The Markets | Bay Area Real Estate Finance

Are You Ready for the 3.XX% Mortgage?

Speaking of no-brainers... mortgage rates set new lows... again!

You’re probably somewhat tired of hearing about the “all-time historical lows in mortgage rates”. Especially if you’re in the ‘mortgage hurt locker’ – trapped in an outdated (high) mortgage rate where if you want to refinance you’re required to make a whole new down payment just to get your loan balance in line with your new (lower) property value. That’s just adding insult to injury, and I talk to people in that situation every day. So I get it. The radio blasts claiming “the biggest no-brainer in the history of mankind” are just plain obnoxious.

I mean, this is my business, and I’m tired of hearing about it. I love that it’s true, but I’m tired of the over-broadcasting.

Mortgage Rates About To Start With A Three?

So, I kind of hate to break it to you, you’re about to hear it all over again. That said, I probably don’t need to explain why this could be a great thing for you, do I?

I watch the mortgage bond trading data on a daily basis. Reading and interpreting the mood of the markets is a bit of an obsession of mine. The markets move fast, and usually when the news about ‘record lows’ is hitting the press, the market has already offered those low rates, briefly, and then bounced back higher. In fact, there are small changes to mortgage rates for any given borrower scenario just about every day. I think the most changes I’ve seen in a day is six.

And Then There Are Seismic Shifts

Before mortgage rates can fall, mortgage bond values need to increase. In recent weeks, the bond values had bounced several times against the same level, causing rates for mortgages to similarly skip off these ‘historical low’ points, with rhythmic increases in between each bounce. Today, the ceiling was broken, and bond values soared into a new range. Lenders don’t often bring their rates down as instantly, for reasons too complex to go into here. But if this move sticks, the new water cooler conversation in the office is going to be about Lumberg’s new Three-point-something 30 year fixed.

We had one of these shifts when the Fed announced they’d be buying Mortgage Bonds in Nov 2008 and again when they essentially doubled-down and committed a new budget for Mortgage Bonds in August 2010.

So What is it This Time? … What’s Operation Twist?

Yesterday the Federal Reserve announced details of the awaited “Operation Twist”, which is a new Open Market activity designed basically to compress borrowing costs. It appears to be almost specifically targeted in the mortgage/housing sector. The “twist” part refers to the idea that the Fed will be converting existing capital versus deploying new capital (so-called Quantitative Easing) but affecting prices and rates without expanding their balance sheet… That’s all probably more technical than we need to worry about. If you want the details, read more about Operation Twist here.

Remember those $300 one-time stimulus checks we got a few years ago? The idea behind an effort like Operation Twist is that if the Federal Reserve can press mortgage rates lower, across the board, then millions of Americans can knock off $50, $100, $300, maybe $500 off their existing mortgage payments … per month… for 30 years. That’s quite a bit more meaningful than a one-time check that might barely cover your cable bill and a tank of gas.

It serves to put spending money in people’s pockets, and extend the survival time for all those people who are hanging on by a thread trying to keep up with mortgage payments in this miserable job environment.

With the direction of rates, and this new low water mark, you simply have got to review your options. There is no black or white answer, each case has unique circumstances, and a unique cost/benefit proposition. But with a backdrop of mortgage rates starting with 3 – for the first time ever – your options should be looking pretty good here.

Contact me by filling in the form below if you’d like to schedule a review. All we’ll do is identify the opportunities you have, and quantify the cost of each – including doing nothing at all.

Conforming Loan Limits – Expiring Or Extending?

'Obey, conform, consume' photo (c) 2004, Z_dead - license: http://creativecommons.org/licenses/by/2.0/ — tongue-in-cheek image here. while this artist questions conformity in society, as a mortgage borrower, conforming is a good thing.

Conforming loan limits are set for a change in just two weeks. This will impact Alameda County, San Francisco, Contra Costa, Marin and pretty much the entire Bay Area. If you’re in the conforming loan limit impact range, and have not done anything about it yet, it’s too late. There’s no way you’re going to start a loan today and close it inside of two weeks. As it stands, closing a loan on October 1 or later, above 625,500 will put you in the non-conforming (or “Jumbo”) sector. Terms are different, and there are several advantages to being a conforming borrower.

But Wait – There’s Something Brewing…

As the economic data in the US continues to roll in, the hopes of a rebounding economy are fading in favor of “double-dip” recession forecasts. There’s still a looming threat of financial crisis contagion from Greece and the rest of Europe, and the domestic data just doesn’t have much to offer in the way of inspiration. Unemployment, GDP, Housing Statistics, Consumer Sentiment, etc.

And just as the tide is shifting, the political arena is gearing up for campaign season. It matters not what we think is right or wrong in terms of removing government support from the housing market by downsizing Fannie Mae, Freddie Mac and HUD (FHA Lending) in favor of private markets. At this time of year politicians seeking reelection will act with short term interests in mind. None of them want’s to be perceived as lacking sympathy for the struggling American, pulling the plug on stimulus era housing/lending legislature that served to prop up a decimated marketplace.

What Are The Chances For A Conforming Loan Limit Extension?

HUD has already scaled back down to the lower limits. You cannot get an FHA loan above 625,500 any longer. They maintain support for the expiration of the higher limits, and are on record as saying that they would like to see the FHA market share roll back a little in favor of private lending.

In the Fannie/Freddie world, a bill was introduced in Congress back in July, which would extend the limits for two more years. Last week, a bipartisan group including 37 lawmakers urged the issue.

Don’t Count On It

If an extension is granted, we’re likely to learn about it at the last second, or maybe even after the current levels expire. And whether an extension is good for another year, or two, or three, all the investors and lenders have already cut off locks, and re-engineered their processing software. It may take some time before the product is offered again. You just can’t count on it until it happens.

When the impact studies came out on these expirations, I questioned the bottom line assessments that the markets could handle these changes without much incident. In the marketplace today, I am seeing an increased level of appraisal issues – where the value of the home has declined beyond expectations. The rising tide of negative overall sentiment in the economy isn’t helping the appraisers see with an optimistic lens, I guess. Allowing loan limits to expire only exacerbates this problem, and puts more homeowners into the mortgage ‘hurt locker’ – trapped in outdated financing and unable to access current market terms. I do not think this shaky market is ready to bootstrap itself into a vibrant, private marketplace.

I’ve got my fingers crossed…

Resetting ARM Loans and the Libor Index: heads-up!

If you took out a 5 year ARM loan just under 5 years ago, your rate is getting ready to ‘float to market’. In this environment, that’s a good thing.

ARM loans are typically structured as 30 year loans with fixed rate periods of 3, 5, 7, or 10 year periods. At the end of the specified period, the rate becomes adjustable. There are predetermined rules for the adjustment parameters that govern:

What financial index the rate is tied to
What the margin is
How frequently it will adjust
How far it can adjust on the initial adjustment
How far it can adjust on each consecutive adjustment
How far it can adjust over the duration of the 30 year term

Most ARMs can adjust a maximum of 5.000% (sometimes 6.000%) above their initial ‘start’ rate. This cap applies to both the first and usually the lifetime adjustment. Interim adjustments after the initial one are most often either 1.000% or 2.000% max.

So if you started at 5.000%, it’s possible that you could adjust to 10.000% or even 11.000% on the first adjustment date. That would be the fastest route to a worst case scenario. But to be able to see something like this coming, you need to understand what index your loan is tied to, and where it is.

Typical ARMs are built with a 2.25% to 2.75% margin, and tracks the 1 year LIBOR and adjust 1 time per year. Sometimes 2 times per year, in which case they might be tracking the 6 month LIBOR.

What the heck’s a LIBOR? Allow me to introduce you to wikipedia, if you want to know more. Then you can come back here and continue.

Here’s the good news. LIBOR is super-low right now. It has been for a while. Typical ARM loans resetting in this environment are landing between 2.750% and 3.250% for their rate resets. A 5 year ARM was getting close to 6.000% 5 years ago, so if you’re in one of those, get ready to see your rate drop in half.

But there’s something worth keeping an eye on here. During the Financial Crisis of 2008, LIBOR was spiking. Referring back to the wikipedia definition will help understand why. Banks were facing liquidity issues, and nobody wanted to lend money to anyone. One measure used to gauge the health of LIBOR was the “Ted Spread“. You can see how quickly the spread spiked during the onset of the crisis – that spike was because of a skyrocketing LIBOR.

In contrast to today’s environment, an ARM loan resetting in 2008 was looking to land close to 8.000%

So all is well and good in the resetting ARMs world. At least for near term planning; remember, ARMs reset each year, so your ~3.000% rate will be great until it resets, then you’re back to the current market.

Wait just a second… Why you might want to be looking out

Right now there’s a slow motion train wreck happening in the Euro Zone economy. Check out Jim Cramer on CNBC getting heated in a debate about whether there’s a liquidity crisis and inter-bank contagion risk brewing. Clearly, these are uncertain times. I think that if you’re facing an ARM reset, you need to be a little cautious in the coming months, and make sure you’re not landing on a LIBOR spike.

At the moment, LIBOR is relatively calm. It’s still really really low, though it has risen a little. But what if some event sparks a contagion fest in the Euro Zone? The entire world economy is on such thin ice it seems. I think you just have to keep an eye on it.

Consider making a lateral move into a fixed rate loan while the rates are so low. When LIBOR is headed higher, and you want out of that adjustable loan, the low fixed rate environment will have already left the station. You have to be forward-facing with this.

Some further food for thought about the relative calm of LIBOR in the face of what is happening in Europe. This is settling, but I would worry about how quickly it could all change. This is from highly regarded industry writer Rob Chrisman on Mortgage News Daily:

In this era of low mortgage rates, few borrowers are opting for ARM loans. We all know that at some point that will change and lenders will all have to dust off their ARM margin notes and remember things like LIBOR, created in the 1980’s. The London Interbank Offered Rate is a key adjustable rate mortgage index, but also helps price trillions of dollars of derivatives and corporate loans. Calculated daily, Libor (not all in caps) is supposed to measure borrowing costs for a panel of banks globally. The rate “floats,” or ebbs and flows depending on how much banks charge one another. At the height of the financial crisis in 2008, Libor was one of the most-watched indicators, as nervous investors looked at its sharp rise as a sign of waning confidence in the stability of the global financial system. These days, however, two key Libor gauges are being suppressed because of sharply shrinking demand since banks have a lot of cash, and don’t need to borrow from each other. Libor rates are very low, and have failed to reflect turmoil in the bank markets amid the European debt crisis. (In the 2008 financial crisis, by contrast, the rate rose to about 4.82% from 2.81% in a six-week period.)

For consumers and companies, low Libor is good news because some home, student and corporate loans, among other things, are tethered to Libor. Just think of all those resetting ARM loans (although the impact depends on margins). Most U.S. auto and credit-card loans are set against the prime rate, however, which now stands at 3.25% and often have margins in the teens.

The British Bankers’ Association “oversees” Libor, and has some reasons why Libor is so low and why banks are borrowing less from one another in the Libor market. In the U.S. and Europe, regulators have given banks cheap access to their lending facilities since the 2008 panic. And depositors are parking their money in banks – who needs to borrow outside aside from banks with end-of-month funding needs? Retail deposits are desirable because they are stable. The Fed has a lot of cash now (which they could use to buy bonds) which also keeps Libor low: there is a massive liquidity cushion.

You know the extreme low on adjustable loans can’t hold up indefinitely. With fixed rates down all around you, it’s as good a time as ever to consider locking something in for the long haul.

Creative Real Estate: Building Homes From Reclaimed Stuff

Dan Phillips has the distinction of being one of my heroes. I base it solely on this video – it’s all I know of him. But this video demonstrates such amazingly creative and interesting approaches to real estate construction. You have to watch it.

Similar to the previous posts in our Creative Real Estate series, this has a strong “Green” component, which is just simply a huge deal in the Bay Area housing markets.

I am particularly fascinated by the social changes that would permit something like this, or make it appealing. Only during times of extreme household deleveraging would something like this strike an accord. Along these lines, I’ve categorized this post in the “Markets” category as well the typical “Unplugged” section of the site.

What do you think your neighbors would do if you built a new roof out of license plates? How about a beer tap in the bath tub? Which ideas are your favorite? Please weigh in by commenting below!

Happy Birthday, Mortgage Meltdown!

note to RSS and email readers: please forgive a prior send of this well before it’s final completion/edit…

It’s rather amazing what is going on in the markets four years after the events that catalyzed the Mortgage Meltdown, which seemed to reach it’s critical point on or around August 9, 2007. That’s four years ago today.

When people talk about things coming ‘full circle’, it’s usually suggestive of a journey that begins in a state of equilibrium – or at least normalcy – then confronts a challenge, then overcomes the challenge. Back to equilibrium. Full circle.

In 2005, deceleration in the housing market was beginning to undermine the financial world of homeowners at the fringe of mortgage qualification. Subprime lending was an unsustainable model without aggressive price appreciation, and as year over year housing gains turned from manic toward flat, capital flocked clumsily to the market, delivered on absurd terms to individual buyers. The subprime borrower, also clumsy if not careless – or at best, naive to rely on the capitalist machine to govern for them in consumerism – didn’t stand a chance.

It wasn’t until 2006 when the subprime mortgage market started to falter. Like an inflated balloon let loose into the room, subprime lending was moving faster and faster right until it sputtered into lifelessness. Despite warnings, banks were throwing money after more and more aggressive terms. A frustrated drunk at the blackjack table, on a cold streak, abandoning strategy and desperately pushing his remaining chips into a final bet.

Even as a few institutions began to fall out, those that remained just cranked it up, anxious to deploy capital and quickly sell the paper. Nowhere in history have so many grown adults joined together to play a game of hot potato.

Four years ago. August 2007. Federal Reserve Chairman Ben Bernanke was served on a plate with knife and fork the words uttered in preceding months, on numerous occasions, by various Fed members – and others – when describing the undulating caldera that subprime had become.

“Largely contained” (Secretary of Treasury Paulson 3/17/2007)
“Mostly contained” (Dallas Fed President Fisher 4/4/2007)
“Severe but contained” (Freddie Mac Treasurer Bitsberger 6/26/2007)
“Likely to be contained” (Federal Reserve Chairman Bernanke 3/28/2007)

Yeah ok.

Contained like Lardass Logan at a pie-eating contest. Get it? Seriously, don’t watch that; it’s disgusting.

Yesterday we had the 6th largest single day point decline on the Dow Jones Industrial Average. A credit downgrade by Standard and Poors, who (by the way thanks for nothing!) rated toxic waste mortgage debt like it was solid gold right up to and into the Mortgage Meltdown. It couldn’t be more confusing.

This mess has been going on for 4 years. We had brief moment of mild optimism, economically. Now we’ve come full circle. Back into panic and uncertainty, and most of us never had the chance to dust ourselves off.

The Chain Reaction

On August 6, 2007, a Friday, the subprime meltdown jumped the firebreak and defied containment when American Home Mortgage filed for bankruptcy. Earlier that week they failed to move a significant chunk of Alt-A mortgage paper, and in turn ran out of capital to make new loans. In the span of the week, they failed one sale, locked up, and went under. That’s how thin the ice was.

This was not subprime; it was Alt-A. A lot closer to prime than to subprime. There were no buyers at any price. The Wall Street backed mortgage market seized up, and everybody put their hands in their pockets and waited for somebody else to make a bid.

The very next Monday, August 9, 2007, BNP Paribas threw their hands in the air admitting that they couldn’t figure out how to value mortgage investments in the absence of market activity.

Just like that, it ceased being “contained to subprime”. By the next day, we had contagion. It spilled over into Alt-A, into other continents, began to infect Wall Street in and out, exposing and bringing to the public awareness the dizzying hierarchy of three letter acronym investment derivatives: CDOs, CLOs, CBOs, CMOs etc. There were bailouts and panics and takeovers, and the subprime problem turned Liquidity Crisis was now a Mortgage Meltdown. And on its way to becoming the Financial Crisis, and the Great Recession.

Reflecting From The Front Lines

That sequence of events ruined my business. Or put more objectively, my business was exposed to risk I didn’t see coming, and suffered. I chose to put my head down and plow through it, and for the most part had to restart and rebuild my business from day one. I consider this to be the completion of my fourth year in business, second tour of duty.

There was a good solid year, from the day American Home Mortgage shut their doors onward, where I was in a state of utter delusion. I can only see it looking back. Frantically trying to make sense of the markets. Trying to help clients make sense of how it affected them. There was a flurry of failed initiatives and bailout related programs for the mortgage industry, concocted by the White House, and that banks refused to participate in. Each one offered promise, and each one lead to false starts. Raised hopes for homeowners struggling to get out from under bad mortgages, and then nothing. Wasted energy. I was wrapped up in the panic as a homeowner, and as a business practitioner. Nothing to show for it. It took nearly a year of swimming upstream, before some life reemerged.

But at the same time, like so many who experience great tests, I can look back and appreciate the lessons. I’ve been forced into disciplines I never knew I needed. I’ve gained confidence in my ability to survive. And rather than give up on the trade, I’ve affirmed an interest in it. Despite the anxiety levels reached a few times, the frustration of constantly shifting regulations and guidelines, the drama, the strife, the windows into some distressful places people are in, despite all of that, I’ve enjoyed this time. There’s no question, I am stronger because of it.

So happy birthday, mortgage meltdown. I appreciate you and wish you good riddance all at once today.

How Often Do Mortgage Rates Change? July 2011 Update

How often do mortgage rates change these days?
About every 3.1 hours.

I’ll admit, July seemed to be a lot more volatile than a review of the tape is indicating. Perhaps that’s because most of the turbulence was in the last week of the month. We had an abysmal GDP report last week, and then of course the craziness over the debt ceiling and budget debates. On the final day of July, mortgage bonds – the instruments that loan originators monitor to keep a pulse on rate movement – wound up at their best levels of the month. In fact, it was their best level of the year.

Mortgage rates still have some catching up to do, as Friday’s move was so sudden and far, that the lenders seemed to have trouble keeping pace with the momentum. That’s typical when rates should be improving – not when they’re going up. “Up like a rocket, down like a feather” (I have no idea who said that first, but that’s how it plays out).

In July, on average, rates changed 2.25 times per day.

Mortgage rates volatility index — Frequency of lenders' mortgage rate changes per day in July

Technically, volatility was down slightly from June. But the number of rate changes does not tell you the whole story. Some of the rate changes were bigger than others, and in July, we had some big overnight moves. To conclude that July was less volatile than June would be misguided.

Rates Changed 45 Times During the 20 Trading Days in July

If you had a 30 day escrow during the month of July, that means there were potentially 45 different pricing results that you could have obtained based just on the timing of your rate lock. The average duration of a rate sheet issued by lenders was about 3.1 hours. That is up from 3.0 hours hours in June.

What About this Debt Ceiling Issue?

There are some rules of thumb in the markets that are relevant here:

Mortgage rates improve when bond investments are in favor.
Mortgage bonds often follow the direction of Treasury notes.
Bonds are often in favor when stocks are out of favor.
Both markets hate uncertainty.

None of these is universal (well, maybe the last one). In the lead up to Sunday’s debt ceiling agreement, uncertainty had become ‘priced in’ to the market values of investment securities. This includes stocks and bonds. In many regards, we are in such uncharted territory with the economy, there’s no way to predict what will come next.

For example, economists in and out of the mortgage industry thought mortgage rates would jump in March of 2010 after the Federal Reserve ended Quantitative Easing. Instead, rates fell off the ledge and hit all-time lows within 3 months. The experts are all over the map, and more are wrong than right with this stuff.

As I write this on Sunday evening, the markets appear poised for a stock market rally (a fairly significant one) and a more mild bond market sell-off. This would be consistent with the last two bullet points above. It addresses the typical relationship between stocks and bonds. And with near-term uncertainty removed from the markets they are set to react.

Could this be a good thing for mortgage rates?

There are a few reasons why mortgage rates may not really care all that much about this right now. For one, at the core of the debate is the essence of our economy – it’s kind of the pits right now. That reality is going to keep rates low across the board for a while.

Two, I’m not sure anybody really thought this debate was anything more than a game of political chicken. Everyone knew what was on the line; nobody was going to let it break down fatally. If this stock market rally doesn’t gain traction over the next few days/weeks, that’s a sign that the ‘uncertainty factor’ wasn’t really all that real.

On the flip side of this, if there was true market anxiety over the debt ceiling issue, the traditional bond/stock lever wasn’t fully intact here. Nervous money moves from stocks to bonds, but panic money moves to the sidelines, away from both. To cash, hard assets, gold, etc. We may see some relief buying in both stocks and bonds, and that will also serve as a force helping keep rates down low.

One more facet of the “good for mortgage rates” argument is that the whole ordeal with the debt ceiling, and the threat of credit downgrades for the US has direct implications for Treasury securities. Mortgage bonds are a step removed from these instruments, and while they often move in a similar fashion, the markets were getting a nervous twitch about Treasury debt, not mortgage debt.

I am sure that I’m overlooking some key variables here. Perhaps guilty of wishful thinking. I guess we’re about to find out…

How to Make the Most of it

If you speak to someone who suggests they can get you the perfect lock, that’s probably a bad sign. Market prediction on that level is impossible. Especially in the face of a market in as unique a place as ours is right now.

Similarly, you shouldn’t expect to catch the market at it’s absolute low – it’s not a realistic expectation. But a professional who can explain the market context you’re transacting in, and show you which calendared events have potential to introduce risk or opportunity to your strategy, is probably more valuable as a resource than anything else when trying to maximize your rate lock.

Make sure you get your rate quotes in the same vintage. This means that any lender who isn’t quick to reply to your inquiry isn’t really helping out. Then, make sure your lender is tuned in to the economic calendar, so that you can be aware of what days are more or less likely to be volatile ones. The market gets little economic data points or events to digest just about every day. It’s important to know which ones carry greater risk at any given time, as their significance can change with the greater context of the marketplace. The last thing you want to do is leave your rate lock open when the risk is greater than the potential reward.

Working with your lender to create a lock and pricing strategy suitable for your transaction will probably shed some light on who you’re working with, and serve you far better in the long run than comparing apples and gooseberries.

Need help with a rate lock strategy? Contact me below and tell me how I can help.

When Do Conforming Loan Limits Change?

Fewer homes in San Francisco and other Bay Area counties will transact under conforming loan guidelines effective 10/1/2011

photo © 2006 Franco Folini | more info (via: Wylio)After several months of speculation that conforming loan limits would be reduced in 2012, FHFA released the official numbers last night. A similar announcement was already made about FHA loans. This another significant step in the declared effort to limit future US Government involvement in the mortgage industry.

Economists and regulators have so far speculated that the broader market impact will be insignificant. However, in a case study below, we will see that at the individual level, property transactions in the affected price ranges will assuredly notice a difference.

Quick Background

At the beginning of 2008, we found the market throat-deep in the mortgage meltdown, and in the early stages of the housing crisis. Conforming loan limits were set nationally at $417,000. Congress passed the Housing and Economic Recovery Act (HERA) of 2008, bumping the conforming loan limit celiling to $625,500 for select ‘high cost’ areas, as defined by median house value in 2007. Some counties hit the max, others landed somewhere between the old limit and the new one.

But a few months later the Economic Stimulus Act (ESA) of 2008 took over with a more liberal approach, and the new ceiling was raised to $729,750. ESA is set to expire on before October 1, 2011. The HERA limits will still be in place.

San Francisco Bay Area mortgages – What’s the Impact?

For most parts of the country, the conforming loan limit is, and has been $417k since 2005. That is not going to change.

Seven Bay Area counties currently have ‘high cost’ conforming loan limits at the national maximum of $729,750. These are:

Alameda County
Contra Costa County
Marin County
Napa County
San Francisco County
Santa Clara County
San Mateo County

Effective October 1, 2011, all of these counties except Napa will revert to the new max of $625,500. Napa County will fall all the way to $592,250.

Impact to the Market and to Buyers and Sellers

For the last year’s worth of mortgage data, approximately 50k loans would have fallen in this ‘used-to-be-conforming-now-jumbo’ range. Roughly 30k of those are California transactions, and though the data didn’t get more specific than this, it’s safe to assume that a significant number of those were from Bay Area real estate transactions. Market-wise, economists say this will not have a significant impact.

But for an individual transacting in the affected sector, the impact will be substantial.

Taking a single price point as a case study:

Purchase price $787,500, 20% down
Loan amount $630,000 (just over the new conforming limit)
Assuming a 0.500% rate increase for jumbo rates relative to conforming
Assuming a .04% qualifying ratio limit decrease for jumbo relative to conforming

As a conforming loan, assuming 4.750%, normal tax and insurance figures, the monthly housing payment in this scenario would be about $4106. Conforming loans allow for up to 45% of gross monthly earnings to be used to service recurring obligations, so the minimum income needed to qualify in today’s environment would be $9125

As a jumbo loan, assuming 5.250%, the same tax and insurance figures, the monthly housing payment in this scenario would be about $4299. Jumbo loans allow for up to 41% of gross monthly earnings to be used to service recurring obligations, so the minimum income needed to qualify after October 1 would be $10,485.

There’s a squeeze play at work here. It will take 14.9% more income to qualify for the same sized loan, because the costs are higher, and so are the benchmarks for qualification. Just like that. Overnight.

In this case, a borrower would likely find another $4,500 to put down on the house and keep the loan under conforming limits. A keen understanding of the marginal costs of borrowing would provide that incentive. But what if the loan amount would have been $640k? $650k? $675k?…. $700k or $725k?

Simply put, there’s a bandwidth of market activity that will be disrupted by these changes. Along with the changes to FHA loan limits, any property selling for between $650k and $912k will have a buyer pool who has seen their borrowing options change. Faced with a different set of options:

Some will put more money down, keep the loan conforming. But not all will have the capital to do so.
Some will digest the higher jumbo loan costs. But others will reduce their top price to keep the payment from increasing.
Some will simply not be able to qualify for financing the home they wanted.

If you’re a seller in this range, this is one more reason to get your home on the market today. If you’re a buyer in this range, this is one more reason to ramp up your home search today. And if you’re a refinance candidate with a balance between $625,500 and $729,750, this is one more reason to evaluate your options today.

Do not Assume the Effective Date is a Safe Deadline

FHFA has announced the change to be effective October 1, 2011. However, even before the announcement was made, last Friday we learned that a major national lender was ceasing all applications above $625,500 for conforming loans. For whatever reason, they’ve decided that the don’t want to participate in this sector for the final three months. Other lenders could follow suit. Maybe today, maybe tomorrow. Maybe not until September. But you certainly don’t want to be too patient here. Rates are presently low as it is, so the risk of waiting is only increasing, and seems to exceed any potential benefits.

Don’t wait. If you’d like to see how these changes would impact your loan payment and long term cost of financing, or if you’re a real estate agent who would like to show a buyer or seller client how these changes might impact their transaction, send me a note in the form below, and let me know the details.

How Often Do Mortgage Rates Change? June 2011 update

How often do mortgage rates change?
About every three hours.

Mortgage rate volatility jumped in June, after a few relatively calm months. That isn’t helping people shop for loans, since it makes it very difficult to compare options. If you survey a few different lenders, and it takes all day to get quotes, you may be looking at indications from different rate ‘vintages’.

In June, on average, rates changed almost two and a half times per day.

Mortgage rate volatility rate sheets per day increases — Frequency of lenders' rate changes surges in June

Rates changed 52 times during the 22 bond trading days in June.

If you had a 30 day escrow during the month of June, that means there were 52 different pricing results that you could have obtained based just on the timing of your rate lock. The average duration of a rate sheet issued by lenders was about 3.0 hours. That is down from 3.8 hours hours in May.

Volatility Came From Events Not On The Economic Calendar

During the months of April and May, when mortgage rate volatility calmed a bit, there was also a growing sense of optimism in much of the economic data that was trickling in. The signals were not exactly what you’d expect with a booming economy, but after the slow recovery crawl we’ve been enduring for the last 2 years (The Great Recession was officially declared over July 2009), ‘less bad’ news begins to sound great. And that’s what April and May brought. Less bad news. Something to grasp onto for the optimists.

But the slow motion train wreck in the Euro Zone came to the surface again in June, with the uncertainty about Greek debt default, associated debates and protests about austerity measures, and concerns about a potential spillover into other European nations, not to mention a scramble to quantify direct US exposure. These issues are not on the official economic calendar. Even though there is an awareness of the issue, the outlook has been highly uncertain, and the markets have reacted swiftly to each and every signal. Some good, some bad. Rates up, rates down. Volatility defined.

How to Make the Most of it

If you speak to someone who suggests they can get you the perfect lock, that’s probably a bad sign. Market prediction on that level is impossible. Similarly, you shouldn’t expect to catch the market at it’s absolute low – it’s not a realistic expectation. But a professional who can explain the market context you’re transacting in, and show you which calendared events have potential to introduce risk or opportunity to your strategy, is probably more valuable as a resource than anything else when trying to maximize your rate lock.

Need help with a rate lock strategy? Contact me below and tell me how I can help.

How To Compete With Cash Investors In The Bay Area Real Estate Market

Money Hand Holding Bankroll Girls February 08, 20117 — 'Come on, come on. Listen to the money talk.'

This is particularly common at the lower end of the price spectrum, as seasoned real estate investors are active in the market for investment real estate. They have been since the crash, and with every notch lower in the housing value indexes, more buyers step in to the market.

Any seller in this market has to be careful about qualifying any offer, given the challenges associated with borrowing mortgage money in the current climate. If financing is involved, the odds of that offer following through are lower than if there is no financing from a bank. An all cash offer conveys capability, intent, and speed – all variables that the seller will value, sometimes more so than price.

Investors use this to their advantage by offering quick closing time frames and all-cash offers, and often get the property at a discount.

Compete with price. Period.

Everything has its price, they say. If you need financing, but want to buy real estate in a market sector that is swimming with cash-laden investors, you have one real variable you can manipulate: price. You can offer more money than the cash investors – enough to compensate for the risk you bring: risk of financing following through, risk of financing taking too long, risk associated with you being a first-time buyer – a little less confident about buying in general and maybe hesitant to make it past your contingency removal dates.

You can mitigate these risks by dangling more money in front of the seller. Most sellers in this market are not selling because they think it’s a great time to do so. They’re selling because they need to. So they’re anxious. An offer to close quickly is relatively appealing. But money buys time, and offering a higher price than the all-cash investors will get the attention of that seller. You just need to find out how much it’s going to take to get that attention.

Wait just a second…

I am not suggesting recklessness in the bidding process. I am suggesting that money will compensate for the advantages the all-cash investors bring – at some point. I don’t encourage anyone to allow for budget creep – where the anxiousness about getting an offer accepted leads to overspending and operating beyond the intended price range. I just think that you can’t expect to compete with a cash offer and expect the same discount to the acquisition price.

This would be a good time to remind you that your own individual circumstances require unique planning, especially with respect to financing.

Built-in reality check

Your financing relies upon a valid appraisal. If you really shoot the moon, and pay too much for the property, the appraiser is going to have a tough time justifying the price. You’ll have a chance to think about it if you receive such an indication. The financing may still work, but would likely require you to increase your down payment dollar-for-dollar above the value indicated by the appraisal, and when making an aggressive offer, you should be prepared to encounter this.

At the end of the day, you can pay any amount you want to as long as the seller agrees. You can finance it if the lender agrees. Believe it or not, there are still some free market dimensions to this marketplace. But to continually make financed offers that are on par with all-cash offers is a process that is likely to lead to exhaustion, frustration, and disillusion. And also prolonged renting.

The other card you can use to your advantage is to appeal to the seller on a personal level. Sometimes that happens, but that’s about as common as finding a diamond in a haystack. So don’t count on it.

If you do compete with investors, and pay a higher price, you’re going to have to shake off the feeling that you overpaid for your home. Fair market value is a subjective concept, and the all-cash investor looking only for discounted acquisitions likely places a lower value on the property than a first time buyer would. If it is about buying your home, and competing with someone who wants to buy a house, fix it up, and sell it for a profit, the cost is just going to be different. Period.

Are you encountering this?

I’d love to hear about frustrations in the bidding process – have you been outbid by all-cash buyers? How many offers have you made or did you make before getting one accepted? Please share your story in the comments below!

Jumbo Rates Have Fallen Harder In The Recent Mortgage Rate Decline

photo © 2010 Lizzie Erwood | more info (via: Wylio)I remember watching the rate for jumbo mortgages change from around 5.750% to about 8.250% over the course of something like three days. It was in August of 2007, when subprime’s “well-contained” meltdown jumped the firebreak into the broader mortgage market, and eventually grew into the wildfire that set global financial markets ablaze and brought the US economy to it’s knees in 2008.

As we draw nearer to the 4th anniversary of that event – a memorable one for this writer – jumbo rates have become more readily available and become relatively competitive again. Buyers planning a move up into jumbo territory, and borrowers who have been locked out for the past few years because of the jumbo market dysfunction should consider now a good time to revisit their situation.

By the time the greater economy was into it’s full-blown panic in 2008, the mortgage industry had already been in the doldrums for a year. A tremendous backpedaling of lending guidelines was well-underway, and the marketplace for jumbo money – then any loan above 417k, no matter what the location – was essentially shut down.

Jumbo rates shot up based on the seizure of liquidity in that marketplace. Banks were not willing to lend without a serious premium because the private, wall-street fueled mortgage marketplace was defunct. The demand went to zero, very few lenders wanted to supply the product, and those that did charged a shelving premium knowing that they would need to sit on the investment indefinitely. This was not the business model preceding the meltdown.

First Steps Toward Jumbo Relief

The Economic Stimulus Act (Feb 2008) and then the Housing and Economic Recovery Act (July 2008) were a couple of economic ‘smokejumpers‘ that helped push the conforming/jumbo breakpoint up from 417k to as high as 729,750, depending on the median home prices by area. For the San Francisco Bay Area, all counties were temporarily bumped up to the max of 729,750. This opened up quite a bit of the formerly-jumbo marketplace, but left anything from 730k and up locked out in the frigid jumbo market.

Eventually, more jumbo product started to appear, and at mildly more competitive prices. Traditional 30 year fixed rate loans were essentially non-existent however, since the banks making jumbo loans did not want to commit money over such long time frames. Instead, they offered more competitive pricing with shorter term scenarios, like 3 and 5 year fixed rates.

Over the past year or so, we’ve seen some 30 year money show up, but with so few suppliers, the terms often just weren’t quite competitive enough. Either the rate was at too big of a premium over non-jumbo (“conforming”) loan rates, or the reach was restricted to low percentages of the home’s value, or the guidelines were too cumbersome to qualify for.

New Life In Jumbos

But in the last few months, jumbo product has begun to show up in the marketplace. As the private secondary market begins to show signs of life, originating lenders are showing an appetite to get back out to the consumer to deploy some capital. With increased supply, we are seeing increased competition on terms.

While a recent bond market rally has brought conforming mortgage rates to their 2011 lows, the jumbo rates have fallen farther as this same bond market activity has been coupled with increased competition.

Jumbo rates today are better than where they were when the market seized up in 2007. You can reach above 1MM in borrowed money with just 20% equity.

Quite a few would-be jumbo borrowers have been stuck on the sidelines waiting out the return of this market. While being held back, they’ve also watched their values decline. But for the many jumbo borrowers who were deep in equity to begin with, this represents as good a time to look at jumbo financing. And for move-up buyers looking to trade-up while prices are down, this is the environment to transact in.

If you’d like to explore this market in greater detail, drop me a note in the form below.