Bay Area Real Estate Finance - mortgage blog

Today’s News About Yesterday’s Record Low Mortgage Rates

A few months back we looked into the accuracy of the Freddie Mac Primary Mortgage Market Survey. The basic bottom line is that you can get a general feel for the trend over a couple weeks or longer, but for up to date mortgage pricing, it’s worthless. Even when accurate, it’s only by coincidence.

Here’s Why Mortgage Rate News Is Usually Wrong

The Primary Mortgage Market Survey comes out every week, on Thursday morning. The sampling of data takes place between Monday and Wednesday of the same week. The number they give is an average of all transactions in the survey, and identifies both levers in the mortgage pricing equation: rate and points.

There are three primary pitfalls for consumers when reading this news – and the weekly survey does get quite a few news mentions; it is undoubtedly the most widely quoted and referenced data on mortgage rate activity in the financial press. Here’s a look at each of the pitfalls:

The average rate is a blend of what rate the loans have been written at during the survey period. It is not the average “zero points” or “par” rate. Some people opt to pay points, others do not. This survey captures what is happening on average, with regard to rate AND points. The headline references the average rate, the fine print includes the points. In the most recent press release, the first paragraph reads as follows:
“MCLEAN, Va., Sept. 29, 2011 /PRNewswire/ — Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS^®), coming on the heels of the Federal Reserve’s recent announcements. The conventional 30-year fixed averaged an all-time record low at 4.01 percent; likewise the 15-year fixed averaged an all-time record low at 3.28 percent for the week. Of the five regions surveyed in Freddie Mac’s survey, the West region recorded the lowest average rate for the 30-year fixed dipping below 4.00 percent to 3.95 percent.”

You have to read further, or click through to the website to find out that the average rate also came with an average cost of 0.7 points. That’s an important variable. Most consumers shop for “zero points” or “no cost” mortgages, so the relative obfuscation of the average points paid will mislead the consumer.
The report is not real-time. Sampling takes place between Monday and Wednesday, and results are compiled and released early Thursday. Thursday’s market may in fact be miles away from Monday-Wednesday.
Last week, on Wednesday, the Federal Reserve announced Operation Twist and sent the bond market into a panic rally. Mortgage rates hit their absolute lowest levels on record the following day (Thursday). The survey for that week picked up some data from Wednesday, which helped, and announced “lower rates”. But it completely missed the point that on that very day the rates were hitting even lower levels.
The report focuses on a narrow borrower profile segment. To be fair, narrow in this case is common. But it is in no way comprehensive. To be included in the survey, the data must pertain to loans that are:

-borrowing $417,000 and below
-single family residence (no condos, duplexes, etc)
-owner occupied residence

The bottom line is that there’s just no way to know if the headline is a day late or a day early. If you’re looking to refinance a condo, an investment property, or a jumbo loan – or, if rates are generally volatile during this period – or, you’re looking for a no cost refinance, the survey isn’t going to give you a clear answer. It will literally be giving you yesterday’s news. Depending on the direction of the markets, this can mislead you for better or worse. It just depends.

In fairness, it’s a pretty good report when looking at longer term trends. Especially as it highlights the average fee component, and shows if people are leaning into or away from paying points for below par mortgage rates. But if you need a quote specific to your case, there’s no better way than to keep in touch with your lender. Set a target, know what’s coming on the economic calendar, and devise a lock strategy with your lender.

Need help with a plan? Fill out the form below and let’s have a quick conversation.

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…

Lego-Style Apartment Gives Domestic Transformer A Run For Its Money

If you saw last week’s installment of the Creative Real Estate series, I have little doubt you were short of amazed. The owner, who was an architect in Hong Kong, had devised a 24 room configuration for his 330 square foot apartment (I know!!!).

Now, from Spain, we’re introduced to Christian Schallert, who has pulled it off with a 248 square foot home. His approach is not dissimilar, in that there’s a basic cube with highly customizable, versatile, and movable parts that can be configured in dozens of different ways. It’s referred to here as a lego house. You just have to see it – this is spectacular ingenuity.

I think I like last week’s Domestic Transformer better. I find it a little more amazing. But, I’d rather live in Spain than Hong Kong, so … hmmm… dilemmas. I’d love to know if anybody in the Bay Area has done something this creative with a small living space. What’s your take? Which one do you like better?

Domestic Transformer – The Most Incredibly Flexible Living Space Ever?

This has to be the most incredible example of efficient use of living space of all time.

I lived on the outskirts of San Francisco’s Chinatown for about 6 years, and I did pick up an appreciation for some that neighborhood’s ability to effectively utilize space and resources in general. But this Hong Kong architect has taken the idea to an awesome extreme. If I said 330 square feet, and 24 rooms, does that make you kind of wonder?

You’ll simply need to watch this (4 minute) video. It’s our latest in the Creative Real Estate series.

The oddest part about it is that it appears that Chang has a significant amount of the space allocated for shelves containing what I believe are CDs. I have to think that he could rip those artifacts onto a hard drive and consolidate the collection to something about the size of two or three CD cases.

Those are some tight quarters – do you think you could handle that kind of living arrangement?

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.

“Half-There” Earth Home Featured In WSJ Luxury Real Estate

I’ve been to East Hampton, NY, and it’s quite a different world from here in the Bay Area, but this property struck me as something you’d be more likely to find here in the Bay Area than on the east coast. At the very least, it would fit in well enough. Here’s the latest in our Creative Real Estate series:

As a matter of fact, if you could find a place to build something like this, it would fit anywhere. Simply because one of the primary attributes is that the home blends into its surroundings discreetly.

A few years ago, I was approached about financing what was called an “Earth Home” here in the Bay Area. It was under development in the East Bay, and the owner was looking to secure a loan post-construction. In that case, a little more extreme than this one, the home was almost entirely subterranean, with windows essentially facing in one direction, like someone had cut a wedge into a hillside and shoved a house in there. The design was amazing, but it was really an outside the box approach. (Reminds me of what was probably my favorite ever scene from the series Lost…)

If you’ve ever been involved in trying to obtain creative mortgage financing for a quirky or unique home, you might recall that one of the frequent trip-ups is when there are a lack of ‘comparable’ properties for the appraiser to develop a sense of relative value. But I digress…. take a look at this feature on the East Hampton home pictured above from WSJ Online, and be sure to watch the video inserted into the page.

Ever seen an earth home in the Bay Area? Could you live in one? Ever tried to finance one? Share your thoughts below!

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.

Here’s A New Idea – Grow Your Home (Filed Under: Ideas That Make The National Association Of Home Builders Do A Facepalm)

Just think – you could have your very own “Meat House” (yeah, just what it sounds like) complete with sphincter doors and windows. In the latest installment of our Friday ‘Creative Real Estate‘ series, take a look at a few innovative ways we could literally grow our houses.

This is in line with last week’s look at Building Green. In fact, I think it’s more green than anybody had in mind, even around here in the San Francisco Bay Area real estate world.

I might be up for the tree house idea, but… thoughts? Share below!