term loan which gives more money back to the banks instead of injecting it into the economy now. Getting the loan paid down faster will provide the homeowner with more disposable cash when the loan is paid off in the future, but our economy needs the stimulus more now than in 15 years. This is the point of “operation twist” and the reason why the Fed is investing in (or subsidizing) thirty year fixed mortgages.

As usual, there is more to life than pure absolutes. Rates are so low right now that individuals have the opportunity to lower their rate in a manner which will both lower their monthly payment and still help get the loan paid off faster. A new 30 year fixed doesn’t have to be paid off in 30 years. Someone who just obtained financing 2 years ago and doesn’t want to start all over with a new 30 years can simply request a 28 year loan (yes, these exist). Since conventional loans don’t have a prepayment penalty, they can also take the 30 year loan and make the payment equivalent to a 28 year amortization to get the loan paid off in the same remaining timeframe. If they can do this at a lower rate than what they currently have, they’ll be able to save themselves some money every month at the same time. This is good for the homeowner, and good for the economy. Finally, we have a “win-win” proposal out of Washington.

Arnaud Dufour
Sr. Mortgage Banker

adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Getting a Good Appraisal

2011-09-19T21:55:00.000-07:00

Whether you’re purchasing a new home or refinancing your current one, an appraisal plays an important role in the process. A good appraisal can make good opportunities even greater. A bad appraisal can completely squelch the chances of achieving your desired objective. With all the challenges posed by new appraisal legislation, homeowners and homebuyers have less control over this critical component than ever before. But there are still precautions that can be taken to protect yourself.

The strictest appraisal reform legislation is the Home Valuation Code of Conduct (HVCC). This legislation was introduced by Andrew Cuomo when he was attorney general for the state of New York. The reform makes it unethical for mortgage lenders, real estate agents, homeowners and prospective homebuyers to have a direct involvement in selecting the individual appraiser ultimately responsible for assigning value to the property. The legislation instead creates a mid-level Appraisal Management Company (AMC) who takes the appraisal order, then randomly assigns the job to one of the many individual appraisers in their database.

The upside to this legislation is that it protects homeowners from overvalued appraisals which could lead to equity stripping. This was a common practice last decade where homeowners would refinance a property to pull as much cash out as they could. Some lenders were asking the appraisers to overvalue the properties so that they could sell a larger loan amount. Some homeowners found themselves in a position where the balance of their new loans was larger than the true value of their property. It was this practice that contributed to the demise of both Aames Home Loans and Ameriquest. It was also this practice that prompted Mr. Cuomo to draft the HVCC legislation that would eventually be adopted nationally by both Fannie Mae and Freddie Mac in 2009.

Everything that has an upside also has a downside. Without the ability to select their own appraiser, homeowners have no direct control over the quality of the individual that holds the power to “make or break” their opportunity. Regardless of what you do for a living, take a moment to stop and think about your peers. Some of them are very good at their jobs. Most of them are at least average. And, no doubt, there are a few you can think of who have no business being in that business. The same is true for appraisers. Unfortunately, homeowners and homebuyers no longer have the opportunity to select their own appraiser. Obtaining one of the best appraisers is a matter of chance. More likely they’ll be stuck with an average appraiser who will do an acceptable job. Unfortunately, a few will be stuck with a subpar appraiser who will deliver subpar work, unless they know their rights.

Even if they don’t have the right to choose their appraiser, homeowners and homebuyers DO have the right to interview the appraiser who’s been assigned. If the client is not satisfied with the qualifications of the individual appraiser, they have the right to request the AMC assign a new appraiser to the job. Here are the top three questions to ask any appraiser:

1. Are they local? This may be the most important qualification. The real estate market is very localized. There may be nuances to one tract that make it dramatically different than the one right next to it. An out of town appraiser is not likely to be familiar with these differences to give them adequate consideration.

2. How long have they been appraising residential real estate? As with any other profession, experience matters.

3. How many types of appraisals are the qualified to do? Conventional only? What about FHA? VA? The more qualifications they have, the more training they have. Training is another form of experience that matters.

The exact answers provided to these questions matter. But what matters just as much is the demeanor of the appraiser when answering these questions. Take a moment to do a brief evaluation of the appraiser’s character. Do they seem like someone who just looks at the job as a quick buck, or do you get the feeling that they actually care about their responsibility to you? This is the most important attribute of a good appraiser. Since your mortgage broker is barred from having any interaction with the appraiser, you’ll need to do this yourself. This interview needs to happen during your first conversation with the appraiser, typically at the time they call to schedule the inspection. Waiting any longer can result in rescheduling fees that could have been avoided.

After you’re comfortable with the appraiser, there will be one more opportunity to interact with them at the time of inspection. I’ve heard many homeowners who express to the appraiser something along the lines of: “I think my house is worth $500,000, but I need the appraisal to support $450,000 in order for my loan to work.” Although it is unethical for a real estate professional to have this conversation with the appraiser, the homeowner does not have any such restriction. Ultimately a good appraiser will not take this into consideration when determining their final opinion of value. But remember that they’re not all good appraisers out there. If you end up with one of the subpar appraisers mentioned earlier, this is your last opportunity to protect yourself from getting shorted. Based on the new appraisal legislation your real estate agent and mortgage broker are not able to get involved in this part of the process. The only way to protect yourself is to take matters into your own hands, and this is how you do it.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Short Sale Strategies

2011-09-06T22:33:00.000-07:00

As a result of today’s depressed housing market, an increasing number of homeowners are considering a short sale as a solution to their housing woes. What most people don’t realize is that a homeowner who undergoes a short sale can still turn around and immediately purchase a new home. But this can ONLY be done if the entire short sale is handled properly. To do this you’ll need a good team to help overcome a couple of key challenges.

Challenge number one is getting the bank to approve your short sale while you’re still current on the mortgage payments. Unless your lender is completely cooperative (most aren’t), it’s very unlikely you’ll have any success in negotiating a short sale until you’ve fallen behind on your mortgage payments. The first “teammate” you’ll need is a good agent to negotiate with your bank. This representative can be a real estate agent, attorney, or loan modification company. Whichever you choose, make sure they specialize in negotiating a short sale.

Most agents will tell you that there are two key criteria that will need to be met in order for the bank to approve the short sale:

First, you’ll need to show that your current income is insufficient to support the total expenses of carrying the existing mortgage payment amongst all your other monthly expenses.

Debt to income calculations vary from one lender to another. This is typically determined by who the investor is backing your loan. If the loan is backed by Fannie Mae or Freddie Mac, the metrics behind the calculations will be familiar to an experienced negotiating agent. If the investor is someone other than Fannie or Freddie, that’s when the calculations can vary. An experienced agent will be better familiar with the best way to present your financials to improve the likelihood your short sale will be approved.

Second, you’ll need to show that the amount of liquid assets you have available are less than what would be required to bring the balance of the loan down below current market value.

Remember that there are expenses involved with selling a piece of real estate. As a seller, you’ll be responsible for the real estate agents’ commissions of both the buyer and the seller. At an average of three percent per agent, this already puts the cost at 6% of the selling price. Let’s estimate another 1% for title, escrow and other associated expenses, and we’re estimating 7% of the sales price. For a home with a current market value of $300,000, that’s $21,000 in commissions and fees that need to be covered by the seller. For someone who is 10% upside-down on their house and owes $330,000, this means they’d need to come up with $51,000 just to sell the house. For someone who has this much in liquid assets, the bank can require you use it all before they’ll approve the sale. Once you’ve selected your agent, ask them which accounts need to be disclosed and which ones do not.

For most people and most situations, it may take their agent some work (and some time) to arrange the short sale approval. However, once the short sale is complete you’ll be ready for the next step in the process, and the next member of your team.

A good mortgage lender can approve loans for individuals who are 1 day out of short sale, provided the individual can meet two criteria:

The first requirement is that the homeowner managed to stay current during the short sale process. This is the one requirement that most short sale participants fail to meet, mostly because they didn’t know it made a difference. Although it doesn’t make a difference in terms of the short sale, it absolutely makes a difference in terms of qualifying for a loan to purchase their next home. Depending on if their next loan is FHA or Conventional, Individuals who experienced even a single late payment on the mortgage are required to wait a minimum of two to three years after the date of short sale before they can obtain financing for a new home. Individuals who manage to stay current on their loan during the short sale process can be approved for their new loan the very next day.

If an individual managed to attain this first requirement, the second one will prove equally challenging as it requires a minimum down payment of 20% of the new purchase price. I can already hear the “glass-half-empty” crowd stating that if they had enough assets to put 20% down on a new house, they would be declined for the short sale for having “too much assets.” For some individuals this will be true. However, the “glass-half-full” readers understand that there is always a loophole. In this case, the 20% down-payment can come in the form of “gift funds” from a family member. This is the third and final teammate you’ll need in order to pull off a short sale on one home and purchase a new home immediately after.

Given a situation where an individual manages to meet all the requirements, they’ll still need to shop around for a lender. Although this program is supported by Fannie Mae, not all lenders choose to make it available to homeowners. Even if a lender does offer it, the individual loan agent may not be aware of it. For most individuals seeking this program, their best resource is likely to be a broker who has access to programs offered by multiple lenders.

Ok, I never said it was easy to get approved to buy a new home after a short sale. But I did say that it can be done by working with the right team who understands the requirements and is able to work within them.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Last Chance for Larger Loans

2011-08-22T21:21:00.000-07:00

In response to depressed home values, the Federal Government is reducing the size of loans which can be securitized by Fannie Mae and Freddie Mac. In California especially, there are a number of counties which are eligible for federal backing on loan amounts up to $729,750. These counties are about to have their maximum loan limit cut to as low as $483,000. Almost every other county in California is scheduled to have its maximum loan amount reduced to as low as $417,000. These new loan amounts go into effect October 1, 2011. Since an average loan takes about 30 days to fund, anyone with a current loan amount over $417,000 should stop reading this and call their mortgage lender immediately.

With the deadline rapidly approaching, this is definitely the last chance for owners of larger loans to refinance. But with interest rates at all-time record lows, it’s also the best time for those who act quickly enough to take advantage of the opportunity. For these “high-balance” loan amounts between $417,001 and $729,750, the current rate on a 30 year fixed is 4.25% with “no points” (APR 4.278%), or 4.375% with “NO FEES” (APR 4.375%). This means anyone with a current thirty year fixed rate over 4.5% should stop reading this and call their mortgage lender immediately.

As I’ve written before, even a quarter percent (0.25%) reduction in rate can make sense in today’s environment. This math is especially supported if it can be done with zero closing costs. On a $600,000 loan, a quarter percent reduction will save the homeowner approximately $1,500 in interest in the first year alone. Additional savings will continue to compound in later years. As an added benefit, the lower interest rate enables the homeowner to pay down more on their principle balance in the earlier years of the loan. This is a basic principle of amortization which the average homeowner is not familiar with. It’s not that the concept is overly complicated, it’s simply that most mortgage lenders focus only on the payment as opposed to explaining the overall financial picture and detailed implications of the new loan.

Those who act with an understanding sense of urgency can lock in the lowest interest rates on record on the highest loan amounts which the government has ever supported. Keep in mind that the current loan limits of up to $729,750 has always been a “temporary” loan limit. What was essentially an exception to the loan limit was renewed every year when Fannie Mae and Freddie Mac were publicly traded companies. Shortly after the Federal government took over these two agencies in September of 2008, it was announced that they would allow the exception to continue but stressed that the continuation was as intended – Temporary. The federal government is making good on their word within the next 30 days.

Monterey will be the hardest hit county in California with a reduction in loan limit from $729,750 down to $483,000. This is a change of $246,750 overnight. San Diego county is second with a reduction of $151,250 ($697,000 down to $546,250). Here are some other notables:

County Name	Old Loan Limit	New Loan Limit	Decrease in limit
MONTEREY	$729,750.00	$483,000	$246,750.00
SAN DIEGO	$697,500.00	$546,250	$151,250.00
SONOMA	$662,500.00	$520,950	$141,550.00
SOLANO	$557,500.00	$417,000	$140,500.00
NAPA	$729,750.00	$592,250	$137,500.00
VENTURA	$729,750.00	$598,000	$131,750.00
SAN LUIS OBISPO	$687,500.00	$561,200	$126,300.00
PLACER	$580,000.00	$474,950	$105,050.00
SACRAMENTO	$580,000.00	$474,950	$105,050.00
ALAMEDA	$729,750.00	$625,500	$104,250.00
CONTRA COSTA	$729,750.00	$625,500	$104,250.00
LOS ANGELES	$729,750.00	$625,500	$104,250.00
MARIN	$729,750.00	$625,500	$104,250.00
ORANGE	$729,750.00	$625,500	$104,250.00
SAN FRANCISCO	$729,750.00	$625,500	$104,250.00
SANTA CLARA	$729,750.00	$625,500	$104,250.00
RIVERSIDE	$500,000.00	$417,000	$83,000.00
SAN BERNARDINO	$500,000.00	$417,000	$83,000.00

With nearly every county in California being affected, this is a very abbreviated list. Anyone who wishes to look up the new loan limit for their local county may find the complete new list here:

https://www.efanniemae.com/sf/refmaterials/loanlimits/xls/loanlimref.xls

What happens to those who miss this opportunity? Those unfortunate individuals will be faced with one of two difficult decisions when shopping for their next home loan. They will have the choice to pay down the difference between their current loan balance and the new loan limit, or accept the market rate on a super-jumbo loan. Since very few homeowners will be in a rush to relinquish whatever cash they’ve been able to hold on to in today’s tough economy, and even fewer homeowners will be excited about a jumbo rate that’s typically a full one percent (1%) higher that what’s available on a conforming loan, individuals who currently have a larger loan and don’t take action now are not likely to take action any other time in the near future. Which is why the smartest individuals have already stopped reading and started dialing their mortgage lender.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

More Bad News = New Low Rates

2011-08-08T21:52:00.000-07:00

The dramatic upswings and downswings of the financial markets have been an options trader’s dream over the last couple weeks. For most of the rest of us though, the news has been pretty much all bad. The only solace is that all the bad news combined has lowered mortgage rates to the a new record low for the year, a bottom which is very near the all-time low set in November of 2010.

The American economy has taken a beating in the headlines over the last 2 weeks. In that time, the Dow Jones Industrial Average has shed 15% - nearly 2,000 points. During that same span of time, the rate on a 30 year mortgage note has dropped by 0.5%. Depending on loan amount, the going rate for a “No Cost” refinance today is between 4.25% and 4.375% (rate and APR).

This “Bear Run” on Wall Street and the flight to safety in the bond market have been fueled by one negative headline after another. The Institute for Supply Management (ISM) released their July manufacturing index, a measure of factory production in America, which came in at a disappointing 50.9. This was much less than the 54 that was expected and much further below the 55.3 rating in the prior month. A number above 50 indicates that factory orders are growing. However, a 50.9 indicates that the growth is anemic at best.

This was followed by the ISM Services index, a measure of non-manufacturing growth in America. This report also showed slowing growth of 52.7, down from 53.3 in the prior month and well below market expectations.

The Personal Consumption Expenditures (PCE) report, a measure of consumer consumption, also disappointed the markets. This figure came in at 0.1%, only half of the 0.2% that was expected and only one-third of the 0.3% from the prior month. Needless to say, this report was also coupled with consumer confidence coming in lower than the prior month. America is an economy based on consumerism. When that is down, the entire market struggles.

All this negative financial news creates panic in the stock market and pushes investors towards the safety of bonds. Traditionally speaking, American bonds have been considered the safest, most secure investment in the world. When global investors panic, American bonds benefit. This is especially true when instability strikes other global competitors. America has benefitted from financial concerns in Ireland and Greece. Recent concerns over the financial stability of Italy and Spain have increased global demand for American-backed assets.

But the dominance of American bonds has now been threatened. For the first time since 1917, Standard & Poor’s removed Uncle Sam’s AAA credit rating. Although the official announcement wasn’t released until long after the markets closed on Friday, August 5^th, the news leaked out while the markets were still open. And the market reacted. Mortgage rates shot up instantly. In that one day, mortgage rates on most products increased by as much as 0.25%, giving back half of the gains that had taken two weeks of progressive bond market rallies to earn. The stock market was very confused that day as well. It was up over 150 points, and down over 300 points. Talk about volatility! In the end, the market closed up 60.93 points.

On Monday came more bad news with the stock market losing 634 points (5.5%) on reaction of the credit downgrade. Surprisingly, bonds found a way to rally. Maybe it was the ongoing concerns in the Euro-zone fueled by the rioting in England. Maybe bond investors were expecting US debt to be downgraded more severely than it was. Or maybe investors just aren’t buying into S&P’s rating. Whatever it was, bonds rallied and mortgage rates improved. That rally lost some of its momentum and was somewhat limited by a credit downgrade of mortgage giants Fannie Mae and Freddie Mac. Nonetheless, any rally in rates completely defies what one would expect after a credit downgrade.

In the end, today’s mortgage rates are back to the lowest levels we’ve seen this year, and within a fractional margin of the all-time lowest rates that were established in October and November of 2010. Who’d have thunk it?

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Killing the American Dream

2011-07-25T22:09:00.000-07:00

By now most homeowners in America are aware of the debt crisis which Washington politicians are quibbling over like stubborn children. And those who aren’t aware, should be. Many proposals have been presented by one political party only to be shot down by the other side. The only real bipartisan proposal to solve the debt crisis has been presented by the so-called “Gang of Six.” Should this bill pass, the housing situation in America will never be the same, and the American dream of owning a home complete with garden and a white picket fence will be forever destroyed.

As part of the “balanced” approach one would expect from a bipartisan movement, the ambitious plan proposed by the Gang of Six introduces spending cuts combined with new revenue sources. That’s where the threat comes in. One of the new revenue sources being proposed is to eliminate the mortgage interest tax deduction.

When news of this broke, a younger colleague of mine commented: “They wouldn’t really do that, would they?” They’ve done this before, so why wouldn’t they do it again? The last time a bipartisan budget proposal passed in Washington was under President Ronald Reagan. Prior to that time all interest used to be tax deductible. This included credit card interest, car loans, and personal loans. After that bipartisan “reform” the only interest deduction remaining for the average American was mortgage interest, and interest on student loans. An even more unpleasant situation played out during the great depression. In 1933, politicians under Franklin D. Roosevelt confiscated gold bullion from American citizens under threat of fine or imprisonment. History shows that politicians can be more vicious than any wild animal when backed into a corner. These are desperate times and Washington is not leaving any option off the table.

For most Americans, the mortgage interest deduction represents their single largest tax deduction. We had a handyman in the office at the time we were having this discussion. He simply stated the sentiment that is no doubt echoed by most every homeowner: “If it wasn’t for the mortgage deduction, I wouldn’t own a home.”

I remember when I bought my first home. I was paying $1200 per month in rent. Buying this house meant that I’d have a $1600 per month mortgage payment. However, with the tax deduction I earned a few hundred of that back. The mortgage interest deduction meant that my net mortgage payment, after taxes, was right in line with what I was paying for rent at the time. So I figured it was a financial no-brainer. There are added costs of homeownership that I hadn’t factored into my simplified comparison (insurance, maintenance, appliances, renovations…) but it made good sense at the time. I believe it still does in that I’m building up a forced savings every month in the form of equity, and I’m also protected from inflation by having a fixed monthly payment that I know will never go up. The same could not have been said when I was renting.

But that economic justification becomes immediately threatened when the mortgage tax deduction is eliminated. Financially speaking, it simply wouldn’t make sense to own a home. At least, not at first. In time though, the domino effect from this type of legislation would fuel two economic principles that would correct the math by increasing rents. First off, property owners run a business and that business needs to cover expenses. Currently, the mortgage tax deduction works to subsidize rents. Some landlords are willing to rent the property for the equivalent of their mortgage payment knowing that they’re positive cash flow after taxes. Some landlords even rent for less than their mortgage payment if the deduction is great enough. Eliminating this deduction effectively eliminates the subsidy and increases the net cost to the landlord. If the landlord’s costs go up, they are sure to pass that expense to the tenant.

As our handyman so eloquently put it, without the mortgage tax deduction there’s no reason to own a home. Thousands upon thousands of Americans are sure to share in this sentiment, creating an increased demand for rental units. The economic law of supply and demand indicates that such a scenario will generate increased pressure to push rental rates higher. The two of these forces combined could have a skyrocketing effect to rental premiums in America.

This proposed legislation by the Gang of Six threatens to make the divide between “haves” and “have-nots” larger than ever. The only way it will make fiscal sense to buy a house is if one can come in with a sizeable down payment, possibly much more than the proverbial twenty percent. But how will the average American be able to save enough for that when they’re burdened with rents that have doubled? Whether you own a home now or would like to buy one in the future, this proposed legislation is downright scary. The sensible side in me hopes that enough people will see the light and prevent this from passing. But is it safe to place that much blind faith in a desperate band of Washington lawmakers?

Arnaud Dufour
Sr. Mortgage Banker

adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Jobs: Still Not Enough

2011-07-11T21:19:00.000-07:00

Rightwhen it seemed the economy might actually be getting better, the most recentjobs report issued a crushing blow to the recovery. For the last few monthswe’ve been adding jobs to the economy at a decent pace. There were even acouple months earlier this year where we saw over 200,000 jobs added to theworkforce in a single month. Considering it takes 125,000 new jobs per monthjust to keep up with population growth, growth of 200,000 jobs only nets theeconomy a positive of 75,000 jobs. This really is the minimum pace needed to regain the number of jobs we’ve lost in thelast few years. Realistically, we need to be adding 300,000 jobs per month inorder to make any significant dent in the unemployment rate.

Sincethe beginning of the “great recession,” our economy has shed over six millionjobs. According to the labor board we’ve since regained two million of thoselost jobs, but we still have a lot of work to recover the last four million.The June jobs report which was just released by the Department of Labor indicated that we only added18,000 jobs for the month. Bringing even more bad news with the report, theunemployment rate ticked up for a third month in a row, now at 9.2%. Here inCalifornia, we’re still well over 12% unemployment. Since we began trackingthese figures in 1948, there has never before been such a sustained high rateof unemployment this far into what is being called a “recovery.”

Thetruth is that we’re still a long ways away from anything that might feel likeactual “recovery” to the average American. Soon after the report was released PresidentObama took the podium to address the jobs market to Americans. Like any otherpolitician vying for reelection, he did his best to find some shining points inthis new report. The problem is that there simply weren’t any. As CBS’s Jill Schlesinger aptly stated, this jobs report was so overwhelmingly awful that“there’s not enough lipstick in America for this pig.”

Afew months back I was driving through Huntington Beach after picking up my twonieces who live there. My two sons were also in the car with us. We drove pasta residential tract when one of my nieces, age 11, pointed to a house that herfriend used to live in. She was sad because when their family lost the house,they moved out of state. She didn’t understand why she lost her friend. Neitherdid anyone else in the car. I tried to be a good uncle and put complicatedunemployment figures into simple math a child could understand. I did somequick math in my head: A 12% unemployment rate means that roughly one out ofeight adults does not have a job. Here in Orange County, where almost everyhouse needs two working incomes to sustain the high cost of living, this meansone out of every four households has a parent that is not working.

Iasked my niece to think about the kids in her classroom. Imagine how the desksare arranged in the classroom and where each child sits. Now beginning countingevery fourth desk: one, two, three four (unemployed parent). One, two, three,four (unemployed parent). Silence. I could tell that even my youngest son understoodthe gravity. He was only four at the time.

Ifthere’s an upside to any of this, it can only be the effect on mortgagerates. In the few weeks leading into the June jobs report, rates had beenslowly inching upwards based on a belief that the economy was improving. Afterthe harsh reality check provided by last week’s figures, rates took a largeplunge lower. The average rate on a 30 year fixed mortgage dropped by almost 0.25%in a single day on Friday. The bond market continued its rally on Monday,further improving mortgage rates.

Thenew consensus is that pain of a struggling labor market is going to sputteralong much longer than anyone had previously anticipated. Prior to the jobsreport the popular belief was that the Federal Reserve might begin increasingkey benchmark rates as early as the fourth quarter of this year. This mostrecent jobs report all but guarantees that the Fed will continue to leave ratesat record lows well into 2012.

ArnaudDufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Looking for Higher-Yield Savings?

2011-06-27T21:28:00.000-07:00

It’s been a low interest rate environment for a couple years now. As our economy struggles to make even the slightest improvements, it’s likely we’ll remain in a low rate environment for quite a while longer. While this is good news for those who are looking to borrow money at record low rates of interest, it’s less optimistic for those who are trying to save. The interest yields on most savings accounts now are down to a fraction of one percent. But there is a creative way to get a fixed two percent yield on a portion of your savings.

Ordinarily, a two percent yield is not much to think twice about. However, that is multiple times more than the rates being offered on today’s savings or money market accounts. Even certificates of deposit (CDs) aren’t offering that high of a yield unless you’re willing to commit your funds for five years or longer. With the future of our economy remaining uncertain, there is another way to earn a two percent yield without making a five year commitment. Simply establish an escrow account on your mortgage.

Escrow accounts, also known as impound accounts, are established by a mortgage lender to ensure your property taxes and homeowners insurance are paid on time. Impound accounts are required on all government loans, primarily FHA and VA loans. On conventional loans, whether or not to establish an impound account is usually the consumer’s choice. The only exception comes when the loan amount exceeds 80% of the property’s value. At this higher debt threshold, most lenders will require an impound account.

There are restrictions and limitations to how much a lender can reserve in an escrow account. The federal law governing this is the Real Estate Settlement and Procedures Act, better known as RESPA. At the state level, California is the most advantageous state for consumers. California law requires that the lender pay the consumer a rate of 2% on the entire balance of an escrow account. Here’s that 2% yield.

An average homeowner who pays $4,000 per year in property taxes and another $1,000 per year in homeowners insurance has roughly $5,000 they can retain in such an account. At a 2% yield, that’s an easy $100 per year in interest the consumer can earn. Considering the taxes and insurance need to be paid anyways, this is tantamount to $100 of “free money.”

Someone who’s debating whether or not to establish an escrow account at the time they obtain their loan should also know about another piece of California legislation regarding escrow accounts. In California, it is illegal for lenders to charge a higher rate or closing costs when a consumer wishes to NOT establish an impound account. This law wasn’t written very well though, because lenders are easily able to work around this by offering a discount on either rate or closing costs for consumers who DO want to establish an escrow account. Obviously, the letter of the law and the spirit of the law are two different things. However, this is something to keep in mind when considering a new loan. Recognize that certain may offer a slightly better deal if you establish this escrow account.

For those who already have a great loan and are not looking to change it, there is still the option of obtaining this 2% savings rate. Simply call your current lender and inform them that you’d like to create an escrow account for your current loan. They will need to know how much your homeowners insurance is and when the policy renews. They’ll also need to know how much you pay in property taxes. With this information, they’ll be able to calculate exactly how much you’ll be able to transfer from your current savings account into a new escrow account.

The best part about this is that there’s no penalty for closing the account later. So, when you need that money for something else, or your finally able to get a higher yield on another investment vehicle, one more phone call to your lender should inherit you a full refund of your escrow balance. Just keep in mind that some lenders require you to have the escrow account for a minimum time frame, usually six months.

Arnaud Dufour
Sr. Mortgage Banker

adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Are the Banks to Blame?

2011-06-13T21:18:00.000-07:00

There are two truths about today’s lending environment: First is that these are just about the lowest rates that have ever existed. Second is that this may be the most difficult time ever to qualify for a loan. “It’s the banks own fault. They did it to themselves,” was the comment I received when in conversation with a client about the challenges of getting a loan today. Although I can understand the resentment this applicant faced after learning he would not be able to obtain financing in today’s strict lending environment, his statement is flawed in multiple ways.

First understand that banks aren’t the ones who control the availability of credit. Banks have investors that define what types of lending practices can be supported. In terms of mortgage lending, the two investors firmly in control of the credit tap are Fannie Mae and Freddie Mac. Historically, these two Government Sponsored Enterprises (GSE) only supported lending to top tier clients, also known as “A paper.” This all changed during the Clinton administration.

Bill Gates’ dream was to have a computer in every home. Bill Clinton’s vision was to make the dream of homeownership a reality for every American. To help propel this dream, President Clinton pushed Fannie and Freddie to relax their guidelines and expand the credit window. Bowing to heavy political pressure, Fannie and Freddie began making subprime mortgage loans – something they had vehemently stayed away from in prior years. This quick history lesson shows that Fannie, Freddie and the Federal government all share responsibility for what caused the housing collapse. It’s not just the banks.

But it doesn’t stop there. Wall Street had a hand it in as well. After Fannie and Freddie acquire loans from the bank, those loans are then pooled into Mortgage Backed Securities (MBS). MBS pools receive a credit rating from insurance companies like AIG and are then traded on the open market by companies like Lehman Brothers and Goldman Sachs. So the blame game gets spread even further.

But let’s be honest – the blame game always comes full circle. I distinctly remember a conversation with a woman in 2005 who was applying for an equity line to pull $75,000 in equity from her rapidly appreciating home. Comparing the limited amount of income she was receiving to the overwhelming amount of debt she was already carrying it was plainly evident that she could not afford the debt she already had, let alone the additional debt she was applying for. After politely informing her that she could not responsibly afford the additional debt, her words still ring in my ears to this day: “If you don’t give me the loan, someone else will.” She was right. The entire market – banks, brokers, insurance companies, investment firms and the government were all permitting and promoting irresponsible lending. And so were consumers. Less than thirty days after I declined this woman’s credit application, she called to inform me that she had received the loan from another broker. That phone call is testament that consumers also share a responsibility in contributing towards the collapse of the credit markets. Many consumers wanted it so bad they felt an entitlement, regardless of what reason and logic might state.

Since the collapse however, the consumer has become the sole victim. The banks and investment companies received their bailouts from the federal government and are now posting near-record profits. Fannie and Freddie were beyond bailout and have since been taken over by the same government that pressured them to promote irresponsible lending in the first place. At a time when all those companies have since recovered and are now thriving, millions of consumers have lost their homes and, in some cases, their entire life savings. And those that have managed to hang on are finding it increasingly difficult to qualify for a loan.

The same government that pressured Fannie and Freddie towards irresponsible lending practices is now the one calling the shots. The politicians in charge have dramatically “over-corrected” for their mistake. The guidelines and restrictions are now more severe than they were prior to the Clinton administration’s influence. And the lending guidelines keep getting stricter and stricter. If a consumer can’t get a loan today, this is why. Blame it on the politicians, not the banks.

In the meantime, banks and are posting profits of billions of dollars per quarter. Today’s business model for banks is very unlike what it used to be. With rates being at record lows, banks make very little profit from lending. The bulk of a bank’s profit today comes from redirecting their capital into other investment vehicles. With less lending taking place, the banks have more capital to invest and profit from.

The most unfortunate detail is that none of this is likely to change anytime soon. The consumer will continue to struggle obtaining mortgage financing until Fannie and Freddie are relieved of their government conservatorship. Once that happens perhaps the political “over-corrections” will be eliminated and we can get back to common sense underwriting practices. Only then will we get back to a balanced and responsible lending environment. Only then will the consumer have a chance at recovery.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

The Threat of Falling Loan Limits

2011-05-23T22:18:00.000-07:00

There are currently three levels of loan limits by dollar amount. These limits determine the types of programs available to a consumer as well as the rates they can expect on each of those programs.

Most everyone is familiar with the conforming loan limit of $417,000. There are substantially more options available to those with loan amounts below this limit. Moreover, the rates on these programs are always lower that on loan amounts of $417,001 and higher. The reason is these loans are able to obtain full backing from Fannie Mae and Freddie Mac. Loans which are eligible to obtain the backing of these government-sponsored enterprises pose less risk for the banks issuing the loans. And less risk for the bank translates to a lower rate for the consumer.

There are certain geographic areas where it simply costs more to live and $417,000 is not enough to cover the average cost of housing. Fannie and Freddie recognize this and have established higher loan limits for certain counties. Some of the highest loan limits are here in California and include the counties of Monterey, Los Angeles, Orange, Alameda, Ventura, Santa Clara and San Francisco. In these counties, Fannie and Freddie will support conventional loans up to a limit of $729,750.

Loan amounts between $417,001 and the county limit are known as “high-balance” or “super-conforming” loans. High-balance programs are only slightly more restricted than their smaller conforming brethren. The difference in rates is also modest – typically less than 0.25% for loans below $417,000 and the super- conforming. However, these middle-tier programs are vastly more competitive than those whose loan amounts exceed the high-balance limit for a given county. Loans which exceed the high-balance limit, also known as “Jumbo” loans, are the most restrictive in terms of options. The rates on Jumbo products are also much higher – sometimes as much as a full 1% higher than their conforming counterparts.

In 2008, congress passed a series of bills aimed to prevent further collapse of the housing market. The Economic Stimulus Act of 2008 established the current loan limits which governs today’s lending environment. Unless additional action is taken by Congress to extend these measures, loan limits will be reduced in 250 counties throughout the United States. Counties whose limits are already at the $417,000 level will not be affected. However, states that have been recognized as having a higher cost of living (such as California) will be dramatically impacted. The change will take place October 1, 2010.

On this date, loan limits will be recalculated according to a predetermined mathematical equation. The loan limit will be set at 115% of the median house price for a particular county, up to a maximum loan limit of $625,500. Should this happen, it would create another severe challenge for property values which are already struggling to stabilize. In many areas, it will cause property values to plummet even further.

When larger loan amounts become more expensive and harder to obtain, it means that there are fewer qualified buyers who are both willing and able to purchase higher-priced real estate. In order to attract more buyers, these more expensive homes need to drop their sales prices in order to attract buyers that can remain in the super-conforming range of loans. So when a $900,000 house is now selling at $800,000, the houses which were formerly selling at $800,000 become obsolete unless they also lower their price. Now the $800,000 houses are selling for $700,000, causing the $700,000 homes to also push down their sales prices. And the dominoes continue to fall all the way down to entry-level homes.

Again, some counties will be hit harder than others. Monterey is scheduled to be the hardest hit county in the state with a drop in loan limit of nearly $250,000 (from$729,750 down to $483,000). Other counties which currently benefit from the $729,750 loan limit include Alameda, Orange, Los Angeles, and Ventura counties. These would all see their loan limit drop over $100,000 to $625,500 – and that’s if they’re lucky! San Diego County would see a drop in loan limits of $151,250. Sonoma County would decrease $141,550. Napa would drop $137,500. And San Louis Obispo would shed $126,300 from its current loan limit.

California’s politicians are likely motivated to propose legislation to extend the current loan limits since their own properties are mostly among the higher-valued homes in the area. However, they are likely to be in the minority. The majority of states are already protected by the $417,000 limit which is not scheduled to change. Legislators from these other states majority of more affordable states are likely to oppose any further “bailout” of California’s real estate. But California is not alone. Florida, New York, Connecticut, and Washington DC also have areas which are at risk. Rest assured, this is a topic that all of us in the housing industry will be watching very closely over the next 4 months.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

New Records in 2011

2011-05-10T21:50:00.000-07:00

The real estate market has continued to take a beating from bad news. Month after month, year after year, one negative headline after another has dominated the media. The only silver lining which the real estate market has had to offer have been super low interest rates. That’s been the story for years now: Values keep dropping, rates remain at historic lows. In an ironic microcosm of bullet points, this last week produced a new record low for both rates and property values.

Mortgage rates have just set a new record low for 2011. Current mortgage rates are within a fractional difference from the all-time record low that was just set in October and November of 2010. This is good news for homebuyers and homeowners – especially those who feel like they missed the boat in trying to lock in the lowest possible rate on their mortgage. These new record low rates provide a second chance for those who struck out the first time.

There may be a new challenge though this time around: values have dropped yet again. And this time they took a dramatic step down. In the first quarter of 2011, property values in the United States dropped more than three percent according to Zillow. This was the largest quarterly drop in over two years. Year over year, property values in America are down another 8.2%. The same report indicates that property values may not hit bottom until 2012 and possibly beyond.

For those shopping for a new home, this should relieve some of the stress and anxiety over finding a great deal. Relax! As this bear run on real estate has no clear end in sight great deals will still be around for months, possible even years.

But what does this mean if you’re already a homeowner? One individual consumer can’t control the market as a whole. However, they can control their own destiny within that marketplace. I you haven’t locked in a super low rate yet, do it now. If values drop any further you might not have enough equity to refinance under favorable terms.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

The 1% Rule

2011-05-02T22:09:00.000-07:00

There’s a long-standing notion amongst homeowners that a refinance must lower their interest rate by a full 1.0% in order to make financial sense. This “rule” has been around for decades. From an ideological perspective, it’s easy to see how this common perception has persisted for so long. However, a simple mathematical equation will confirm that this basic concept is in drastic need of modernization.

The “1% Rule” of refinancing has been in existence since the 1940s. Everyone would agree that times have changed since then. In the 1940s gasoline cost less than $0.20 per gallon. The average price of a home was also $4,000. Today the average price of gasoline is nearly $4.00 per gallon, and the average cost of a home is $156,000. The average price of a home in California is much more than that. And although today’s home prices represent the lowest they’ve been in 9 years, they’re still 3,900% more than they were in 1940. So why does the old adage persist?

When we’re talking about substantially larger mortgages, it takes a much smaller difference in interest rate to accomplish the same savings. For example, lowering a rate by 1% on a $100,000 loan would reduce the interest expense by $1,000 per year. A $400,000 loan could save the same $1,000 per year in interest expense by only a 0.25% reduction in rate.

But loan amounts are not the only change to the housing industry over the last 70 years. Consumers also have many more financing options now than they used to. This is especially true when looking at various pricing structures. Traditionally, refinancing a mortgage always involved paying the costs associated with the loan. This included what’s commonly known today as “paying points” to buy down a lower interest rate. But today’s consumers have much more options that our predecessors didn’t. There are refinance structures available with no points, and there are even loan structures available with no closing costs whatsoever. This evolution in finance structure has rendered the 1% rule obsolete.

Let’s look at a homeowner with a $200,000 mortgage currently financed at 5.25% on a thirty year fixed rate. In order to reach 4.25% and obtain the full 1% reduction on a new thirty year fixed rate, this homeowner would need to invest approximately two and half points to buy down the rate. The total finance charges would be over $6,000. At the end of the transaction, the homeowner would save themselves $120 per month on their mortgage payment. Whether or not this investment makes sense is somewhat a matter of opinion. Some homeowners will find it worthwhile, others won’t. But there is a simple mathematical calculation that assists in this determination.

If we look at the $6,000 in costs as an investment and the $120 savings as a dividend, how many months will it take to reach the breakeven point and recuperate the initial investment? Take the $6,000 and divide it by $120 and the result is 50. In other words, it will take 50 months of $120 savings to earn back the initial $6,000 investment. As a general rule, a calculation which supports a breakeven point longer than five years won’t make financial sense for most homeowners. Conversely, a breakeven point under three years is generally considered a good deal. Recapture periods between three and five years, such as the case with our example, are a toss-up. What I see is about 50/50. About half the homeowners will do it and about half won’t.

Now let’s look at a popular modern option which breaks the 1% rule. The same homeowner from our previous example also has the option to reduce their rate without spending anything at all on closing costs. This would be a “free” refinance where all the expenses are paid by the lender and the homeowner pays nothing. Today’s interest rate on this particular option is 4.75% for the same 30 year fixed mortgage as our prior example. This 0.5% reduction in rate saves the homeowner $61 per month on their mortgage payment. Under this option, the “recapture” period is easy to calculate. When the expenses are $0, there’s nothing to recapture: Any reduction in payment constitutes an immediate benefit.

With an immediate savings to keep money in one’s pocket every month, this seems like the ultimate “no-brainer.” Again though, this is a scenario that’s about 50/50. About half of the homeowners I talk to would say that $61 simply isn’t enough savings to justify the hassle, regardless of what it isn’t costing them. The other half of homeowners calculate that $61 per month is $733 per year, $3,667 over five years and $22,000 over the course of 30 years. Not bad for a loan that breaks the rules!

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107
CA DRE # 01360217
NMLS # 335758

Securitization: What Really Drives Rates

2011-04-18T21:41:00.000-07:00

A homeowner recently informed me that he didn’t feel there was a rush to lock in a rate. “The banks won’t let rates go up or they won’t be able to make loans.” Although this statement is completely misguided, it’s not the first time I’ve heard it from a homeowner. Mis-statements like this show just how disconnected the average homeowner is from how mortgage rates are actually determined.

A claim that banks have control over the price of interest rates is equivalent to stating that clothing companies have control over the price of cotton, or that gasoline companies have control over the price of oil. We all know that neither of these is true, yet nobody makes the claim that “Clothing companies won’t let the price of cotton go up or they won’t sell any clothes,” or “Gas companies won’t let the price of oil go up or they won’t sell any gas.” Both cotton and oil are openly traded commodities whose price is dictated by traders on an exchange floor. In the last year, the price of cotton is up over three hundred percent, and the price of oil just topped $110 per barrel. Consumers are still buying clothes and gas, they’re just paying more for it.

The average consumer is well aware of the impact which the prices of cotton and oil have towards the staple items we consume daily. Yet most homeowners don’t realize that mortgage rates are determined in much the same way.

Very few banks actually own the loans they service. As a way to minimize risk, banks typically securitize loans by selling them to an investor. Through this process of securitization, the banks are able to recapitalize themselves so they can turn around and make more loans. They are also relieved of all the risk on the loan while still retaining a portion of the profit. If you’re not sure who the investor is on your loan, call your bank and ask (they’re only required to tell you if you ask). The odds are overwhelming that your bank has securitized your loan in this manner.

So who are the investors? Fannie Mae and Freddie Mac remain the two largest. By some accounts, these two Government-Sponsored Enterprises (GSE) acquire as much as 60% of all new loans originated today. But even Fannie and Freddie don’t retain ownership of these loans very long. These investors also need a means of recapitalizing themselves. So the loans they guaranty are bundled together into pools of Mortgage-Backed Securities (MBS). These MBS pools are then traded openly on an exchange floor just like cotton, oil or any other commodity.

How favorably (or unfavorably) an MBS pool trades is what determines mortgage rates. If the financial markets show low demand for these products, then the MBS pool needs to offer a higher yield to attract more investors. This is done very simply by raising mortgage rates to offer investors a higher yield, thereby raising demand for this commodity. Conversely, a strong demand amongst investors would indicate that the securitization process would still function at lower rates. This is the force that enables rates to drop.

Although most homeowners are unaware of this process, the Federal Reserve is very much attune to it. This principle represents the entire premise behind Quantitative Easing (QE). In the first round of Quantitative Easing (QE1), the Federal Reserve spent $1.25 Trillion dollars to purchase both Treasuries and MBS. The rationale was to essentially “subsidize” interest rates by artificially increasing demand for these products.

When QE1 ended the Federal Reserve believed the US economy was still too fragile to stomach increased rates, so they announced a second round of quantitative easing (QE2). This time they spent another $600 Billion on treasuries and MBS to ensure rates remained affordable. By the time QE2 expires in June of this year, the Federal Reserve will have spent over $1.8 Trillion to subsidize interest rates through this artificial demand.

The government will not implement a QE3. As it stands there are already politicians and Federal Reserve members who are calling for QE2 to be terminated ahead of the scheduled June expiration date. When this program expires, it will remove the government subsidy. The artificially inflated demand will revert to actual market-based pricing. The market will need to make up for the Fed’s absence by attracting more investors. The only way to do this is to raise the rates which consumers pay.

Going back to the client’s statement that began this article, how can he not feel a sense of urgency? It takes the bank roughly 30 days to sell a loan to a GSE. It then takes that GSE roughly another 30 days to assemble that loan into a pool and sell it on the market. Since a loan doesn’t reach its final destination until 60 days after it funds, one would expect banks to start raising rates as early as 60 days before the June expiration of QE2. Has he checked his calendar lately?

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

A Renter’s Nightmare

2011-04-04T21:17:00.000-07:00

A friend of mine used to own his home as well as a few rental properties. Like many Americans, he fell on financially difficult times over the last few years and ended up short selling all his properties. When he found a new home to rent, he asked the prospective landlord to provide a copy of their credit report confirming that they were current on the mortgage. He simply wanted to make sure that this landlord wasn’t going through the same hard times that so many others were. If the landlord fell subject to a short sale or foreclosure, my friend would have to move all over again. He asked for the landlord’s credit report to make sure foreclosure or short sale were not likely to occur.

When I first heard of this, I thought my friend was being a little silly. Just a few months later, a couple friend of mine was travelling in Europe. Two days after he proposed (and she said yes), they received notice that the house they were renting had been sold at auction. Although they had been making all their rent payments on time, their landlady had not been forwarding that payment to the bank, and the bank foreclosed on the house. The new homeowner served them a 30 day notice to move out of the property.

In California, renters have rights. According to a local Real Estate Attorney, if the tenant had been under an annual lease contract, they would have been entitled to 90 days before being required to vacate the property. However, because their contract had expired and they were now “month to month,” either party can terminate the rental agreement with only 30 days notice. So when they got back from Europe two weeks later, they only had two weeks remaining to pack up and move. Now my other friend’s request to see the landlord’s credit report didn’t seem so ludicrous.

It’s a very normal practice for landlords to request a credit report from prospective tenants. If the credit report demonstrates a history of paying bills on time, there’s a high probability they’ll also make the rent payment on time. This would indicate that the prospective tenant is a safe bet for the landlord.

But what if the landlord isn’t a safe bet for the tenant? In today’s real estate market investment properties are foreclosing at an astronomical rate. Investment properties are more likely to foreclose than either primary residences or vacation homes. Have we now reached the era where tenants should also request a credit report from their prospective landlord? Some might say this is a stretch. However, this may just be an evolution of the rental market in today’s times.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

A Self-Employed Dilemma

2011-03-28T21:11:00.000-07:00

Today’s lending environment is the strictest any of us have seen in our lifetimes. Every day, applicants who have never had any prior problems obtaining credit find that there simply are no options available which they qualify for. Not today. No specific group is experiencing this more so than the self-employed, especially when it comes to fulfilling income requirements.

One of the largest advantages to being self-employed is the vast array of tax write-offs that are available only to this group. After years of reviewing tax returns, I’ve personally seen hundreds of self-employed individuals who are extremely well qualified to buy or refinance a home. They have great credit scores, sizeable equity or down payment, and make significant income. The problem is that their tax write-offs eliminate most or all of their income so that they owe little to nothing to the IRS. This means they also demonstrate little to no income that can be used in qualifying for a loan.

Lenders have always had an understanding of this dilemma. Until recently, self-employed individuals have been allowed to document their income simply by providing bank statements or other forms of alternative income documentation. But that all changed once Fannie Mae and Freddie Mac were taken over by the government. Fannie and Freddie still dictate the majority of underwriting guidelines in existence today. Ever since the politicians have been calling the shots and establishing underwriting guidelines, the rules have become much stricter. It’s as if the politicians have given the self-employed an ultimatum: “Either you pay taxes, or you qualify for a home loan. You can’t have it both ways.” And this is exactly what’s happened.

These stricter rules pose a challenge for self-employed individuals looking to purchase a home and take advantage of today’s depressed property values. There are even more self-employed homeowners who would like to refinance their existing loans into more favorable terms by taking advantage of today’s record-low interest rates. The money they could save would offset the decreased profits most business owners are seeing as a result of the current economic environment.

I received a call this week from a self-employed client who is trying to buy a home this year. Although he has always written off most or all of his income on prior tax returns, he understands that there are loan programs available which only require one year of tax returns to qualify (most loan programs require 2 years of returns). His plan is to show enough income on his 2010 returns so that he can qualify for the loan he’ll need to buy his house. After meeting with his tax preparer, he was advised that there were two ways he could file his returns. One option would show $120,000 in net income with minimal write-offs, while the other option would show only $35,000 net income.

There are two significant impacts of this business owner and prospective homebuyer’s decision. In order to qualify for the home loan, he will need to demonstrate the higher income as $35,000 is simply insufficient income to qualify for the home he wishes to purchase. However, the larger income will generate an additional $40,000 in income taxes which he would not have to pay at the $35,000 level. A difference of $40,000 presents a difficult decision for the business owner.

After consulting with both his tax advisor and me, this gentleman was able to find a way to do both. His plan is to file his tax returns demonstrating the larger income so that he can qualify for the loan and purchase his house. After escrow closes on his new home, he is going to file an amended tax return revising the income back down to the $35,000 level. This will entitle him to a refund of $40,000 back from the IRS later in the year.

Self-employed individuals who are considering this should be aware of two things. The first one is the most obvious: Will filing an amended tax return raise a red flag at the IRS and potentially trigger an audit? According to this one tax advisor, the circumstances for this individual are such that the cause for the amendment will not raise any such risk. From the way this statement was phrased it was evident that every circumstance is different. Therefore, a business owner should seek counsel from their own tax advisor before contemplating such action.

The second concern will be less obvious to most: Could such an action be considered fraud against the lender? In theory, yes. If the business owner stated to the lender that the tax returns used to qualify for the loan were incorrect and subject to change, the lender could not underwrite a loan based on those returns. Rather, the lender would choose to wait until after the amended tax returns were filed – even if it meant declining the loan. It could also be a problem if the business owner knew he was going to file amended returns and failed to disclose this to the lender. Failure to disclose this information would be considered fraudulent by the lender, although it would be very difficult for the lender to prove. More importantly, it’s unlikely the lender would even care as long as the mortgage payments were made on time.

Before making one decision or another, any homeowner or prospective homebuyer should be advised of all their options. They should also be advised of the potential implications of their decisions. My job is to inform homeowners and prospective homebuyers of the impact their decisions will have on their mortgage. One should also always seek the counsel of a tax advisor to understand the tax implications of their decisions.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Global Influences

2011-03-14T21:51:00.000-07:00

The last time I wrote about global influences on the American financial markets, credit concerns in Greece and Spain were headlining the news. Those headlines were coupled with inflationary concerns in China. Those two global economic forces were pushing and pulling the American financial markets in opposite directions. That was in February 2010 – just over a year ago.

Here we are one year later facing a similar push-pull in the markets due to global activities. This time though the global influences at work wouldn’t appear to be financially related. But they are.

The turmoil in the Middle-East has been bad news for most American consumers. Instability in the region has caused oil futures to rise and forced us to pay more for gas when we refuel our vehicles. A secondary concern over rising gas prices has taken a severe hit on the stock markets. Needless to say, falling stock prices are not good for our 401ks, IRAs and other investments. The fear is that rising gas prices could hamper the economic recovery. In other words, if we’re all spending more money at the gas pump, we have less money to spend in other areas of our daily life. In an American economy which is based on consumerism we need to spend more, not less, for our economy to recover. It is this fear exactly that has caused the bears to return to Wall Street.

It’s hard to imagine a “silver lining” to rising gas prices, but there is one. As I’ve written before, there is an inverse relationship between stocks and bonds. What’s bad news for stocks is typically good news for bonds. The Middle-East political turmoil coupled with the fear of our economic recovery losing momentum has put downward pressure on mortgage rates. The “safe haven” trade into bonds has caused mortgage rates to decrease slightly over the last couple weeks.

Then tragedy hit. Literally. Japan was devastated by the seventh largest earthquake in Earth’s recorded history. The magnitude 8.9 earthquake and the tsunami which ensued caused death and devastation which has yet to be fully understood. The recent images from Japan indicate that this could be even more disastrous than the Haiti earthquake of 2010 as well as the Indonesian Tsunami of 2004. The humanitarian toll is catastrophic.

But there is also a financial impact which will make Japan’s tragedy different from Haiti and Indonesia. Japan is the world’s third largest economy behind the US and China. In addition to the humanitarian toll, there is also a financial toll. By this measure, Japan’s recent tragedy may set a new record cost of damage and repair. Fortunately for Japan, a healthy majority of the financial damage will be covered by insurance companies.

This insurance cost is bad news for the American bond market. After the earthquake, insurance companies from around the world began selling a large part of their bond holdings in order to generate liquid cash to prepare for the $100 Billion in claims related to the earthquake damage. This sizeable selloff has begun putting pressure on the bond markets, thereby pushing mortgage rates higher. This selling of bonds and upward pressure on rates is expected to continue as the damage continues to be measured and claims continue to pour in.

The recent occurrences in Japan and the Middle-East are tragic to say the least. This article is not meant to place our own economic interests over their humanitarian needs. Quite the contrary. Having a better understanding of how one of us influences the other should make us all better understand just how intimately we are related. What happens there affects us, and what happens here affects them. If everyone understood this better it might help us all to act as better neighbors to one another.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

FHA Raises Costs…Again

2011-03-07T20:39:00.000-08:00

For the second time in less than a year, the cost of obtaining a government-backed loan through the FHA is going up. And this increase is going to impact more homeowners than the last one.

With property values still decreasing in most areas, the Federal Housing Administration (FHA) represents the best, and sometimes only option for most homeowners looking to refinance their existing mortgage for a lower rate. FHA allows financing to a higher percentage of a property’s value than what is typically available through more conventional methods. The FHA also has less restrictions on combining a first and second mortgage into one new single mortgage.

Because it is more accommodating than conventional loans, FHA financing now constitutes over 30% of all mortgage loans originated today. Compare that to the mere 1% of a few years ago and it’s immediately apparent just how big a player the FHA has become in today’s mortgage market.

The FHA is also increasing its market share of purchase transactions. Severely depressed prices are very attractive, especially to first-time buyers. FHA makes those prices even more attractive when property can be purchased with a minimal 3.5% down payment. More conventional financing requires anywhere from 5% - 20% down payment. During today’s “Great Recession,” even those who are able to make a larger down payment are opting to put less down and retain more of their liquid assets.

The good news regarding FHA loans is that the interest rates are usually lower than other programs. The Federal Housing Administration is part of the Department of Housing & Urban Development (HUD). Therefore, all FHA loans are backed by the full faith and credit of the US government. This federal backing limits the risk to the lenders. Lower risk means the lenders are able to offer lower rates to consumers.

That government backing does come at a cost though, and this cost is about to go up. Currently the FHA charges 1 point, or 1 percent of the loan amount to insure the loan. On a $400,000 loan, that upfront cost is currently $4,000. On April 18, 2011, the upfront cost will increase to 1.25 points. On the same $400,000 loan, the new upfront cost will be $5,000.

FHA loans also carry a monthly fee to insure the loan. This monthly mortgage insurance impacts all loans with an amortization period longer than 15 years. For the second time in less than a year, the FHA is raising this cost. On a typical $400,000 loan, the monthly mortgage insurance would currently be $283.33. Last year it would have only been $166.67. After April 4, 2011, the new monthly mortgage insurance will cost that same homeowner $366.67 every month.

FHA loans with amortization periods of 15 years or less do NOT have any monthly mortgage insurance as long as the loan amount is less than 90% of the property’s current value. With rates still at record lows, the FHA 15 year fixed is an increasingly popular program – especially for loan amounts over 80% of a property’s value. This is the only program in existence today that does not currently require mortgage insurance on loan amounts in excess of 80% of value. But that’s about to change.

Although 15 year terms were not affected by last year’s increase, they will be this time. On April 4, 2011, a $400,000 FHA 15 year loan will have to pay $83.33 per month (currently $0.00) for loan amounts below 90% of value. A $400,000 loan over 90% of value currently pays that same $83.33. After April 4, 2011, the monthly amount will double to $166.67 for the same terms.

Still, the government claims this needs to be done. The FHA is still losing billions of taxpayer dollars. This move to increase the cost of FHA financing is being done with the intent to (1) decrease the government’s current market share of mortgage loans and (2) increase the profitability of the loans that it will insure moving forward.

But “Mortgage Insurance” isn’t such a bad word. For many homeowners, it allows them to obtain more favorable financing through the FHA when all other lenders would not offer them any assistance. In other words, the mortgage insurance makes the refinance possible. Without it, there’s simply no loan. Also, mortgage insurance is generally tax deductible (one should always check with their tax advisor to make sure they are eligible for the deduction). And generally speaking, the mortgage insurance goes away after five years anyways. In the grand scope of homeownership, five years is a relatively short period of time.

Anyone who’s been told that a refinance wasn’t possible for them because the balance of their loan is over 80% of the property’s value should take a look at FHA financing. They just might be surprised at what a great program it is and the benefits it can offer. However, do so quickly. You’ll want to get the process started BEFORE the increases take effect. Doing so will maximize your benefits - waiting will only increase your costs.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

The Future of Financing

2011-02-21T20:20:00.000-08:00

Last week the Obama administration announced what is likely to be the most dramatic change in the future of America’s housing industry: The dismantling of mortgage giants Fannie Mae and Freddie Mac.

Ever since the housing market collapse signaled the start of the “Great Recession” the lending and mortgage industries have been under constant overhaul and re-regulation. Washington has been unrelenting with its political and media pressuring of the banks to lend. Washington has also spent hundreds of billions of dollars to artificially keep rates low so that consumers remain able to borrow money at record low rates. At the same time, the overwhelming new legislation and regulation that has been imposed on the lending industry makes the process of borrowing and lending money a bureaucratic and legislative nightmare.

Although the politicians claim to have the best interest of consumers in mind, every new piece of legislation also has a side-effect which consumers won’t like. Whether intentional or accidental, each new piece of legislation has eliminated many of the options which used to be available to consumers. The end result of having fewer options is that the remaining products are more difficult to qualify for and are likely to cost consumers more money. The trends of increasing difficulty and escalating costs are almost guaranteed to continue if Fannie and Freddie are allowed to be dismantled.

Banks rely on Fannie Mae and Freddie Mac to securitize the banks’ investments into mortgage loans. Utilizing a securitization facility minimizes the risk and exposure the banks would otherwise have if they were “on the hook” all by themselves. Lower risk for the banks translates directly into a lower rate for the consumer. Eliminating this securitization tool from the banks’ business model will increase their risk. The banks will offset this increase in risk by increasing the rates which consumers must pay to obtain the same financing.

One potential replacement to Fannie and Freddie would be increased utilization of another securitization tool already in place: Private Mortgage Insurance (PMI). Should this happen, consumers are likely to be even more limited in their lending options. Mortgage insurance underwriters are much stricter than those of the banks, Fannie Mae, or Freddie Mac. One simple example is in the leniency towards income calculations. Fannie Mae currently allows a debt-to-income calculation (DTI) of 45%. For an average household income of $5,000 per month, the total cost of maintaining the mortgage payment, property taxes, hazard insurance and any association dues would need to remain below $2250.00 in order to secure an approval. With additional compensating factors such as healthy liquid reserves, Fannie and Freddie may still issue approvals with a DTI up to 50% of gross income. This would allow for an additional $250.00 per month.

The current PMI companies are far more restrictive. They only allow for a maximum debt ratio at 41% of gross monthly income. This limits the maximum approvable payment to $2050.00 with zero exceptions. Should PMI be implemented at a more widespread level, consumers will certainly see the availability of credit become even more restrictive than it is currently.

Those that are still able to meet the new stricter requirements are likely to be hit with another surprise. Not only is PMI more difficult to obtain, but is also adds a supplementary expense to the overall financing cost. The current legislation that is being proposed is expected to add approximately $100 per month for a $200,000 loan. Payments on a $400,000 loan would be increased by $200 per month.

But none of this is official yet. The White House has now passed the ball to Congress to make the official decision. Whether or not congress makes the correct decision depends heavily on how well they understand the industry they’re regulating. Whatever that final decision is, it’s estimated that consumers won’t see the full phase-out of Fannie and Freddie for another five years. In the meantime, housing prices are down, rates are down, and the lending environment is more lenient now than it’s likely to be in the future. I wonder if in five years we’ll be talking about today as “the good old days” of financing in America.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

The Importance of an Approval Letter

2011-02-08T20:15:00.000-08:00

Today’s real estate market is the best “Buyer’s Market” that most of us have ever seen during our lifetimes. Like any market, there are ways to play the game that improve your chances of getting the best deal. Unfortunately, there are also things that can cost you time and money if not done correctly.

For those of us who work in the industry, a lender approval letter is such an integral part of a purchase transaction that we frequently forget its power and importance. Because of this, we sometimes fail to stress to our clients just how critical it is.

The number one reason homes fall out of escrow today is because the buyer failed to qualify for a loan, or failed to do so in time. Because of this, sellers today require a lender’s approval letter be included with the offer in order for that offer to be taken seriously. Imagine spending weeks, maybe even months, looking at house after house after house before finally locating your dream home. Now imagine you can’t get that home in time because of something that could have been avoidable simply by addressing it earlier. This is exactly the kind of surprise that buyers and their agents want to avoid.

In the last week, I’ve seen two offers fall through because the approval letter was not obtained earlier in the process. Both of these customers lost their “dream home” over something that could have been avoidable.

The first individual had thousands of dollars in collection accounts that were inaccurately reflected on their credit report. All of today’s underwriting guidelines would require those collection accounts to be paid before the loan would be able to close. In this individual’s case, they simply didn’t have enough liquid funds to pay off the collection accounts and still have enough for the down payment. Because these items were reporting incorrectly, the credit report could have been corrected to have the collection accounts removed.

A quality lender however can frequently work directly with the credit reporting agencies to repair credit errors in just a few days. Unfortunately for this consumer, there were other bids on their house and they had less than 24 hours to submit their bid and approval letter. There simply wasn’t enough time to repair the credit and issue an approval letter before the cutoff. Although this issue will be repaired, their failure to secure this property could have been avoided simply by obtaining the approval letter earlier instead of waiting until the last minute.

The second individual assumed he shouldn’t have any problem getting approved for a loan. He makes plenty of money and has great credit scores. Moreover, he already owns a home and has maintained a flawless payment history on his mortgage. His plans are to buy a larger residence while prices are down and rent out his old home until prices go back up. He’s never had even the slightest problem getting approved for a home loan before, so he just assumed they wouldn’t have any problems getting one now.

But the rules have changed. This consumer was unable to get approved for a loan because of a relatively new underwriting guideline regarding “departing residence.” This new rule mandates that the house you’re moving out of meets a minimum equity requirement in order for the projected rents of that property to be considered in the income calculation. If the house you’re moving out of has less than the minimum equity requirement, then the rental income you’re expecting from that house cannot be used in the income calculation. This means that your regular income alone needs to be sufficient to comfortably cover both mortgage payments on both houses.

In the end this consumer was able to get approved for a loan, but not in the manner he desired. After investing months of effort into finding what he thought was going to be his new dream home, he decided to put the brakes on and reassess his situation.

In order to avoid situations like these, most real estate agents require lender approval letters from their clients. For an agent, this is a good way to protect their time. Not wasting time with a prospect whose purchase will fall apart enables them to provide the highest quality of service to a customer who’s purchase will be able to close escrow. For an agent, this is simply a responsible business practice.

One of the best agents I work with has what seems to be the best policy. He will take a prospective client out one time to look at properties. This allows him and the client to get to know each other a little bit and make sure they are the right fit for one another. Because he’s exceptionally good at his job, almost everyone wants him again. Before he’ll agree to take them back out to view properties a second time, he requires them to provide an approval letter from a lender. If that client doesn’t already have a lender they’re working with, that’s when they call me.

Homebuyers are very well aware of how much today’s real estate market has changed from prior years. That’s usually why most of them are buying now. They know that prices are down and great deals are everywhere. It truly is a buyer’s market. However, very few prospective homebuyers are aware of just how much the lending environment has changed as well. Understanding all of the challenges in today’s marketplace is the only way consumers can protect their time and their money.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

Is My Lender Truly “Direct?”

2011-02-01T20:13:00.000-08:00

“Are you a direct lender, or a broker?” This is one of the most common questions homeowners and homebuyers ask when shopping for a lender. Although it is a valid question, it’s incomplete. There is a third type of lender which most homeowners are not aware of.

The behind-the-scenes truth is that most of the lenders who claim to be “direct” should more accurately refer to themselves as “correspondent.” A correspondent lender is basically a broker with a credit line. The large, well-known banks such as Bank of America, Chase and Wells Fargo are the only ones who truly lend their own money held in deposit. A correspondent lender doesn’t hold depository funds, so the loans they issue are made off of a credit line. In other words, their “own” money that they lend must first be loaned to them by another bank. Although the law allows correspondent lenders to claim they are direct, the truth is not so black and white.

Instead of asking a lender whether or not they can claim themselves as “direct,” here’s a better question to ask: “Out of the loans you make, what percentage do you service?” All lenders – direct, correspondent, or broker – are required to disclose what percentage of loans they service. A lender who claims to be direct but doesn’t service their own loans will most assuredly be correspondent.

Unlike the large banks, correspondent lenders do not service the loans they make. They can’t. Their business model is based on having availability on their credit line to make loans. If the credit line remains occupied by existing loans, they would not be able to continue making new loans. In order to stay in business, a correspondent lender needs to clear its credit lines regularly. They typically do so every month. The process of clearing the credit line involves putting all the loans into a pool, and then selling that pool to the highest bidder. A customer who funds a loan with a correspondent lender has no idea, and no control over which bank will ultimately end up servicing their loan.

In many ways, a correspondent lender presents the worst option for a consumer. Whether working with a broker or a true direct lender, consumers are made aware who the servicer of their loan will be before it funds. With a correspondent lender, consumers must wait approximately 30 days after the loan has funded to learn who the highest bidder was for their loan. That top bidder will be the consumer’s lending relationship for the next 29 years and 11 months.

Because correspondent lenders want to increase the number of investors that bid on their pools, they typically need their loans to comply with the underwriting guidelines for each of those bidding banks. This ultra-conservative approach typically leads to even stricter underwriting guidelines than what a consumer might obtain elsewhere. A true direct lender is limited in the programs that they offer, but at least they only have one set of rules to contend with. A correspondent lender might be combining as many as three or four sets of rules to attract the maximum number of bidders.

So which type of lender offers the best deals for consumers? Let’s be honest: if you walked into your local bank and they knew that a competing bank across the street had better rates, do you think they’d send you over there? Of course not. A correspondent lender is even worse: they won’t know who has the best deal for you until 30 days after your loan funds. By then the loan has already funded and it’s impossible to further improve the terms of your loan. Any additional benefit simply becomes additional profit for the lender.

In this context, a broker represents the greatest advantage for the consumer. A broker is able to select the one investor that has the most favorable combination of rate and underwriting guidelines that best match a particular consumer. This is the service that only a broker provides.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

Missed the Boat?

2011-01-24T21:04:00.000-08:00

Over the last couple weeks I’ve spoken with many homeowners and prospective homebuyers who feel like they “missed the boat” on capturing a great interest rate. Because of this negative sentiment they decide to do nothing. This giving up attitude is akin to an athlete who realizes he can’t win the gold medal so he ceases to compete. There’s no shame in a silver medal, and it certainly carries more pride than sticking one’s head in the sand and ignoring the opportunities that still exist.

Let’s start with a little perspective. 2010 was an exceptional year for mortgage rates with records being broken at two distinct times. The first one came in April when mortgage rates reached their first record low of the year. Rates went back up in the summer of 2010 only to come back down in the fall. October and November of 2010 featured new record-low interest rates. These rates were even more favorable than the prior record-low rates established just a few months earlier.

The 2010 rate party came to a crashing end in December, when mortgage rates posted one of the sharpest increases in the history of mortgage financing. Although they’ve come down considerably since their December levels, I’m still amazed at how many people I hear complaining about today’s rates.

Freddie Mac has been tracking mortgage rates for over 60 years. During that time, there are only two months in history where mortgage rates were any lower than they are right now. Because those two months are still fresh in our recent memory, it’s easy to lose sight of the big picture. True, today’s rates are still slightly higher than what was available in October and November of 2010. However, today’s rates are also more favorable than what was available in April of 2010. And remember that April 2010 was, at the time, a record low. If we remove October and November’s rates from history, today’s rates would be the lowest on record.

Since not everyone likes sports analogies, let’s look at this another way. If someone told you that they’d mail you a $10.00 bill every day for the next 30 years, would you throw that away as “junk mail” because it wasn’t a $20.00 bill? Of course not – that’s $3,650 per year! You’d find a good use for that money to improve your quality of life or that of those around you.

In reality this analogy is right on the money and people are throwing away this opportunity every day. I was speaking with a client last week who had the opportunity to cut $300.00 in interest off his mortgage payment without spending a dime. This would have been a free loan that lowered his rate and his payment, and also given him the opportunity to pay off his loan faster. He decided to pass because he wanted a rate that saved him more. He understood that October’s rates no longer existed and said: “I guess I missed the boat.” True, the “gold medal” rates of just a couple months ago are no longer available. The sad part was that he decided to throw in the towel instead of locking in the Silver medal rates that are still available today.

As rates continue to increase this sentiment is likely to increase. Maybe we’ve missed the bottom, but we haven’t missed the boat. The boat is still here and rates are still favorable. Let’s make sure we maintain a proper perspective.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

Unemployment’s Impact on Housing

2011-01-10T20:43:00.000-08:00

The jobs report released by the Labor Department last week showed that the official unemployment rate in America had dropped from 9.8% down to 9.4%. The same report showed that there were 103,000 jobs created during the month of December. Although creation of this many jobs is certainly better than in 2008, when we were losing 500,000 jobs per month, it’s not nearly enough to spur the economy forward. And it’s certainly not enough to cause a drop in the unemployment rate.

Our country needs to add 125,000 jobs per month just to keep up with population growth. This is the number of new jobs that are needed each month just to “tread water.” The truth is that the drop in unemployment rate had less to do with the creation of jobs than it did with a decrease in the work force. There were nearly 500,000 Americans that left the workforce in December. Whether their unemployment benefits expired or they just abandoned hope of finding a job, these individuals are no longer accounted for in the workforce. Their exclusion from the unemployment equation helps Washington paint a rosier picture of the labor market.

Exactly how the government calculates unemployment was further detailed in one of my previous articles.

The reality is that the true jobs market in America isn’t going to get much better any time soon. Economists are projecting that 2011 will average growth of 100,000 to 150,000 jobs per month. Again, it takes 125,000 jobs just to maintain population growth so this prediction indicated that the job market will be treading water for all of 2011. Still, this is considered “good news” in that things have finally stopped getting worse. Now begins the real challenge: rebuilding what has been lost.

Regaining the millions of jobs lost since the current crisis began is going to be an excruciatingly slow process. It’s estimated that 2012 will only average 200,000 to 250,000 jobs per month. This is the minimum level that’s required to begin putting a dent in the unemployment levels. Real job creation at a pace large enough to significantly decrease unemployment isn’t projected to happen until at least 2015, and the labor market is not expected to fully recover until 2025.

How does this information impact homeowners? In two ways:

First, the unemployment figures are one of the key measures which Wall Street investors look at when determining the overall health of the economy. A stronger jobs report means a stronger economy, which will drive investors to prefer stocks over bonds. Weaker jobs data will create more cautious investors who prefer the safe haven of bonds over stocks. Understanding that the bond market is what determines mortgage rates, we can look at the jobs report another way: A stronger jobs report means higher mortgage rates. A weaker jobs report means lower mortgage rates.

The second impact of the jobs report on real estate effects property values. Less people working means fewer people can afford homes. The law of supply and demand, an economic fundamental, states that less buyers (a lower demand) drives down prices. We’ve already seen this happen to American real estate which has dropped 40% or more since the peak values attained in 2007, creating the buyers’ market that we’re now in. One way to help real estate prices recover is to increase demand by creating more buyers. This will naturally happen once Americans regain work and feel secure in their jobs again. If the job market is not expected to fully recover until 2025, could housing prices also take that long to recover?

Possibly. Fortunately there are other factors which could help property values recover sooner, and we’ll discuss those in future articles.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

Strategy for a Volatile Market

2010-12-20T22:23:00.000-08:00

In a normal market, bond prices and yields don’t change a whole lot from one day to the next. Given that bond prices determine mortgage rates, there may be no noticeable difference in mortgage rates for days or even weeks. Whether it’s a purchase or a refinance, time has little relevance in determining the rate a homeowner gets on their loan during a tame bond market.

What we’ve seen in the bond market the last few weeks has been anything but stable. It’s become normal to receive two, three, or even four rate changes in a single day. There have been times where rates were published and then changed again less than half an hour later. This is the most volatile that the bond market has been since the September 2008 collapse of Lehman Brothers triggered the current financial meltdown.

Most homeowners might find it surprising that the bond market has been this volatile while all other indexes seem so tame. The stock market has posted healthy gains over the last few weeks but nothing that seemed out of the ordinary. Additionally, the volatility index (VIX) on the S&P 500 just reached a six-month low. Also, the prime rate has remained unchanged since December 18^th, 2008 – over two years now. This constitutes the core of financial indexes that most consumers follow.

During the last five weeks the stock market didn’t change dramatically and the prime rate didn’t change at all. In that same span of time, the price of mortgage bonds has dropped nearly 700 basis points since the all-time low set on November 4^th. Since then the rate on a thirty-year fixed mortgage has risen from an average of 4.125% to an average of 4.875%. That’s an increase of three quarters of a percent (0.75%) in barely five weeks.

When the market is moving this much this quickly, it’s simply impossible to lock in the best rate using traditional reactive techniques. This level of volatility demands a proactive approach in order to increase the likelihood your rate is locked under the most favorable terms.

Whether it’s a purchase or a refinance, most consumers shop for a rate by providing a sampling of their qualifications to a lender or broker and asking for a “rate quote.” This consumer will talk to a small handful of lenders over a few days and typically make their decision to proceed with whoever had the lowest “quote.” This strategy might work in a stable market, but we can all see the inherent problem of this strategy in a volatile market. By the time they finish speaking to one lender and move on to the next rates have already changed again, making the comparison invalid. Volatility such as this makes it impossible to accurately compare which lender or broker truly has the competitive edge to provide the best rates.

A more effective strategy would be to start by interviewing lenders based on trust. How long have they been in the industry? What qualifications or degrees do they carry? What additional services do they provide their clients? Do they offer a “float-down” policy if rates improve? A trustworthy loan officer is more likely to have a minimum of ten years in the industry and should have a degree in finance, economics or a related field. The number one red flag to look out for are companies who charge an upfront fee for their service. Whether it’s an application fee, commitment fee or lock deposit, you are unlikely to get this money back if you find a better deal elsewhere. Even if they fail to deliver on their initial quote because something “changed” down the line, companies are unlikely to return a consumer’s money once they’ve received it. The most competitive companies retain their clients through competitive products and unparalleled service, not upfront fees.

Once the consumer has determined which lenders are the most trustworthy, take a proactive measure to fax them all your qualifying paperwork. This includes verification of income, assets, liabilities and credit. With this information on file the agent is able to complete your approval and, more importantly, is in position to lock your rate. At this time the consumer can make a choice of what rate can be locked in right then and there. If the market has turned for the worse, at least we’ll be in position to lock the rate when it comes back – even if it’s only there for a few minutes. But if the rate still makes sense, you’ll have the opportunity to lock it before it changes again.

When and whether to lock a rate should always be the consumer’s choice, not the loan agent’s. However, a good loan agent closely monitors the market and recommends waiting when the market is improving, and locking when it starts to deteriorate.

In a docile market, time is on the consumer’s side. They can spend a couple days talking to various lenders and eat up a couple more days gathering the necessary paperwork before finally sending it in to their lender of choice. In a volatile market like we’re seeing now, any time lost carries an expensive price tag. The faster a consumer can gather their qualifying paperwork and submit it to a lender they trust, the more likely they will be to lock in the best possible terms on their loan.

In the case of a purchase transaction, this means having all your paperwork with the lender before an offer is accepted. In the case of a refinance, it means having all your paperwork with the lender as soon as possible. Period.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

Washington to the Rescue?

2010-12-13T21:39:00.000-08:00

Frequent readers of my column are aware of how the many forces influence mortgage rates. The impact of inflation, the stock market and foreign affairs have all been repeat topics of conversation in my column and other media. The recent driving force is one that I haven’t yet written about and it’s proved to be the most influential: The US Government.

Rates have been on an upward trend for the last few weeks. In that time I’ve had multiple conversations with homeowners and homebuyers alike urging those who can to lock in a rate before it goes up anymore. Some do, some don’t. What’s surprising is that many of those who deny rates will increase all claim the same reason for believing so: “The government won’t let rates increase.” I hate to break these people’s hearts, but the government is done caring about mortgage rates.

The government made a move to help mortgage rates early in 2009 when it announced its first round of Quantitative Easing. The program purchased $1.25 Trillion in treasury bonds and mortgage-backed securities (MBS). The reason for the program was to keep rates low. This first round of quantitative easing had the desired effect of creating historic low interest rates for most of 2009. Amazingly, mortgage rates were even lower in 2010. In fact, the lowest rates on record happened in November of 2010 – nearly nine months after the quantitative easing program expired.

Coincidentally, November of 2010 is also when the Fed announced its second round of quantitative easing. Dubbed as “QE2,” the expectation was that this second round would also lower rates just as in the prior round. The result was the exact opposite. The instillation of QE2 marked the beginning of an upward trend in mortgage rates that has yet to stop or even slow down. The difference this time was the reason behind the program. In this second round, the Fed’s motive had nothing to do with lowering rates. Rather, QE2 was initiated with the primary purpose of creating inflation. Frequent readers of my column know that inflation is public enemy #1 when it comes to mortgage rates.

Last week, Washington demonstrated that it has a powerful impact on mortgage rates. Just when it looked like the upward trend in mortgage rates had stabilized from QE2, Washington dealt another powerful blow to mortgage rates. The announcement of the compromise between Republicans and Democrats to extend both Bush-era tax cuts and unemployment benefits triggered the largest two-day increase in mortgage rates since the collapse of Lehman brothers. Anyone who is looking to the government to be their knight in shining armor had better wake up. That story has already played out once. It’s not going to happen again.

The primary driving force in the markets right now is fear. Primarily, it is the fear that deficit spending in Washington will devalue the dollar and create inflation. And if the fear is inflation, then the paranoia would be hyperinflation. With that would come the double-digit interest rates we haven’t seen since Carter left office.

Washington has bigger problems right now that what rate American homeowners can get on their mortgage. Politicians are juggling high unemployment, healthcare reform, military wars in both Iraq and Afghanistan, a currency war with Asia, and tax reform. Washington’s solution for each of these has led to increased government spending and a ballooning federal deficit. When it comes to mortgage rates, Washington can't spend their way out of it. In fact, those efforts are now backfiring.

Every step the government takes lately has the impact of raising rates. The only thing Washington can do to reverse this upward trend in rates is to alleviate the inflationary fear and bring stability back to mortgage rates by balancing the budget and reducing the federal deficit. So far there’s not even the slightest hint that this is going to happen. Until this changes, fear over America’s future financial stability will continue to devalue the dollar and rates will continue to increase.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

Time to Fix an ARM

2010-11-29T20:49:00.000-08:00

Anybody who had an adjustable rate on their mortgage adjust in the last 2 years was most likely very pleased with the adjusted rate they’ve experienced. The decrease in rate is due to the historically low rates on the indexes associated with mortgage financing. Recent data shows that the tide is about to turn. So should those with adjustable rates on their mortgages now look to lock in a fixed rate? That all depends how much longer they’re planning to keep the home.

Most of the Adjustable Rate Mortgages (ARMs) obtained in the last decade were 5 year ARMs. This type of loan is still amortized over 30 years, but the initial rate is only fixed for the first 5 years of the loan. For the remaining 25 years, the rate remains adjustable. The adjusted rate is calculated by taking a base rate and adding a fixed margin to that index. For most ARMs, the indexed rate is the six month LIBOR, which currently sits at just under 1%. The margin added to this index is usually 2.25%. So for loans that have already adjusted, the current rate is usually around 3.25%. At least, for now.

Other indices which are tied to Adjustable Rate Mortgages include COFI and the prime rate. At present all of these benchmark rates are at historic lows, driven down by a struggling global economy. As the global markets recover, these rates will rise. A more startling effect would occur in the event of hyperinflation. Many economists believe that inflation is now a foregone conclusion and the only uncertainties are how soon it will hit and how severe it will be. One thing’s for sure: I wouldn’t want to still have an adjustable rate when that inflation hits.

Inflation causes rates to rise. We’ve already seen the beginnings of this over the last month. As the Fed launched their second round of Quantitative Easing (QE2), mortgage rates experienced their sharpest increase in over a year. As more reports are released indicating that the economic recovery is progressing, rates will continue their upward trend.

If I still had an adjustable rate on my mortgage there is one very important question I would have to ask myself: “How long will I keep the house?” If my plans for the property were short term, meaning that I’d plan on selling the house within two to three years, I’d probably choose to ride it out with the adjustable rate. It’s a little bit of a gamble, but odds are that the short-term savings from the super low rate over would outweigh any losses from the increased rate in the future. However, if my plans for the property were more long term – say five years or more – I would seek shelter from future rate increases by converting to a fixed rate mortgage. And I would do it now.

It’s true that mortgage rates have begun increasing from their all-time record lows. Acting now means I might have missed the bottom, but I haven’t missed the boat. Let’s be honest – rates are still ridiculously low. Thirty year fixed financing is still available in the low four percent range. If I were to convert my ARM to a fixed rate at 4.25%, that would mean a one percent increase from the current adjusted rate of 3.25%. However, that sacrifice would be temporary and likely very short-lived. Most adjustable rates can increase as much as two percent per year. And as the economic recovery continues to gain momentum, the indices which ARMs are based on will continue to increase and push adjusted rates higher as well. This means the 3.25% rate on the ARM this year could go to 5.25% next year and 7.25% the year after that. It would be well worth t for me to lock in at 4.25% and pay one percent more in rate over the next year if it meant saving one percent next year and three percent the year after that.

I recently received a question from a reader who asked if I actually follow my own advice that’s dispensed in this column. For what it’s worth, I’ve already taken my own advice and converted my own ARM to a 30 year fixed earlier this year. Because my plans for my home are long-term, it was prudent to make a short-term sacrifice that would create substantial savings in the near-enough future. So, yes, I practice what I preach. Additionally, my wife sleeps easier knowing that she never has to worry about a rate or payment adjustment ever again. Her peace of mind is something I can’t put a price on.

Arnaud Dufour
Sr. Mortgage Banker adufour@dljfinancial.com
714-677-4107

Fed Interference

2010-11-15T20:39:00.000-08:00

There reaches a point where a parent must trust that the guidance they’ve provided this far has empowered the child to tackle their own challenges going forward. How is a child ever supposed to mature into an independent and responsible individual if the parents keep making all the decisions for them? All parents must eventually let go in order for the child to grow up.

There also reaches a point where our government and the Federal Reserve must let go of their stranglehold over financial markets. Last month the Federal Reserve announced it would be releasing a second round of quantitative easing, or QE2. The initial impact of this announcement created a bullishness towards bonds and treasuries, which lowered rates. However, this bullish sentiment was based purely on expectations which have since proven to be false. The backlash over QE2 has created an almost panicky sell-off of all treasuries, including mortgage bonds. The end result drove mortgage rates up by 0.25% in under 48 hours. Mortgage-backed securities closed out the week at exactly the same levels they were at before the Fed announced QE2. The upward pressure on rates carried over into Monday, posting the largest single-day increase in mortgage rates since June of 2009.

In other words, the Federal Reserve just spent $600 Billion to temporarily lower mortgage rates only to have them end up in a worse position two weeks later. And this is probably not the end of rate deterioration. As the United States continues to print dollars with no visual end in sight, the value of a single individual dollar within that growing pool of currencies gets diminished. This is inflation; and as I’ve written over and over again, inflation is public enemy number one for long-term fixed investments such as mortgage bonds.

In today’s global economy, our inflationary risks are magnified when other countries implement monetary practices which conflict with our own. France and England both made headlines recently over their austerity measures. Although the residents of those countries might be upset over certain budget cuts, those cuts will strengthen their countries’ currencies and ensure they remain an economically viable force in the future.

China also is making moves to hedge off inflation and prevent their currency from falling. As the dollar continues to lose value these countries (and others) are already calling for the dollar to be replaced as the global currency. Don’t be surprised if gold and oil are soon traded in Euros or Chinese Yuan. If the dollar is replaced in this manner, the costs of these core commodities will face further increases. So what we’ll be looking at is an economy similar to what existed during Carter’s administration: Property values dropped, unemployment was high, core prices were up, and rates were astronomical. Many economists agree that this is the path we’re headed down if we continue to “spend” our way to economic recovery.

So the Federal Reserve is not quite ready to cut the umbilical cord and let the economy strengthen on its own. Instead they continue to pay for the child’s mistakes, racking up record credit card debt as they continue to feed the child's bad habits. Eventually the parent will get out of the way and enable the child to mature enough leave the nest. The economy will strengthen on its own. My only questions when this happens are these: How big is the final credit card bill going to be, and who's going to pay it?

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

Unemployment and the Jobs Report

2010-11-08T22:01:00.000-08:00

There are times when trying to get the best rate on a mortgage is like betting against the table at craps: In order for you to win, everyone else must lose. This is especially true when examining the jobs report and the impact it has on the economy.

This most recent jobs report indicated that the private sector added over 151,000 jobs for the month of October. This was not just the best report the economy has had in two years, it more than doubled analysts expectations of 60,000 jobs created. Although this is a good sign for the economy, it delivered a severe blow to mortgage rates. More people working eventually leads towards wage inflation. As I’ve written before, inflation is public enemy number one for mortgage rates. So although a strong jobs report is good for the economy, it spells bad news for mortgage rates. Continued good news on the jobs front further supports what I wrote about last week: although rates remain ridiculously low, the bottom has just passed.

Of course, one good report does not a recovery make. Unemployment in the United States remains at a whopping 9.6%. Here in California, our unemployment rate is over 12% - the third worst in the union. The reality is that with 14.8 million Americans still out of work, creating 151,000 jobs does about as much to fix our economy as does putting a Band-Aid on a bullet wound. Our country needs to create 125,000 jobs per month just to keep up with population growth and new laborers entering the work force. After adjusting for this expansion of the workforce, our net gain last month was only 26,000 jobs. At this pace it would take over 20 years to get unemployment under an acceptable level of five percent. Still, if we compare this to early 2009 when the country was shedding 400,000 to 600,000 jobs per month, even a net gain of 26,000 jobs is a significant improvement. Moreover, it provides long overdue optimism that our economy is headed in the right direction.

UNDERSTANDING UNEMPLOYMENT

There are six different degrees of analyzing unemployment statistics, dubbed U1 through U6. The government’s official unemployment rate of 9.6% is the middle of the road and only paints half the picture. The U3 unemployment rate, as it’s officially called, only takes into account individuals who are actively looking for work and do not have any. It does not take into consideration discouraged workers who have given up looking for work because they don’t think it’s available or those who choose not to because they can earn more by staying on unemployment benefits. The U3 number also doesn’t take into consideration individuals who are working part-time just to make ends meet until they’re able to locate permanent full-time employment. Here’s a quick example to help understand how politically biased the “official” jobs report can be:

Using simple numbers, let’s say there are 100 people in the labor force. If 10 of those individuals are not working the unemployment rate is easily calculated at 10% (10/100). Now let’s say that out of those 10 individuals, five become discouraged and give up looking for work. Those five individuals are essentially removed from the official U3 unemployment calculation. We now only have a labor pool of 95 with 5 of them not working or a 5.26% unemployment rate (5/95). No actual jobs were created, the data was merely interpreted to paint a rosier, more optimistic picture of the labor market. The official unemployment rate, or U3, is calculated in this same manner.

A more accurate picture of the state of the labor market would include everyone who is not currently working and would like to be, and those who are working part time but would like to be working more. Adding these two groups to the unemployment statistics gives us a much truer indication of the severity of the labor market. This complete interpretation of the job market, the U6 unemployment rate, currently sits at 17.0%. Needless to say, this economic “recovery” still has a long ways to go.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

The Bottom has Passed

2010-11-01T21:16:00.000-07:00

If you are among the remaining homeowners who haven’t yet locked in a record low rate on your mortgage, the likely reason is because you were waiting for the bottom. Well, it now appears very likely that the bottom has just passed.

The one advantage of the recent “Great Recession” is that it drove interest rates to record lows. Mortgage rates appear to have been the main beneficiary with 30 year fixed financing offered at rates below 4.0% for the first time ever. Those of us in the mortgage profession still find it difficult to believe that every homeowner in America hasn’t yet taken advantage of this historic opportunity. Yet, to our amazement, more and more homeowners submit new applications every day. The number one reason why they waited: they were waiting for the bottom.

There’s a well known phrase common to both investing and financing communities: “If I wait for the absolute bottom, I’ll probably miss it.” Well, this appears to be exactly what has just happened in terms of mortgage rates. In early October the Fed announced a second round of quantitative easing. Although the Fed didn’t initially announce either the size or the scope of the measures they’d be taking, the mere expectation alone was enough to boost mortgage bonds and cause mortgage rates to set a new record low. But the party didn’t last long. Within a week some of the details of the new “QE2” plan were released. The markets quickly realized that QE2 would be implemented with the primary desire of creating inflation. The size of the Fed’s treasury purchases is also expected to be less than previously anticipated. These two revelations caused a panic sell-off of mortgage bonds, causing mortgage rates to rise about 0.25% in barely over 24 hours.

If there’s a new bottom to be hit, it will happen this week. The one thing we can anticipate for sure is VOLATILITY in the markets. Tuesday’s mid-term election will likely be the first market mover of the week. It’s already expected that Republicans will take over the House of Representatives. If they fail to do this, or if they successfully take over both the House AND the Senate, expect movement. On Wednesday the Fed will release a full statement on monetary policy, including the details of QE2. This announcement will finally put an end to the mass-speculation that’s been driving the markets crazy over the last few weeks. Anything even slightly out of line with expectations will move the markets. And Friday brings a third major event with the jobs report. Some experts are predicting 55,000 jobs were created last month. Other experts are saying that the economy actually shed jobs. With this much at stake, this week’s financial market drama will not be for the faint of heart.

However, for those who are well positioned this week presents enormous opportunity and possibly the last chance to catch the market at its bottom. I’ve written before about taking a proactive approach to the market. With this much volatility at stake, rates are likely to change with only minutes of warning. Change this rapid will require a proactive approach – there simply won’t be enough time for reactive measures.

The bottom line is this: If you currently have a rate over 4.5% and would like to see about getting it lower, this week may present your last chance. Although there is likely to be a brief dip down in rates this week, the long-term projections are for significant deterioration in mortgage rates from here on out. The Mortgage Bankers Association (MBA) is predicting that the 30 year fixed mortgage rate will be back up to 4.875% by the end of this year, and up to 5.25% by the spring of 2011. Currently, the average rate is only 4.25% for a 30 year fixed. The average 15 year fixed is currently 3.75%.

If you want to lock in your rate at the lowest possible time, the time to act was two weeks ago. Those who act today can still obtain rates within a fraction of that record low, but this opportunity won’t last much longer. The overwhelming sentiment among mortgage professionals is this: “Call today. If you don’t call me, call someone else, but call today.” I couldn’t agree more.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

Is QE2 Good for Mortgage Rates?

2010-10-25T21:36:00.000-07:00

Expectations of another round of quantitative easing have created a stir in financial markets over the last couple weeks. Dubbed “QE2,” the expectation is that the additional billions (possibly trillions) of dollars injected into the economy will lower interest rates. But will that actually help American homeowners? Let’s be clear about which rates will go down and which rates could go up as a result of this move.

Quantitative Easing has the typical effect of lowering certain lending rates. However, note that these moves by the Fed do not directly impact mortgage rates. Rather, it more directly lowers the rates at which banks borrow money from each other through the Federal Reserve System. In theory these lower rates should be passed down resulting in lower rates for consumers as well. At least, that’s the theory. In practice there are more variables at play – especially when talking about mortgage rates.

The first round of quantitative easing was believed to have had a profound effect on lowering mortgage rates. The primary reason for this was that the Fed purchased $1.25 trillion in mortgage backed securities over a one year span. The average monthly expenditure was $100 Billion in Mortgage Backed Securities purchased between March of 2009 and February of 2010. But did this massive expenditure really lower mortgage rates? When asked this question shortly after the program began in 2009 the answer would have been a resounding “yes.” The average rate on a 30 year fixed at this time dropped to 4.875% which was, at the time, a historic low. However, the program didn’t eliminate volatility in the markets. The average rate on a 30 year fixed in June of 2009 jumped up to 5.25%. This was almost halfway through the MBS purchase program. Today we are more than six months after the expiration of the MBS purchase program and the average rate on a 30 year fixed is 4.25% a full one percent lower in rate. Looking at the data this way creates a clouded picture of the government’s effectiveness in controlling mortgage rates. In truth, the government has very little influence over mortgage rates.

Mortgage rates are more largely impacted by institutional investors and the global economy. As I’ve written before, the number one consideration these investors make when considering a long-term investment such as an MBS pertains to the risk of inflation. Therein lies the threat QE2 brings to mortgage rates. Fed Chairman Ben Bernanke stated that the primary reason and motive behind QE2 is to stem deflation and spur inflation. Anyone that remembers what financing was like during the Carter administration will remember the impact inflation has on interest rates. It was at this time that my family purchased a house and obtained financing at 17% interest.

Compare that to today, when the potential of deflation has created mortgage rates at new historic lows. If Bernanke gets his desired result from QE2 in sparking inflation then rates are sure to go up. It isn’t a question of if rates will rise, it’s more a matter of how soon and how fast they’ll go up. Only time will tell if they end up in double digits again.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

No Equity, No Loan

2010-10-18T22:21:00.000-07:00

How much equity has your home lost since the market peaked? For most homeowners, this is a painful question to ask. It’s even more difficult to answer this question honestly. Some of the hardest hit markets have lost more than half of their values since the height of the Real Estate Boom. This rapid depreciation of value has become the largest obstacle for many homeowners trying to take advantage of today’s record low rates.

All mortgage loans done today can be categorized into three types:

1. Conventional loans underwritten according to the guidelines established by Fannie Mae and Freddie Mac.
2. Government loans insured by the FHA.
3. Non-conforming loans.

Fannie Mae and Freddie Mac currently provide the only options for homeowners in a negative equity position. As I’ve written before, this option is only available to homeowners whose loans were acquired by Fannie or Freddie prior to March 1st, 2009. If the loan was not on the government’s books prior to this time, the government does not have a program to help. The few individuals who are fortunate enough to qualify for the government’s Home Affordability Refinance Program (HARP) may have options to refinance even if the balance of their loan(s) is up to 125% of the property’s current appraised value. Unfortunately this program will only help roughly 5% of American homeowners.

For the remaining 95% f homeowners that don’t qualify for assistance through HARP, the FHA has been the last saving grace – until now. In September the FHA has removed the ability of banks to provide loans to homeowners in a negative equity position. The new restrictions effectively limit financing up to 97.75% of a property’s value. For those who still qualify, FHA still provides a great option to refinance. However, the 97.75% cap must account for any subordinate liens on the property as well. This new restriction practically ensures that anyone who took out a second mortgage or home equity line of credit during the market’s peak probably won’t be able to refinance either of the loans on their house today.

For example, if a home is worth $300,000 and there is a $250,000 first mortgage on the property, that homeowner will have options available to refinance into more favorable terms. If that homeowner also has a $75,000 second mortgage or equity line of credit, the combined liens on the property exceed the property’s value by $25,000. Unless this homeowner is fortunate enough to qualify for assistance through HARP, they will not be able to refinance unless they pay the loan down to 97.75% of the appraised value. In our example, that would require bringing $31,750 cash into escrow.

The third category of non-conforming loans are the most restrictive. Because these loans are not supported by Fannie Mae, Freddie Mac, FHA or any other agency, the banks limit these loans to only 80% of a property’s value. Period.

Homeowners who currently find themselves in a negative equity position have very few options. The first thing they should do is check to find out if their loan is eligible for assistance through HARP. Although the odds of eligibility are limited, the potential reward is worth the five minutes it will take to find out. For the majority of homeowners in a negative equity position, their only option might just be to stick with what they’ve got and wait for the market to recover.

WHAT COULD FIX THIS?

I’ve always believed that every problem has a solution. I’m also a believer that talking about a problem without proposing a solution is a waste of energy. So, here’s my proposal to help solve the negative equity crisis. First though, let’s realize what isn’t going to happen:

The banks are not going to forgive debt. Although this does and has happened on occasion, it is the exception to the rule. More importantly, the government cannot force the banks to take these losses under any type of consistent basis. Without consistency, this is not a viable solution.

What would work is getting the banks to lend to homeowners in a negative equity position even though those loans are considered high risk, and then offsetting that risk by insuring the loans. This would be relatively easy to implement given that the government already has an agency which insures loans made by banks. This agency is the FHA. Now as I mentioned earlier in this article the FHA has just become more restrictive in the types of loans they make. Their reasoning was that the risk of negative equity was higher than could be covered by the standard rate of mortgage insurance. So, quite simply, what the FHA could do is charge a higher mortgage insurance premium for these higher risk loans.

The solution is quite simple, really. The banks would be willing to lend to higher risk individuals, including those with negative equity, so long as they knew that the loan was insured. The FHA insures many loans today which the banks wouldn’t make without that government backing. If the FHA needs to charge a higher premium to offset the higher risk of negative equity, I think everyone would understand. At that point it would simply be up to the homeowner to make sure that the added cost of the mortgage insurance still pencils out given the savings from the lower rate. The advantage to the homeowner is that they are able to lock in long-term financing at record low rates. In time, the mortgage insurance will go away leaving the homeowner with a low rate and payment. The advantage to the banks is that they limit their losses due to foreclosure or short sale on those negative equity properties, and that the new loans are backed by the full faith and credit of the US Government. And the advantage to the government is that they finally bring a real solution to the struggling real estate market. This is a win-win-win solution.

If the politicians would start writing bills like this to actually get banks lending again, we might just come out of this real estate crisis sooner than later. By the way, I forwarded this proposal to my congressman…did you?

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Time to Refi…Again

2010-10-12T07:17:00.000-07:00

Freddie Mac reported that the average rate last week for a 30 year fixed was 4.27%. If that was the “average,” then there are people who are locking in stable financing even below that.

During the last 18 months especially, homeowners have been taking advantage of a depressed market by locking in a 30 year fixed mortgage under 5%. In 2009, it seemed that 4.875% was the “benchmark” rate that most homeowners were targeting. Historically, any rate under 5% is ridiculously low and amazing. However, there simply are better rates available today. These same homeowners today are able to lower their interest rate by another 0.5% or more with little to no closing costs.

What does this mean in terms of dollars? Let’s look at a $400,000 loan amortized over thirty years. At 4.875%, the monthly payment would be $2116.83. At 4.375% that same $400,000 loan would be $1,997.14, lower by $119.69. Not bad for a loan which cost potentially nothing to attain.

The standard argument against this scenario is that a refinance resets the term back to 30 years. So let’s adjust our calculation accordingly. After one year of fully amortized payments, a loan which was initially $400,000 would be down to $393,964 remaining principle. If we drop the rate to 4.375% and amortize the loan over 29 years, the new monthly payment would be $1,999.99. This is still a savings of $116.84 every month, $1,402.08 every year, and $40,660.32 over the remaining 29 years of the loan. Again, not bad for a loan which cost potentially nothing to attain. And since today’s mortgages don’t have prepayment penalties, there’s no reason one couldn’t do this.

Homeowners who choose to invest into their loan can reap even more savings. For example, adding closing costs to our scenario could further lower the rate to 3.875%. Our same $393,964 loan amount over 29 years would only be $1,886.51. Now our benefits analysis yields $230.32 in monthly savings, $2,763.84 in annual savings, and $80,151.36 in savings over the remaining life of the loan. Assuming that the closing costs to attain this rate were around $6,000, that investment of closing costs would still be recovered in 26 months ($6,000 divided by $230.32 = 26.05), or just over 2 years.

Looking at these same numbers another way, let’s calculate how much faster someone would pay off these same loans if they continued to make the same monthly payment as their current mortgage. At 4.375%, paying $2,116.83 per month would erase the debt in full after 312 months (exactly 26 years). This homeowner just saved themselves 3 years of mortgage payments. At $2,116.83 per month, that’s a total of $76,205.88. Considering most homeowners pay off their homes in their fifties and sixties, that’s a lot of extra that the homeowner could bring into retirement. At 3.875%, paying the same $2,116.83 per month would pay off the mortgage in only 285 months (less than 24 years). This same homeowner would save themselves 63 months at $2,116.83 per month. That’s an extra $133,360.29 which this same homeowner could have available for retirement.

By any calculation, it becomes clear that anyone who refinanced within the last 2 years might want to take a look at lowering their rate again. The savings can be great and the costs can be minimal (I’ve written before about how a “No Cost” loan works). I can’t believe I’m about to say this, but 4.875% just isn’t a good enough rate anymore.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Inflation or Deflation?

2010-09-27T21:36:00.000-07:00

Interest rates are at historic lows. What’s most amazing about this is how long they’ve remained at these “unsustainable” levels. Although there have been multiple factors contributing towards this phenomenon, one of the most influential forces that pushed rates so low and held them there was a very unusual concern over deflation.

Deflation is the single greatest friend to lowering mortgage rates. Other economic factors play in to how favorably mortgage-backed securities trade in the open market, but the tug-of-war between inflation and deflation is the most dynamic.

Inflation is a concept most of us are familiar with. It simply means that what costs a dollar today will cost more in the future. In other words, the dollar decreases in value over time. The longer the span of time, the more value that dollar loses. Because mortgage bonds offer a fixed rate of return over a long period of time, loss of value is a significant concern for investors who consider mortgage bonds. A bond which pays a rate of 5% this year may rapidly depreciate to 4% once adjusted for inflation. If inflation becomes rampant, the net return could actually become a loss.

Americans saw this effect during the Carter administration. Inflation at this time was amongst the highest in American history. Accordingly, mortgage rates were also among the highest in history. My family bought our first home at this time and obtained financing at 17.5%. Inflation at this level meant that loans already in existence at lower rates were creating a net loss for the banks. Homeowners who had existing mortgages at lower rates were getting offers from the bank to buy out the loans.

Deflation is the exact opposite of inflation. Deflation means that the dollar will actually gain in value. For investors, this means that a bond offering a fixed rate of return at 5% may actually net 6% or more once adjusted for deflation.

The economic slowdown of the last few months has created a deflationary concern. This concern has helped push rates down to their lowest level in history. The ongoing concern has helped sustain the record low rates. Within the last 2 weeks however, this has changed. For the first time in months, economic indicators are shifting and the new fear is an inflationary one. If the indicators continue to push towards inflation we’ll see rates rise, and possible rise quite quickly.

WHAT TO WATCH FOR

All eyes are on the Federal Reserve. Currently the Fed is facing a conundrum. On the one hand, there is the desire to inject more liquidity into the economy to stimulate spending and stem deflation. Japan went through a deflationary spiral in the 1990s that they still haven’t recovered from. Economists and historians refer to this era in Japan as “The Lost Decade.” The Federal Reserve has a responsibility to Americans to prevent that same cycle from happening here.

On the other hand, throwing more money into circulation dilutes the value of the dollars already out there. Over the long term, injecting more money into an economy has only one guaranteed result: Inflation.

The Fed has a very delicate balance of problems on its shoulders: How to hold off short-term deflation without creating excessive inflation in the future. If deflation is allowed to persist our economy will duplicate that of Japan. Recovery at this pace could take decades. However if the Fed acts too aggressively in stemming the deflationary trend, we could very easily end up with Carter-era inflation all over again.

No doubt this is a very delicate task requiring careful, calculated decisions by Fed Chairman Bernanke and President Obama. All eyes will be watching to see how they attempt to handle this balancing act. The trick is to be patient – we don’t want a quick answer on this. Trying to do too much too quickly may generate a short-term victory, but it will likely create long-term inflationary catastrophe. True success can only be measured in years. We need to be patient.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

How Long Does a Loan Take?

2010-09-21T07:26:00.000-07:00

Everyone shops around for the best rate. There is, however, a common flaw in the way most people make their comparisons. They often operate under the assumption that all banks are quoting rates for the same duration or lock period. They also assume that the bank can close the loan within the lock period quoted. But what if both of these presumptions are false? This is a very real problem in today’s mortgage market.

Some lenders advertise only the best rates which exist only on the shortest lock period. For most banks the shortest lock period is 15 days. If it takes the bank longer than 15 days to complete your transaction, they’ll need to lock your approval for a longer period or wait to lock your rate until mid-way through the process. Locking for a longer period means more uncertainty for the bank. Increased uncertainty for the bank always means a higher rate for the consumer. Waiting to lock until mid-way through the process is a strategy that can pay off when working to get the best rate, but it does require that the consumer assume some of the risk and uncertainty about the short-term future of interest rates.

The time it takes to process a loan has lengthened substantially with most banks. Enhanced legislation and financial reform have created new procedural checkpoints which intentionally slow down the pace of mortgage financing. Record-low interest rates have created a second problem: There are a record number of people trying to take advantage of these low rates, and yet there are the same number of underwriters attempting to process the increased volume. These underwriters simply can’t get to the overflow in time. Very simply, it’s a traffic jam. So how long is it taking to get a loan done in today’s environment?

Conventional wisdom states that thirty days should be sufficient time to complete a loan. This has typically held true for both purchase and refinance transactions. Unfortunately, there are currently very few banks that are able to execute and deliver a funded transaction within 30 days of opening escrow. Most banks require 45 days, and some of the largest banks in the country require up to 90 days to process a traditional home loan. And that’s if everything is “cookie-cutter.” If your situation is unusual in any way, the nuance can add extra days or even weeks.

For example, if you have a second mortgage that you wish to leave intact while simply refinancing only the first (a process called “subordination”), plan on additional time to process the loan. If the second mortgage lender is one of the large banks, this can add 30 extra days or more to the process.

I recently read an article in Origination News which stated that a loan officer at Bank of America required seven months to close a loan with the company for which he worked. The only positive comment about this is that at least they’re not treating the common public any worse than they’re treating their own employees.

So what is an accurate way to comparison shop based on lock times? First, find out how long that lender will need to close your loan. If it’s a standard refi or purchase, remember that 30 days is not a safe bet anymore. Although there are a few lenders who can still close a loan in 30 days, 45 days is a more appropriate lock period in today’s environment. If you require a subordination, find out how long that lender requires to process the subordination request. Knowing how much time your loan will take is the only way to make sure you are getting quoted the proper length of time on your rate lock.

And if your transaction is a purchase, there’s even more at stake. If you fail to meet your loan contingency because your lender was not able to close on time, you may lose more than the right to buy this house. The seller may exercise their right to retain your entire earnest money deposit. Make sure your lender is able to close on time!

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

FHA Raises the Cost of Financing…Again

2010-09-08T07:04:00.000-07:00

The Federal Housing Administration (FHA) currently insures 30% of all residential loans generated in today’s real estate market. Scores of homeowners looking to refinance are surprised to learn that an FHA loan is their best option. A decrease in equity also means that, for many more homeowners, an FHA loan might be the only option to refinance. Homebuyers with less than 20% down payment are also likely to look towards an FHA insured loan.

Insuring one out of three loans is a significant jump up from the roughly four percent market share which the FHA had in 2006. Government insured loans are good news for consumers in that they are able to obtain loans that the banks might not otherwise make. It’s also good for the banks because their loans are insured by the full faith and credit of the US Government. However, an increase in government loans during a real estate market which continues to struggle has really tightened the vice on American taxpayers. Along with an increase in market share comes an increase in defaults and default-related losses.

Earlier this year the FHA attempted to offset those losses by shoring up its reserves. The FHA raised the premium on its funding fee which is collected at funding for every FHA insured loan. This Upfront Mortgage Insurance Premium (UFMIP) was increased from 1.75% to 2.25% of the loan amount. This meant that consumers had to pay an additional $500 per every $100,000 financed directly to the FHA. On a $400,000 loan, this meant an additional $2,000 in costs just to get the loan insured.

Here we go again. Just six months after their last fee increase, the FHA is stating that they need more money from American homeowners in order to continue insuring loans. The amount of the monthly mortgage insurance (MIP) payable to the FHA for insuring the loan will nearly double to 0.90 from the current 0.50 for most FHA insured loans. Although they will be lowering the amount of the UFMIP to offset this latest fee increase, most American homeowners will find that this new calculation will result in a higher payment on their mortgage.

For example, a $300,000 FHA loan today would have a monthly payment at $1,636.84 (4.25% rate, 2.25% UFMIP and 0.50% MIP). Assuming rates are the same when the new calculation takes effect, this same $300,000 loan will now carry a monthly payment of $1,717.83 (4.25% rate, 1.00% UFMIP and 0.90% MIP). The difference is $80.99 per month or $971.88 per year. Since the FHA’s monthly mortgage insurance typically lasts five years, this same $300,000 loan is likely to cost the homeowner approximately $5,000 more to obtain and maintain. Understandably the government doesn’t want to lose any more money on bad loans, but even the private mortgage insurance companies aren’t charging this much!

Homeowners looking for a 15 year fixed are the only ones likely to benefit from this change. The FHA doesn’t have a monthly insurance premium for most 15 year loans. And that’s not scheduled to change under this new plan. Yet these homeowners are still capable of benefitting from the reduced UFMIP.

The most common instances where FHA Financing would be considered are:

• Homeowners looking to consolidate a 1st and 2nd mortgage
• Loans with less than 20% equity (purchase or refinance)
• Homeowners looking to “cash out” some of the equity in their home

If an individual is looking to do any of these on a 30 year term, they’ll want to do so before the changes take effect. If they’re looking to do any of these on a 15 year term, they’ll want to have everything ready to pull the trigger while rates are still at record lows. Either way, Individuals who relate to one or more of these areas should call their mortgage broker immediately. These changes take effect October 4th.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Is This the Time to Buy?

2010-08-31T22:26:00.000-07:00

My last article discussed the distressed values of today’s real estate market. The notion really made me ask the question: “Is this a buyer’s market?” We all know that lower property values impact a buyer’s purchasing power, but just how do rates impact that same buying ability?

Generally speaking, a 1% decrease in rates accounts for a 10% increase in purchasing power. So a prospective homebuyer who was approved to purchase up to $300,000 worth of property at 5.25% could potentially purchase up to $330,000 worth of real estate at 4.25%. Coincidentally, 5.25% was the going rate on a 30 year fixed in June of 2009. The current going rate on a 30 year fixed today is 4.25% - exactly 1.0% lower than it was a year ago.

In addition to rates being lower, property values are also lower now than they were a year ago. California real estate values started the year down 10% from the prior year. So a property that was worth $300,000 last year would have lost $30,000 in equity and would now only be worth $270,000 in value.

Combining the drop in rates with the drop in values means that a prospective homebuyer is looking at 20% more buying power in 2010 than they had in 2009. This is true whether we’re talking about a primary residence, a second home or an investment property. Buyers can simply get more for their money today than they previously could.

But has this opportunity peaked? Data released today showed that, for the third straight month, property values in California are actually increasing. The Case-Shiller Index indicated a 4.2% increase in year-over-year property values. Although this may not seem like a huge increase, it’s certainly better news than when values were losing 20% in a single year. More importantly, this data suggests that housing prices have hit bottom (finally). Three months is just enough to start a pattern, and if this pattern holds it will bring long-awaited increases in property values for millions of American homeowners.

At the same time, this data suggests that there has never been a better time to be a buyer. Property values and interest rates have both reached their nadir at the same time. A prospective buyer has more purchasing power now than at any other time in history. There's now no doubt in my mind: this is definitely a buyer's market and those that are able to take advantage of these conditions could land the deal of a lifetime!

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

The “Double-Dip” Threat

2010-08-24T22:42:00.000-07:00

The recent news on the housing front has been dismal. In fact, it’s been absolutely abysmal! Today’s numbers on housing sales showed pending home sales plunged by 27% from the previous month. This represents the largest single-month drop since records began in 1968. The short-term implications caused the Dow to temporarily drop below the 10,000 level before finally settling down 134 points, or 1.3% below the day’s open. The worries on Wall Street are the same as on Main Street – there is no sign that the housing market is recovering any time soon. In fact, there are renewed fears of a double-dip in housing prices.

Does this dark cloud have a silver lining? All this negative economic news has fueled the flight to bonds and other safe havens, propelling mortgage rates to new all-time lows. But what good is a record-low rate if homeowner’s don’t have enough equity to qualify? For existing homeowners, the equity depletion is the greateset threat of a “double-dip.”

Mortgage rates have been on and off historic lows for some time now. Most anyone who could qualify to refinance to a lower rate has already done so. In fact, many homeowners who refinanced into a rate at 4.875% or higher last year are coming back to reduce their rates at 4.25% or lower this year. As long as you have the equity to qualify, why not continue to save more money?

There are far too many homeowners who don’t have enough equity to qualify for a refinance based on today’s depressed property values. Many more homeowners have enough equity to qualify but not enough equity to avoid mortgage insurance as an added expense of the refinance. Since property values began their downward spiral I have been fortunate to work with many homeowners who have enough reserves to pay down their loan balances in order to obtain ideal refinancing terms. Unfortunately, I’ve seen far too many homeowners who lacked either the ability or the desire to pay down their principle balances in order to qualify. Many of these homeowners decided their needs would be better served by waiting for home prices to recover rather than paying down the principle. Currently, that’s looking to take a lot longer than anyone had previously anticipated.

The long-term prognosis for existing homeowners is bleak. The equity which American homes have lost is not likely to come back for years, and today’s news indicates that home prices may get even worse before they begin to get better. A homeowner who has been waiting on the sidelines, either for rates to go down or for values to go back up, should reconsider how this renewed threat impacts their financing strategy. If a homeowner has 30% equity or less, waiting any longer may prevent them from having sufficient equity to qualify in the event values fall any lower.

Of course, what’s bad news for some is good news for others. A dip in housing sales means that there are more individuals looking to sell than there are looking to buy. Combine that with a record supply of short sales, foreclosures and bank-owned properties, this may just be the best “buyers’ market” ever. Whether it's a primary residence, second home or investment property, there are plenty of deals available for those looking to buy.

For the best digestion I've seen on the implications of today's report and the future of property values, visit http://www.bloomberg.com/video/62409982/.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

What is a “Free” Loan?

2010-08-16T22:33:00.000-07:00

We all know there’s no such thing as a free lunch, but is there such a thing as a free loan? The answer is: yes…sort of. It is possible to process a loan where the homeowner pays $0 in costs. This is commonly referred to as “no cost” financing. Of course, there are always costs associated with any real estate transaction and someone needs to pay them. So how does a “no cost” loan work?

Typical expenses on a mortgage transaction include title, escrow, processing and underwriting, credit report, county and state fees, notary and / or attorney fees, etc. These costs normally amount to $2,000 to $5,000. This is the cost of processing and funding a typical real estate loan. Under what’s commonly referred to as “No Points” financing, the homeowner is only responsible for paying these third-party expenses and nothing more. Of course, the homeowner always has the option to invest more into their closing costs to buy down the rate through what we know as “paying points.” Should the homeowner choose to pay points, they will in turn receive a lower interest rate. The more points they choose to pay, the lower the rate will be.

Just as the homeowner may choose to pay more in closing costs to receive a lower rate, the homeowner may also choose to sacrifice a little bit of rate in exchange for lower closing costs. Here are some examples for a conforming 30 year fixed based on today’s pricing (8/16/2010):

3.875% with less than $3,000 in closing costs plus 1 point
4.125% with less than $3,000 in closing costs and no points
4.375% with no closing costs and no points

On a $300,000 loan, the option of the (relatively) higher 4.375% rate creates an additional rebate of approximately $3,000 which is then applied to cover the closing costs of the loan. This rebate is referred to as a Yield Spread Premium (YSP). Understanding how YSP influences options can be a powerful tool for consumers to be properly informed and make appropriate decisions. In a purchase transaction, this YSP can even be used to cover most or all of the costs associated with the purchase transaction.

MARKETING EXPLAINED

Recently I heard an advertisement on the radio for a 30 year fixed at 3.75% with $995.00 in total closing costs. According to Truth in Lending regulations, the company was required to disclose the APR, which I then used to estimate that they were charging approximately three points to obtain this rate. I also heard another company advertise that they could do a loan with absolutely no closing costs – that their company would cover all the costs of financing. Of course, the lender didn’t advertise the rate or APR in this advertisement. Buyer beware: that rate, closing costs, and YSP are all part of how a homeowner will structure the deal that’s best for them.

Under current legislation, only brokers are required to disclose the YSP on a real estate finance transaction. Direct and correspondent lenders are not required to voluntarily make this full disclosure. In reality though, there is no difference between how a broker or direct lender process the loan or are compensated. Although direct and correspondent lenders do not have to volunteer this information, they are required to provide this information when asked. If you wish to know it, simply ask.

The bottom line is that there is no such thing as a free anything, and home loans are no exception. Either a homeowner gets the best rate that exists (currently 3.75% on a thirty year fixed) or the homeowner gets the lowest closing cost option ($0). Whether it’s paid in closing costs or in rate-generated YSP, the costs must always be accounted for. The real question is: where is that magical balance of rate and closing costs that makes the most sense for you? This question was covered in a previous column titled Points or No Points. Because it is a critical part of every purchase or refinance, it is a topic I will continue to address.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Washington Reconsiders Stated Income Loans

2010-08-09T21:45:00.000-07:00

Since the real estate collapse we’ve seen Fannie Mae and Freddie Mac dramatically increase the qualifications for a home loan. The tightening at the credit window has been even more severe with all the emphasis on financial reform in Washington over the last couple months. The effect has been downright debilitating for certain homeowners. Across the country there are thousands of homeowners who have historically never had the slightest difficulty obtaining a loan. Now, all of a sudden, they find that banks are no longer willing to lend to them.

Is it entirely the banks fault? The banks are willing to make loans as long as Fannie or Freddie are willing to back them. On TV, the politicians are blaming the banks for the credit crunch, claiming that the banks don’t want to lend. In reality, the politicians are the ones who have been ratcheting down on Fannie and Freddie’s requirements. The banks are just following the newer, stricter guidelines.

There is some good news in all this. Although Fannie and Freddie have made it increasingly difficult for new customers to get a loan, they still have millions of home loans on their books that are at high rates and at a high risk of default. Fannie and Freddie experimented in relaxed criteria for existing customers last year with the HARP (Home Affordable Refinance Program). The idea was that existing customers were less likely to default on their loans if they had a lower rate and / or monthly payment. As simple a concept as this might seem, it was actually considered a high-risk program to relax the credit criteria for these homeowners. In some cases Fannie and Freddie would lend up to 125% of the house’s current appraised value. This program, funded by the TARP bailout (Troubled Asset Relief Program) also relaxed the income requirements and made loans available to homeowners with much higher debt ratios than otherwise available.

Are stated income loans the next step in the government’s bailout for homeowners? According to a recent announcement, yes! Fannie and Freddie have opened the door for existing loans to be refinanced at lower rates without the need for supporting income documentation. It’s funny how the same politicians who referred to these as “liar loans” just a few months ago now realize that even stated income loans have their place in mortgage lending. There are a multitude of homeowners who receive income that cannot be documented according to Fannie and Freddie’s strict requirements. Self-employed individuals represent the largest segment of this population but there are many others. I recently worked with a client who’s ex-husband paid child support every month like clockwork. However, their relationship was so amicable that the court was not involved and an actual Child Support Court Order could not be produced to meet the strict underwriting guidelines. For individuals like these, a stated income loan makes sense. Helping them lower their rate and therefore lower their payments will help more homeowners. It will also help decrease the amount of foreclosure losses Fannie and Freddie will take on their books while under the government’s care.

Although Fannie and Freddie have both announced they are willing to partake in stated income loans for select current clients, the decision falls on the servicing bank whether or not to make it available to the homeowners. Score one for the politicians. They devised a program that would actually help hundreds of thousands of homeowners, yet the majority of banks are not making this program available to American homeowners.

Still, this should come as a sign of hope. Homeowners who have not been able to take advantage of today’s historic low rates because of an inability to meet income documentation requirements should call their lender or mortgage broker to see if they qualify for this government assistance. When a 5 minute call could potentially save thousands of dollars a year in interest it certainly justifies a minimal investment of time. And although the number of participating banks is anemic at present, more banks will surely jump on board as the campaign proves successful. This is definitely something to keep an eye on.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

The Floor Drops!

2010-08-02T21:42:00.000-07:00

Up until recently, 4.25% was the lowest rate available on a 30 year fixed rate mortgage. Obtaining this lowest or “floor” rate typically involved some form of buy-down or “points.” With mortgage rates achieving new record lows in the last few weeks, something phenomenal has happened. The floor rate of 4.25% has been available with little or no buy-down. In order for banks to accommodate homeowners wanting to make an investment into their mortgage the banks have just lowered the floor rate on their rate sheets.

Can you imagine a 30 year fixed rate at 3.75%? Over the last 40 years the average rate for the conforming 30 year fixed rate loan has been nearly 7%. Throughout the 1990s and early 2000s a fixed rate under 6% was considered highly desirable. In the last 2 years since the housing bubble burst a rate under 5%, previously unimaginable for many, has now become the mental benchmark of American homeowners. Anyone who’s followed mortgage rates for any length of time realizes that the mere concept of a 30 year fixed below 4.0% is downright ludicrous. Lunacy be damned! For the right individuals, a 30 year fixed is available as low as 3.75% (points apply).

Earlier this year I wrote an article called “Point or no Points.” For some homeowners it makes sense to invest more into their closing costs to obtain a lower rate. For others it doesn’t. The ultimate justification is similar to any other investment: How long will you keep it? As a general rule, five years seems to be the breakeven point for mortgage buy-downs. This means that homeowners who are not likely to keep their loan for a minimum of five years will very rarely find justification for any type of buy-down or investment into their rate. On the other hand, those who are more certain of long-term residency are likely to receive a potentially substantial return on their investment. This has never been more true than now while rates are at record-breaking lows.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Lenders Loosen Up on Larger Loans

2010-07-13T21:58:00.000-07:00

It was about 1 year ago that the lenders in the housing market started making jumbo loans again. Of course, when these programs were reintroduced the rates were significantly higher and restrictions were also much tighter. In most cases, the 30 year fixed rate was a full 1% more on a jumbo loan that on conventional financing. The restrictions were also more severe. Conventional lending offered financing up to 90% in California whereas Jumbo loans were typically restricted to a maximum 75% of the appraised value.

Within the last months we’ve already seen the pricing gap decrease between conventional and jumbo loans. The newest development within the last month is that lenders are now more comfortable lending to 80% of a property’s value on Jumbo loans. This is good news for many homeowners who bought larger homes a few years ago and have since seen their values decrease. The extra 5% financing means that the owner of a $1.2 Million home can finance an extra $60,000 on their mortgage. Last month, that same homeowner would have been required to pull $60,000 from savings to pay down the balance of their loan just to have that option.

The loosening of guidelines on Jumbo programs is good news for all homeowners, not just those owning larger homes. Unlike conventional loans, Jumbo loans are not eligible for government backing through Fannie Mae or Freddie Mac. Lenders on these programs are essentially “on the hook” all by themselves with no one to share the risk. The fact that lenders are willing to take on more risk in this area indicates that lenders are more optimistic about California’s housing recovery.

This optimism is shared by other influential participants in the housing market. Private Mortgage Insurance (PMI) companies have also recently demonstrated a willingness to accept more risk. These insurance entities make it possible for lenders to offer home loans above 80% of a property’s value. Most PMI companies were unwilling to offer mortgage insurance for loans over 90% of value in California. Within the last month, we’ve seen this restriction increased up to 95% of value.

The willingness of banks and mortgage insurance companies to lend at a higher value is an indication that these entities don’t believe property values will go any lower. More importantly, it’s the first tangible sign of optimism that the market is poised for recovery. While this is good news for all homeowners, it is especially great news for many homeowners who have been unable to refinance because they were either unable or unwilling to pay their loans down to the more conservative lending requirements. Now that those requirements have been expanded, these homeowners are being given a second chance to improve their terms of financing.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Fannie Gets Tough on Foreclosures

2010-07-06T23:46:00.000-07:00

Ever since Fannie Mae and Freddie Mac were taken over by the Federal Government, lending guidelines have become increasingly strict. So far this year we’ve already seen Fannie Mae ratchet down on income ratios. Dropping the maximum debt ratio from 50% down to 45% effectively amounts to a 10% decrease in the amount of home someone can afford. More recently we witnessed Fannie Mae’s attempt to eradicate ARM and interest-only financing. Now they’re at it again, making it more difficult for individuals with a prior foreclosure to obtain financing for their next home.

Fannie Mae’s guideline calls for a 7 year waiting period after a foreclosure before an individual can obtain financing again. However, Fannie Mae did have a provision which would allow an individual to seek new financing after only 5 years if the individual could demonstrate strength of other compensating factors (higher credit, more down payment…). Fannie Mae’s recent announcement removes the 5 year option.

Fannie’s intention is to incentivize homeowners to work with their lender(s) to seek alternative resolution to avoid foreclosure. This would be a great idea if the banks were willing to do their part and work with the homeowners as well. If only the politicians who currently run Fannie Mae and Freddie Mac could find a similar way to incentivize the banks to provide these desired alternative resolutions.

Some consumers will read this and think: “I couldn’t help the foreclosure. There were extenuating circumstances and the bank wouldn’t work with me.” Unfortunately, this tale is all too prevalent in today's troubled economy. If there was a true extenuating circumstance, there is a provision which will allow financing after only 3 years. Fannie Mae describes extenuating circumstances as “nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.” In the end, it is the underwriter’s discretion to determine the severity of the hardship and whether or not it qualifies for the 3 year provision. Loss of income due to divorce or death of a spouse seem to be the easiest to document. Loss of income due to layoff and or decrease in employment income are more subjective. If you think you may find yourself in this position in the future, be sure to save all your documentation including severance papers, furlough notices, pay rate changes, etc. Also be prepared to show that you attempted to work with your lender to seek other resolutions. Letters of denial for loan modification and copies of listing agreements indicating that you attempted to short sale are 2 very specific examples.

Other consumers will think the complete opposite: “these people were irresponsible and should have never gotten a loan to begin with.” There are many who would agree to this point. Whether or not it was deserved, property values will struggle to recover until demand overtakes supply. The homeowners who have recently lost or are losing their homes to foreclosure will look to buy another home in the near future. The sooner they are able to do that, the sooner we will see an increase in housing demand. That increase in housing demand is what’s needed to fuel the recovery in housing prices. Unfortunately, Fannie Mae will not be looking to help these consumers anytime soon.

The good news is that Fannie and Freddie aren’t the only players in town. Historically, the Federal Housing Administration (FHA) has insured mortgage loans that were deemed too risky by more traditional lending methods. The FHA’s restrictions on lending to homeowners with a prior foreclosure are only 3 years to Fannie Mae’s 7 years. The FHA’s provision for extenuating circumstances is only 1 year to Fannie Mae’s 3. These more relaxed guidelines will enable foreclosed homeowners to get back to the American dream of homeownership sooner. And the sooner we get these extra players back in the game, the sooner property values recover and contribute towards stimulating the overall economy.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

National Debt

2010-06-30T21:39:00.000-07:00

On Monday, June 14th, Moody’s Investor’s Service became the second major agency to downgrade Greece’s bond status to “junk.” Standard & Poor’s did the same in April of this year.

Foreign debt has been the largest force shaping the global financial markets over the last few months. Portugal, Spain, Turkey and (of course) Greece have each had their turn taking financial criticism. Each time their debt gets downgraded, these countries need to pay a higher rate on their national debt. This is very similar to an individual who’s FICO score plummets and credit card companies charge 22% rate of interest instead of the 7% or 8% that individual was previously accustomed to. The benefit for us is that these other countries have made the USA’s credit grade appear better by comparison. This has been perhaps the single largest factor leading into the new record low rates we are currently experiencing.

So what causes an entire country’s credit grade to be dinged? Just as in consumer lending, global investors question one’s ability to repay the debt. The primary measure of a consumer’s ability to repay a loan is their “Debt to Income Ratio.” This calculation is a measure of the amount of money owed (debt) versus the total amount of money earned (income). On a national scale, this is measured in the exact same way by comparing total debt to Gross Domestic Product (GDP).

Greece’s debt to GDP ratio is 170.5%. This is the equivalent of a person making $50,000 per year having $85,000 in debt. Surprisingly, this only puts Greece as 16th worst in the world according to a recent article on http://www.cnbc.com/id/30308959/The_World_s_Biggest_Debtor_Nations. There are 15 other countries who, according to this measure of financial stability, are in worse shape than Greece. Other countries whose debts have made headlines recently include Spain (14th worst) with a debt to GDP Ratio of 186.1%, and Portugal (10th worst) with a ratio of 235.9%. Hungary, whose national debt sent global markets crashing earlier in June, is in 19th place at 121.9%.

Amazingly, the USA ranks 20th worst on the national debt risk list – only 1 spot behind than recently-infamous Hungary. Our debt to GDP ratio, which was only 63% in 2007, has since ballooned to over 95%. Of greater concern is the rate at which that debt is growing. We are projected to surpass 103% within the next two years. Crossing the 100% Debt to GDP ratio would put the USA at risk for having its credit grade demoted, leading towards higher interest rates for the country and all consumers within it. An additional concern would be the replacement of the dollar as a global currency. This would add increased pressure on inflation and further compound the increase in rates. This would be a double-whammy that any economy would have a tough time absorbing.

For decades our country has been living beyond its means. We’ve become dependent on foreign investors to finance our economic way of life. We’ve certainly had fun playing with other peoples’ money, but when the collector comes knocking we’ll be in for a world of hurt. Until then our current administration is increasing the national debt at record levels. The bond auctions from the US Treasury are on the order of $100 Billion every month, or $1.25 Trillion per year. At some point, the Federal Government will have to trim the fat and balance a budget. The only question is: How long will it take, and will it be in time?

By the way, ever since the government took over Fannie Mae and Freddie Mac the maximum DTI for American Homeowners was cut to 45% - deeming that any ratio higher than this was simply too risky. Previously Fannie and Freddie would approve debt ratios as high as 60%. Obviously the politicians are aware that too much debt equates to too much risk. I just hope these politicians will begin following their own advice before our national credit grade gets demoted and our entire country is forced to pay higher interest rates.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

New Record Low Rates!

2010-06-22T21:33:00.000-07:00

And we thought it would never happen again. Despite the odds against it, today’s (Tuesday’s) bond market closed at a record level. This record close opens the door for tomorrow’s (Wednesday’s) rates to be the lowest on record.

Ongoing concerns regarding overseas markets and bearish performance in US equities have fueled the “safe haven” play into bonds. Today’s surprise announcement of a dip in home sales re-instilled fears of a “double-dip” recession in the housing market. This unexpected news acted as the catalyst to push bonds to record levels.

“By the time you read about it, it’s too late.” This was the topic of my column in December of 2009. Online and print media that track interest rates fail to do so on an accurate daily basis. The data they pull from is typically one week to one month behind actual pricing. This publication is being posted the same day as the bond market movement. Remember that the bond market is what drives mortgage rates. Those who are signed up to receive my posts are obtaining “real time” updates.

What does this mean for you? Today is a good day to call your mortgage lender. Even if you’ve refinanced within the last year, call again. Record low rates create the possibility to lower your rate as much as 0.5% with little to no closing costs. If you haven’t refinanced yet, this is the opportunity you’ve been waiting for. But remember that markets can change quickly – call or email your lender today.

Arnaud Dufour
Senior Mortgage Banker
adufour@dljfinancial.com
888-680-5777 x302

The End of ARMs and Interest Only Loans

2010-06-07T22:03:00.000-07:00

Not everybody wants a 30 year fixed mortgage. Although a 30 year fixed remains the #1 mortgage product sought today, there are still many homeowners who don’t feel it’s the best mortgage product for them. Two of the most popular alternative are Adjustable Rate Mortgages (ARMs) or loans with Interest Only options. On June 19th these products will become more difficult to qualify for, making them unobtainable for many consumers who prefer these products.

ARMs remain popular because they offer rates much lower than a standard 30 year fixed. Those lower rates will equate to lower monthly payments. A typical 5 year ARM will normally feature an interest rate that is almost a full 1 percent lower than the rate on the comparable 30 year fixed. For someone who only plans to stay in a property a few years or has other short-term plans for the loan, this makes perfect sense. Here’s an example on a $250,000 mortgage:

• 30 year fixed at 4.625% = payment of $1,285.35 (principle & interest)
• 5 year ARM at 3.75% = payment of $1,140.13 (principle & interest)

On a larger loan, the savings become even more substantial.

Of course the risk with an ARM is that after the initial fixed period (5 years in the example above), the rate becomes adjustable. At that time the rate could go up, could go down, or could stay the same. It all depends what the market does at the time. Loans with rates that adjusted in 2005 – 2007 saw the worst of this risk with rates that shot up to 8% or 9%, sometimes even higher. However, loans that adjusted in 2009 and 2010 are seeing rates that adjust downward in the 3% range. Choosing an ARM always carries risk, but it’s a risk that many homeowners are comfortable taking in order to get that lower rate and lower payment.

Interest Only (IO) loans are also very popular for homeowners looking to keep their payments low and affordable. Below are sample interest only options for our 30 year fixed and 5 year ARM at $250,000:

• 30 year fixed with 10 year IO at 5.125% = payment of $1,067.71 (interest only)
• 5 year ARM with 10 year IO at 3.875% = payment of $807.29 (interest only)

The risk here is, of course, what happens after the initial 10 years. On the 30 year fixed, there will only be 20 years left at the remaining term. For the same $250,000 loan at 5.125%, the payment will shoot up to $1,667.20 for the remainder of the loan. That’s a $600 step up from the initial $1,067.71.

Despite the risk, many homeowners still feel this is the right program for them. Some homeowners are savvy investors. With rates at record lows right now, these individuals feel it is better to borrow at a low rate and put extra money into the current investment opportunities that are available right now. There are also many individuals who rely on the initial low payment of these loans to get them through until they can afford the fully amortized payment. Young first-time homebuyers used to be the primary candidates of this type. As they mature in the workforce, their income levels will increase substantially. More recently, even mature employees are in search of the cash flow afforded by an interest only loan. With cutbacks, furloughs and other paycuts, more and more homeowners are looking for payment relief to buy time until their income levels return to “normal.”

Unfortunately, the millions of American homeowners who rely on these products will find they can no longer obtain these products after June 19th. ARM financing will only be available for individuals who can demonstrate an ability to afford the loan even if hits the fully indexed rate. For example, a loan that starts at 4% but has a fully indexed rate of 9%, the borrower will have to demonstrate that they could still afford the payment even if it went all the way up to the maximum 9%.

Interest only loans currently are available to individuals with a minimum 20% equity. Effective June 19th, the equity requirement will increase to 30%. The credit score requirement will also be increased to 720. The biggest hurdle is that interest only loans will now require homeowners to demonstrate enough liquid savings to cover 2 years worth of housing expenses – including principle, interest, property taxes and homeowner’s insurance.

The 30 year fixed is the “safest,” most stable financing product available. Think of it as the Volvo of the financial world. Of course not everyone drives a Volvo, and not everyone wants a 30 year fixed mortgage. Some homeowners want faster financing vehicles, and others want cheaper ones. Unfortunately, the politicians who have a stranglehold on Fannie Mae and Freddie Mac have decided that we shouldn’t want the risk associated with those other vehicles. After recently bailing out Fannie Mae and Freddie Mac, it's easy to understand their logic. But at what point should we be allowed to choose for ourselves? Whatever happened to Free Enterprise? These politicians can’t force us all drive Volvo’s, can they?

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Foreign v. Domestic Tug-of-War

2010-06-01T21:31:00.000-07:00

What does it take for the market to recover? Consumer confidence is up, construction is increasing, manufacturing orders are up, and American companies are posting solid gains – exceeding market expectations by miles and miles. All the economic indicators suggest that the United States has come out of the darkness and is on the path to recovery. Despite this domestic optimism American Stocks are shaky, indicating high risk. As I’ve stated before, what’s bad for stocks is good for bonds and we’ve seen mortgage rates remain near all-time lows during this most recent bear market on Wall Street.

So why isn’t the stock market reflecting all the domestic optimism? Two words: Europe and China. The turmoil in the European markets is far from over. Just last week Spain’s credit grade was downgraded one notch, from AAA to AA+. This coming on the heels of the Spanish bank failure last week and the austerity measures enacted by both Greece and Spain sent the Euro lower against the dollar and increased concerns over the Euro’s sustainability as a global currency. Once again, now is a great time to take that overdue trip to Europe!

China added fuel to the fire last week by leaking a rumor that it was considering a sale of some of their Euro-backed holdings. This rumor, which China has since denied, sent the Euro plummeting along with global stock markets – including those here in the US. This also created a Bull run on the dollar and dollar-backed holdings, including bonds and mortgage-backed securities. As usual, this was good news for mortgage rates.

The time has come to accept that the US is no longer the largest driving force in global markets. For now, the financial king of the hill is China. The proliferation of the European Union and the Euro has created a third superpower that is arguably just as influential as America and the Dollar. At least, for now. The Euro is still a long ways from stabilizing. China's overall economy is stable, but their manufacturing orders are way down. In the meantime, the US is leading the global recovery. We’ve taken this adversity and returned to the principles that made us great to begin with: ingenuity, stubborn persistence, and the Protestant Work Ethic – the willingness to get our hands dirty to get the job done. So long as we stick to the roots of our forefathers, we have a chance to regain our spot as kings of the global financial realm.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Spanish Bank Failure

2010-05-24T21:51:00.000-07:00

Another development from the Euro Zone: Over the weekend, a Spanish savings bank was rescued by the country’s central bank. CajaSur is a relatively small bank holding less than 1% of the total assets in Spain’s financial system. Ordinarily the failure of such a small bank would be shrugged off by the global financial markets, but there are mounting concerns that this is only the tip of the iceburg – that more bank failures are forthcoming in Spain’s near future.

The Euro Zone was already under pressure from Greece’s sovereign debt woes. A banking crisis in Spain could potentially cripple an already weakened European economy. The Euro is now trading at a 4 year low against the dollar. Anyone who had put off their travels to Europe should find the current exchange rate to be in their favor. It may be time to take that trip...

Similarly, anyone who’s put off refinancing their home may find today’s rates to be in their favor. The ongoing European crisis has led towards increased global investing in American bonds and mortgage-backed securities, thereby yielding lower rates for American homeowners. Today’s rates are the lowest they’ve been since early December of 2009, and are within a fraction of the all-time record lows set in Thanksgiving of 2009.

So what next? Well, if I could predict the future I’d be out buying a lotto ticket right now…

Ok, just got back from buying my lotto ticket. With that out of the way, let’s look at what could potentially happen in Spain and how that would impact this side of the Atlantic. If the failure of this little bank is just the beginning of a much larger banking crisis in Spain, then we’ll see mortgage rates shatter through 2009’s record lows. If not, then the technical signals will dominate. Currently technical signals indicate that mortgage-backed securities are overbought and due for a correction. In other words, rates are lower than they should be and are due to go up. The “wildcard” that could make them go lower is a collapse of Spain’s banking system. Otherwise, it may be time to capture today’s unnaturally low rates and lock one in.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Lowest Rates of the Year

2010-05-17T21:26:00.000-07:00

It happened. Were you ready for it? Today is Monday, May 17, 2010 and Mortgage Rates just hit their lowest level for all of 2010. Were you ready for it? Mortgage rates have steadily improved every day for the last week. This market improvement has been fueled by a “safe haven” rally on US Bonds, including mortgage-backed securities.

The stock market hasn’t completely regained the trust of investors after last week’s “flash crash” that saw the Dow drop nearly 1000 points in mere minutes. Investors are instead looking to put their money where they feel it will be safer. This conservative investing model typically leads to a run on Bonds. And as I’ve written before, what’s good for Bonds is good for mortgage rates.

This most recent bond rally has been especially good for US bonds. A global skepticism over equity markets would typically lead to investment in all bonds. Ongoing concerns over the Euro fueled by continuing concerns over Spain, Portugal and (primarily) Greece have left European countries out of this bond run. One way to look at it is that the US picked up market share at Europe’s expense. The additional market share means more demand, which in turn leads to even lower rates.

How long will it last? If history is any indicator, not long. Investors are very fickle and one iota of positive economic news could easily swing the pendulum the other way. If anyone’s been waiting for rates to improve, the wait is over. Right now may be the best time we’ll see to take action on your home financing.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Euro Dominos!

2010-05-10T21:33:00.000-07:00

Greece certainly was the word last week. It’s amazing how such a small country can cause so much havoc in the global financial markets. But is Greece just the first wave in a series of financial collapses? What will happen when Ireland, a member of Great Britain, faces a similar crisis? Or what about a larger country like Portugal, Spain or Italy? According to some financial analysts any of these countries could be the next domino to fall. And if you believe everything you read, there’s even talk that the largest domino in the chain will be China. What impact would that have on the global financial markets? Only time will tell. For now, let’s take a look at what happened to mortgage rates last week.

The Greek credit crisis was bad news for the stock market, sending the Dow plummeting 998 points in less than 30 minutes. As I’ve written before, what’s bad for stocks is good for mortgage rates. While the Dow was taking its record tumble, the bond market became a safe haven for investors around the world. This run on bonds sent the benchmark Mortgage Backed Security (MBS) running up 150 basis points in about the same time that the Dow was running down. What does that mean in terms of pricing?

One “point” that a consumer pays to buy down their rate is one percent, or one percentage point of their loan amount. An improvement of 100 basis points on the bond market typically translates to 1 point less that the consumer pays towards their loan. So a swing of 150 basis points on the MBS would be approximately 1.5 points to a consumer. In other words, if a 30 year fixed rate was pricing out at 4.625% with 1.5 points early Thursday morning, this bond rally would have made that same 4.625% a “no points” loan if timed perfectly. If only it had lasted longer…

Let’s look at these numbers another way. A buy-down on a 30 year fixed mortgage is typically a 4:1 ratio towards the rate, meaning that a 1 point buy-down towards the closing costs will typically translate into a 0.25% benefit towards the rate. So Thursday’s 150 points swing in the bond market would save the customer either 1.5 points towards their closing costs or 0.375% of their rate. If only it lasted longer…

Unfortunately, Thursday’s rally ended as rapidly as it began. Some lenders issued 2 or even 3 improved rate sheets in the half hour rally. Those same banks the issued 2 or 3 more rate sheets in the half hour recovery, taking back their earlier pricing improvements. This market volatility proves a point I’ve been making for years: Consumers cannot react to the market and win. The market simply moves too quickly. Every day I speak with people who want to “wait for rates to get better.” Well rates were better on Thursday, but for less than 1 hour. By the time consumers were able to react, the improved rates were already gone. Most consumers never even had the chance to find out about it. Fortunately, there are a few consumers who have read my column on taking a proactive approach to timing the market. Even though rates weren’t yet where they wanted them to be, these proactive individuals had previously submitted their paperwork and had a complete approval. Once rates improved, they were able to lock in at the most opportune time. Their proactive approach put them in position to lock at a discount during that short window the market was on sale.

For those that missed this opportunity, don’t worry. History is bound to repeat itself. We don’t know when exactly it will happen next, we just know it will happen again. For those homeowners who want to refinance at the best possible rate, this is an opportunity to take that proactive stance. Contact your loan advisor today to find out what is required to create and finalize your approval. Once that’s done, then wait. The market will go on sale again. This time, make sure you’re ready for it.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Been Declined for a Loan Mod? Try a Refi!

2010-05-03T21:26:00.000-07:00

Some people may read this title and second-guess if they’ve read it correctly. Yup, it’s true. Lower rates are available for homeowners – even those who have been declined for a loan mod. And one of the primary reasons homeowners get declined for a loan modification would actually help them obtain a refinance under more favorable terms.

A modification sounds a lot more exotic and sexy than a boring old refinance. However, there’s something to be said about a tried and true veteran that continues to deliver results. A refinance may not be sexy, but it’s effective and reliable. Refinance applicants are approved at a much higher conversion than the 1% approval rate boasted by modifications. Refinances are also clear-cut with no uncertainties. Applicants will know upfront what rate they’re going to end up with at the end of the deal. With a loan modification, the final terms are not made available until after the end of a six month trial period. The most frustrating part for many homeowners is that most applicants are actually declined for permanent loan modification after the trial period. After the six month period they attempt to refinance only to find that mortgage rates went up during that time.

And that’s not the worst of it. Many homeowners who are declined for permanent modification after the trial period find their credit has been damaged to the point that they can no longer qualify for a refinance anymore. During the six month “trial period,” a lender agrees to collect a payment which is less than the normal contracted mortgage payment. Because the homeowner is making less than a full payment, the lender has the right to report to the credit reporting agencies that the homeowner is not upholding the terms of agreement. After 2 months of partial payments the loan typically reflects as 30 days late on the credit report and the scores are adversely affected.

The media has made loan modifications sound so sexy with stories of principle balances being cut and rates being reduced to as low as 2.5%. The fact is that these are the exception, not the rule. According to government statistics on the Home Affordable Modification Program (HAMP), only a mere 1% of all applicants have successfully had their loans permanently modified. One of the key reasons homeowners won’t obtain a modification is because they are overqualified. In other words, they are deemed to either make too much money or have too much in savings to qualify for a “free lunch” at the expense of taxpayers.

The good news is that HAMP has a sister – The Home Affordability Refinance Program (HARP). Sure, this branch of the Making Homes Affordable program gets a lot less media attention, but it is by far the more effective channel for anyone looking to lower their mortgage rates and payments. Making Homes Affordable was primarily designed to help people refinance. The HARP program loosened many of the normal underwriting requirements including income, equity, mortgage insurance and credit scores. In the event that a homeowner is still not able to qualify for a refinance under these widened parameters, this homeowner is likely in need of more drastic measures and may qualify for assistance through HAMP.

The biggest problem with the Making Homes Affordable program is that it was never properly explained to the American homeowner. In a nutshell, the program anticipates three types of homeowners:

A. The most qualified individuals can lower their rate using HARP.
B. Homeowners who fall short of HARP’s expanded qualifications may qualify under HAMP.
C. Not all homeowners can be helped. Homeowners who fail to qualify for either HARP or HAMP may seek assistance for foreclosure alternatives including short sale.

Frequent readers of my column know that I’m often critical of our government’s recent over-involvement in our industry. However, this is one time that politicians actually got it right. At least, they did a good job writing a sensible bill. The only shortcoming has been in adequately explaining it to American homeowners. Understanding the bullet points above gives homeowners a clear indication of the steps we should all take to improve our situation, and in this order:

Attempt refinance through HARP
If that fails, attempt a modification through HAMP
If that fails, seek alternatives to foreclosure

Individuals who attempted to go straight to step 2 and found they did not qualify should go back to step 1 and see if a good old-fashioned refinance can help.

Arnaud Dufour

Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Light at the End of the Tunnel

2010-04-26T21:26:00.000-07:00

Could this be what we’ve been waiting for? Last week Private Mortgage Insurance companies removed the “Declining Market” restriction from the California real estate market. This means that the insurance companies who calculate risk on mortgages are now comfortable insuring loans that utilize a higher percentage of equity in a home. This is the first sign that lending requirements might be easing and is welcome news for many homeowners. After all, if the insurance companies are willing to open up and accept loans that had previously been “too risky,” perhaps lenders will begin opening their doors as well.

Lending practices are still the most conservative they’ve ever been and there are millions of homeowners who are still unable to take advantage of current record low rates. These individuals would like nothing more than to refinance their mortgages into more favorable terms. After all, shouldn’t that be their reward for making their mortgage payments on time when it seemed like no one else was doing so? Sure the government launched the Home Affordable Refinance Program (HARP), but this program wasn’t about helping people refinance. HARP was designed to help the government avoid foreclosures on their book by converting government-backed loans into more favorable terms. For the millions of Americans whose loans aren’t on the government’s books, the government can’t help them. Instead, these homeowners are entirely at the mercy of the private lending sector and Private Mortgage Insurance companies. For these homeowners, help can’t come soon enough.

The three main requirements to refinance into more favorable terms have always been (1) income, (2) credit and (3) equity. Historically speaking, so long as you qualified on two out of the three requirements there were options available to refinance. During the irresponsible lending practices of the last decade, you only needed one of the three to get a loan. The current lending environment has overcorrected for its recent transgressions and now requires strengths in all three areas in order to qualify for any type of a loan, let alone receive the most favorable terms. Out of those three criteria, the decline in property values has created the single largest challenge for most homeowners. Even with perfect credit the ability to document sufficient income, all of our homes have lost value and that’s our greatest limitation.

Lenders currently place an enormous importance on equity. After all, the equity in a property is what determines the lender’s likelihood of recuperating its losses in the event of foreclosure. As the housing market continued to lose value, lenders became increasingly squeamish and started limiting their programs. In a declining market, programs that were previously available up to 80% of a home’s equity were cut down to 75% or even 70% equity. These stricter lending guidelines combined with the drop in values made it impossible for millions of homeowners to refinance and take advantage of the recent low rates.

The removal of the “declining market” label is a sign that opportunity may soon come a’knocking for many homeowners. The first glimmer of hope has already been granted by the mortgage insurance companies. They are now willing to insure loans up to 95% of a property’s value. This had previously been limited to only 90% of equity for fear that values would drop even further. The removal of “Declining Market” restrictions is a promising start for the real estate market. Since the housing crisis began lending practices have been getting stricter and stricter. This is the first time we’ve seen a lending guideline open up in a long time. And it is very welcome news. It’s a sign that the worst is behind us. It’s a sign that housing prices have hit bottom and the door is open for them to go back up. For homeowners that have been watching their equity disappear month after month, this stabilization of values has been a long time coming. It’s also a sign that more programs may be right around the corner as the market enters a recovery mode. For many self-employed individuals who have difficulty documenting their income, new options can’t come soon enough. For all of us that have lived through the worst housing crisis in history, get ready to release a sigh of relief. We may have just seen the light at the end of the tunnel.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Market Overreaction

2010-04-19T21:47:00.000-07:00

It seems every week delivers fresh financial news to move markets. Last week was no exception, thanks to Goldman Sachs's landmark fraud case. There is a big difference between this most recent development and the preceding financial bombshells: The Fed is no longer bringing stability to the market, and the market is overreacting.

Up until March 30, 2010, the Federal Reserve had been spending $1.25 Trillion (roughly $100 Billion per month) purchasing Mortgage Backed Securities. In addition to subsidizing the mortgage market to keep rates low, the MBS Purchase program had the secondary effect of bringing stability to the markets. During that one year span, daily rate changes were relatively nominal. Reaction from institutional investors was kept in check by the 800 pound gorilla in the room. Once the Fed officially ended their MBS purchase program, volatility returned to the market.

When the Fed officially ended its MBS purchase program on April first, rates jumped up. Actually, rates had began creeping up a couple days earlier in anticipation of the Fed’s exit. A few days later, investors realized they had overreacted and rates came back down from their recent highs.

The same is true of this recent reaction to Goldman Sachs fraud case. After the news broke last week, the equities markets plummeted and investors ran towards the safety of bonds. This Bull run on bonds helped mortgage rates, sending them down to their pre-April 1 levels when the Fed was still subsidizing the market. I’m afraid that this too is an overreaction and the market will soon take back what it has given to mortgage rates.

Ever since the Fed’s exit mortgage rates have been very volatile. Receiving more than 1 rate sheet per day is becoming the norm rather than the exception. Timing the market now needs to be calculated in hours – sometimes minutes – instead of days. Options traders love this kind of volatility. But this level of uncertainty poses great risk to the average consumer. With the Fed no longer keeping the playing field level only one thing is certain: Now more than ever, time is not on our side.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

Shopping for Value

2010-04-12T22:09:00.000-07:00

When shopping for the best deal, consumers have a tendency to repeatedly make the same mistake: They only look at what it costs and overlook what they’re getting. Billionaire investor Warren Buffet’s quoted expressions explains that “Price is what you pay, Value is what you get.” We seem to remember this when we buy clothes and frequently pay retail price for the newest and latest fashion. We even remember this when making larger expenses like automobiles. If it was only about price and nothing else mattered, everyone would be driving used Yugos and wearing second-hand clothes purchased from a thrift store. So why do so many people forget to look at value when financing their largest investment?

DLJ Financial is extremely competitive. Since I’ve been with DLJ financial, I’ve never been beaten on rate. In other words, nobody has ever offered a lower rate than DLJ could offer for a similar product and we rarely get beat on closing costs. And yet, I’ve seen a few instances where customers elected to work with another lender because the difference in closing costs appeared to be less than $200. In every instance I’ve followed up with these clients to see if the other lender delivered as promised. Only twice was this the case. More often than not, the other lender changed the terms at some point in the transaction. The change in terms was usually caused by a “change in circumstance” that resulted in the quoted or initial terms no longer being valid. When this happens, I’ll typically get a call back from these clients explaining the situation and seeing if we can still offer our original terms. Often times we can. But if the market has moved, sometimes those old rates just don’t exist anymore. No matter what, they've lost valuable time.

Most people pay full price for clothes because it’s convenient. It’s easier to buy what they like right then and there rather than wait for the item to go on sale. They also know that the item may not be available in their size by the time it gets on sale. The convenience of having their goal accomplished faster and eliminating the risk of not attaining their desire is worth the extra few dollars. When shopping for a car, consumers are typically willing to pay more for performance, reliability, security and style.

It’s amazing that consumers are so quick to pay extra for the benefits of convenience, security, performance, reliability and style in their everyday purchases but neglect to consider these same benefits when financing their house. But do these same features have anything to do with shopping for a loan? Isn’t everything the same rate? Surprisingly, no. Even the standard 30 year fixed can be structured dozens of different ways. Which way is best for one homeowner may not be the best for someone else. Here are other points of value that should also be considered:

• Convenience: Financing (or refinancing) a home is one of the top three most stressful events (the other two are getting married and having a child). An experienced loan advisor will help limit the anxiety associated with the process.
• Security: Before you place your family’s financial security in the hands of a stranger who quoted you a number after a brief phone conversation, make sure they understand your long-term goals. Only with this knowledge can they help structure the most appropriate loan package.
• Performance: Your agent should have a reputation for under-promising and over-delivering.
• Reliability: New regulations have slowed down the mortgage process. Is your lender able to close your loan on time? Failure to do so can cost hundreds or even thousands of dollars.
• Style (in this case, lifestyle): The time, money and stress that are saved by choosing the right lender will have a positive impact on your lifestyle.

Before selecting your lender, look at more than just the rate and closing costs. Absolutely those things matter, but a wise consumer will also research their loan advisor before placing their trust in them. How long have they been in this field? How long has their company been around? Google them or look for them on networking sites like Facebook and LinkedIn. In this information age, any professional’s credentials should be readily available to the consumer - and the consumer would be wise to value this information.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107