Jon's Mortgage News

The American Dream?
I have more to say about the American Dream. What’s wrong with owning a home? I was listening to Tavis Smiley today on NPR and was once again compelled to write about housing, and whether or not it should be a goal for many Americans. The focus was on the cover of Time Magazine with the story about the economic sense of owning a home. To be fair, I haven’t read the entire article, only the abridged version that was available online. I’m not aiming to challenge the article, but instead to add my thoughts on the subject.

I agree that home-ownership isn’t right for everyone. There are a lot of people out there that just don’t have it together financially and shouldn’t take the plunge. You shouldn’t spend 60% of your income on your mortgage. You should think carefully about your budget before you decide to take on a mortgage, or trade up to a new house. You also shouldn’t think of owning a home as a means to financial freedom. It’s true that history dictates that over time houses increase in value, and that there is a very good chance that some day, you’ll be able to take advantage of that. If you’re counting on it for your retirement, you may want to re-think your strategy. I’m sure there are many people who were counting on their equity to retire who now are finding themselves having to work for several more years. You can’t control the housing market any more than you can control where your 401k is going to be when you are at retirement age. One major difference is that you can pay off your mortgage and live in the house paying only taxes. That’s something you can control.

I’m not going to tell you that I’m perfect- no way. I’m invested in the real estate market and have several rental houses. Some of the houses have lost a lot of value and some have lost a little. I get worried sometimes, but I just have to remind myself that it’s a long-term investment and that my ultimate goal is to own the homes and collect rent as income. I had a plan when I bought them and I’m sticking to it.

Let It Go…
I really don’t like the idea of people letting their houses go. I don’t think it’s an option- I think it’s a last resort for people going through a financial hardship. It’s annoying to read articles or listen to the talking heads tell me that it’s the government’s fault for encouraging home-ownership. Personal responsibility, people. If you bought a place that you couldn’t afford just to try to turn it for a profit in two years- too bad. If you’re going to be a real estate investor, then you have to be prepared to lose as well as win.

To the Government…
You’re not totally off the hook. Please insist that financial responsibility is a virtue and should be recognized. It’s not all about the benjamins, baby. I was happy to see that the US Savings rate jumped over 6%. Good for you, America.

I just received an update from FHA that details what HUD is going to do about the impending FHA upfront and monthly MI premiums. The changes that I detailed in my last post were slated to start September 7th. There was enough industry outcry that they are delaying the implementation until October 4th.

Here’s what you need to know

• Changes are for mortgages that are assigned FHA case numbers effective Oct. 4th, 2010
• Upfront mortgage insurance is being reduced by 1%
• Monthly premium is being raised from 0.5%-0.55% to 0.85%-0.9%
  • LTV <= 95% is changing from 0.5% to 0.85%
  • 95.01% < LTV <= 97.75% is changing form 0.55% to 0.9%

Here’s how it works with real numbers
Based on a $200,000 FHA loan:

95% LTV

95.01% to 97.75% LTV

Interestingly, when you look at a 95% LTV loan, the FHA option is really going to stop making sense for a lot of borrowers. A conventional loan will offer a lower rate of mortgage insurance (quoting a major national MI company) than FHA provides if you have a credit score that is over 720. If your credit score is between 680 and 720, then the difference between the rate for conventional MI and FHA coverage is small, only 0.04% higher. When you consider that there is no upfront premium required for conventional mortgages, the benefit starts to vanish.

If you want to read the press release for yourself, click the link below.

Here is the official statement from HUD

A while ago FHA changed the upfront mortgage insurance premium from 1.75% to 2.25%. There were some other changes also, but that was the big one. Now, it seems that bigger changes are underway. The US House and Senate just passed a bill that gives the Secretary of HUD the authority to change the scheme even further.

For all loans that are originated after Sept. 7th, the upfront mortgage insurance premium is reduced by 100bps (that’s one percent). That sounds all well and good, but the monthly premium is going up by 63%, to 90bps (0.9%) from 55bps. Ouch.

If you’re thinking FHA, think it more quickly. I’ll put some numbers together and post more in a bit so that you can see how this will affect a normal purchase.

I hope so. It was part of my “American Dream.” The idea of the American Dream is different for everyone, but the one I’m talking about is where if you work hard, you can achieve success against all odds. I’m not the most eloquent writer out there, so pardon me if I didn’t state that quite right.

Look, I was a first generation college student and struggled to pay my way through and get my degree. I worked full-time as a busser and then a server at Ivar’s Salmon House (It’s great, you should go there) and didn’t get the best grades. I saved my money and by no means lived a lavish lifestyle. In fact, my U District apartment was pretty gross. Why am I telling you this? Because I graduated in June 2003 and bought my first house in August 2003. My wife and I had saved up enough for a down payment. That was my American Dream. At the time, I couldn’t believe that I was going to own property. I was going to be the ruler of my little fiefdom. Now, when property tax levy measures were on the ballot, I was going to have to read them. I was going to be a real citizen and member of society. Sweet!

Well, home-ownership has it’s ups and downs, but that feeling is still there. I can dig a giant hole in my back yard if I want to. I can paint my house purple and gold to show my Husky pride (haven’t taken that plunge quite yet). So, a couple of things have been bugging me lately- the idea of strategic default and an article in the Seattle Times this morning about shifting the government’s promotion of home-ownership.

Strategic Default

I’m not going to say a lot about this. It speaks for itself. I think it can be best stated by saying that loss of equity is NOT a financial hardship. Yeah, it sucks big time- but tell the family that’s struggling because both parents lost their jobs and are trying to pay their mortgage and feed their kids with their unemployment checks that you are just as entitled as they are for a break. I think that’s garbage. Sure, you can cut your losses and “Stick it to the bank,” but didn’t you sign the loan paperwork? When it comes down to it, America is (at least in my opinion) about freedom, which means personal responsibility. You may have bought the snake oil, but there wasn’t a gun to your head. The banks messed up, but so did we. We’ve all lost equity. If you can pay, do. Period.

Should the Government Stop Promoting Home-Ownership?

No! How about the government starts promoting home-ownership as a long-term investment and helps encourage the expansion of financial education. Yeah, that’s a novel idea. Debt sucks. I know people in debt, and it can be like a heavy chain that you’re carrying around. We all want big screen TV’s but facts are facts- not everyone can afford them. I sincerely hope that we don’t de-emphasize the value of owning a home in this country. What is the alternative- a few people that have a lot of money buying up properties and renting them out to everyone? I’d rather not see a concentration of land ownership in this country. I like the fact that if you work hard, you can buy a house and it’s YOURS. Let’s not over-react to the recession and assume that Americans are too undisciplined to manage a mortgage.

I’m chronicling my experience of filing my 2009 taxes in person. You see, I’m refinancing one of my mortgages and I need to provide my last tax return. This is common for self-employed persons because of the irregularity of pay stubs and the potential for businesses to have many operating expenses that could impact the ability of the borrower to repay their loan. Okay, on with the show…

I go downtown to the Federal Building (2nd and Madison) and go through security. I was looking at the directory and was having a tough time figuring out exactly where to go. One of the security guards asked me where I was headed and I told him “I’m headed to the IRS.” I’m pretty sure my voice cracked as I spoke due to the (I’m sure it’s normal) knot in my stomach. He told me where to go and I hopped onto the elevator headed to the 32nd floor.

Arriving in the IRS office, which notably is next to Senator Cantwell’s office, I proceeded to the counter and took a number. I’m lucky that there was no line even thought the place was deserted and I was next in line it still took about 20 minutes. The office itself was very stark and somewhat Orwellian; exactly what you would expect.

When my number was called I entered the “Cubicle of Silence” and a very friendly IRS representative asked me how she could help. I explained to her that I needed to file my taxes in such a way that they would be verified as received by the IRS. Normally, transcripts are ordered by the lender directly from the IRS, but they aren’t typically available for 45-60 days after filing. She knew exactly what I needed. She took my returns, stamped them and made me a copy. Piece of cake.

I’ve told clients that they needed to go through this process, but I wasn’t sure exactly what they actually had to do and what I was sending them in to. I think it’s good that I went through the process myself and can now say that it’s not too bad.

I met with a great couple yesterday that are interested in purchasing their first home. They are both retired military and are eligible for a VA insured mortgage. VA loans are different than conventional loans in that they do not require mortgage insurance when you have less than 20% for your down payment. If you’re putting 20% or more down, then a VA loan isn’t the way to go, but being able to avoid mortgage insurance can allow you to save a lot of money every month.

• VA loans have a funding fee
  • The funding fee varies from 3.3% to 0.5% and is financable
  • Veterans receiving disability pay may be exempt from the funding fee
  • The fee is higher the less you put down. Click here and scroll down to see a list of all funding fees
• No down payment required (there are exceptions for properties over $417k)
• Closing costs are comparable with other financing types
• No mortgage insurance premiums
• Right to prepay without penalty

I surprised my clients when I told them that there funding fee would likely be waived due to one on them having a 10% disability from the military. The typical funding fee for someone putting 10% down would be 1.5%, but they hadn’t been told that by the bank that they had been talking to before coming to me. Also, there was confusion about mortgage insurance. Let me reiterate- there is no mortgage insurance required with VA loans. VA loans are different than FHA loans, which do have a monthly component of mortgage insurance.

Here is a breakdown of the difference between a VA loan and a conventional loan for a $300k purchase with 10% down

So, a veteran using their benefit can save $118 per month!

Good question. No easy answer.

The decision about what loan product you select for your home depends a lot on your personal goals. Fixed rate loans are great- they provide stability (who doesn’t want some of that right now?) and allow you to budget far into the future. On the other hand, an ARM will score you a lower rate and save you a bunch of money over the fixed term of the loan. Here are a few things to think about whey you’re making the decision:

• What is your long-term strategy with the property? Are you going to sell it in the next 5 years?
• What is your tolerance for risk?
• Do you have plans for the money that you are going to save if you get the ARM?
• Can you afford the payment if your loan adjusts to the maximum?
• Do you anticipate that the index for your ARM will be significantly higher at the end of your fixed term?
• Have you checked out the ARM margin? Remember, your future rate will be the index value added to the margin.
• Do you think home prices are going to rise?

Here is a real-world example of a $200,000 loan:

30 year fixed

Rate – 4.5%
APR – 4.644%
Principal and Interest Payment – $1,013.37

5/1 ARM*

Rate – 3.375% (fixed for 5 years)
APR – 3.542% (based on current indexed rate)
Principal and Interest Payment – $884.19
* The index is the 12 month LIBOR with a margin of 2.25%. The adjustment caps are 5/2/5

Over the first 60 months of the loan (5 years) you are going to save $7,750.80. That’s a lot of dough- 3.875% of the original loan amount, to be exact. If you refinance into another loan, you could use up $3-4k of that savings getting your new loan. You’re still on top- provided that rates aren’t higher than they are today. Maybe you can use this money to pay down principal and negate mortgage insurance?

There’s no easy answer. It’s important to talk with a mortgage professional that you trust to get advice that is tailored to your individual situation.

The Home Affordable Modification Program (HAMP) is available for some people that are in trouble with their loans. They’ve just created a new site that is going to try to make it easier. Below is some text from the website.

Click here to visit the new HOPE Loan Portal

HOPE LoanPort™ is a neutral, transparent, web- based utility created to improve the execution of loan modifications and designed to be used by borrowers, non-profit counselors, servicers, and other organizations that have a vested interest in the loan modification process.

HOPE LoanPort™ currently focuses on providing this utility to non-profit counseling organizations while:

* streamlining counselors’ ability to collect complete modification applications to include all required data elements and documents,
* requiring participating servicers to provide status to in-process modifications,
* providing industry and counselor transparency to any potential bottle necks that may exist while borrower’s complete a loan modification application working with non profit counselors or while servicers are decisioning a case,
* addressing servicer challenges in receiving applications, and
* ultimately offering a lift to completed loan modifications and applications.

Background
HOPE LoanPort™ evolved out of HOPE NOW’s (www.hopenow.com) technology committee that was formed for the purpose of exploring a more robust communication strategy to better serve consumers.

In late 2008, HOPE NOW’s Technology Committee adopted a three phase strategy to develop a web portal to include creating a more user friendly site allowing borrowers to complete an online intake form to request assistance, expanding the form to gathering a complete application that can be submitted to servicers, and potentially expanding the portal to decision an online application.

HOPE NOW launched this first phase in early 2009. All HOPE NOW servicer members agreed to accept the intake form in the standard data exchange methods and all borrower data submitted to the HOPE NOW website is immediately pushed to servicers once completed.

As of January 2010, over 100,000 families began HOPE NOW’s online assessment form and over 28,000 families have completed intake forms that have been submitted to their respective servicer for assistance.

In September 2009, HOPE NOW had detailed discussions around the role of an expanded web portal with the Department of Treasury and member organizations.

A working group was established to develop a strategy for Phase 2 and further define scope. Participants for Phase 2 included six mortgage servicers (PNC Mortgage, American Home Mortgage Servicing, Inc., Chase, SunTrust Mortgage, Saxon Mortgage and GMAC) and six major counseling organizations in nine markets (Neighborhood Housing Services (NHS) of NYC, NHS of Greater Cleveland, NHS of Chicago, NHS of Phoenix, Cabrillo Economic Development Corporation in Ventura, CA, and 4 HomeFree-USA offices in Atlanta, Kansas City, Washington, DC, and West Palm, FL).

The pilot was successfully launched in November, 2009.

I was recently asked the following question from a real estate agent that I work with:

Is it true that people that currently have an FHA loan can refinance up to 125% of their loan amount to get to a fixed rate mortgage? I have a few clients that might need to take advantage of this. If it truly is the case let me know your thoughts.

Here is my response:

The answer is yes… and no. The loan program that you are referring to is the Making Home Affordable refinance. It allows up to 125% for a refinance if your loan is backed by Fannie, Freddie or FHA. There are some harsh realities that go along with this though…

For starters, it is dependent on a bank’s participation in the program. Also, there are very few banks that actually allow the 125%. The highest that the majority of banks will go is 105%. Also, if you have a second mortgage, you aren’t eligible. If you have mortgage insurance, it will be up to the mortgage insurance company.

That’s not the entire story though-

Funny thing, yesterday I started writing a blog post about FHA streamline refinances. The proverbial “light at the end of the tunnel” for your borrowers is likely the fact that they have FHA loans and are eligible for a streamline. Here are some interesting facts:

• Streamline refinances can be done WITH OR WITHOUT and appraisal. Who cares about 125%?
• You don’t need to prove income, just that you’ve been paying your mortgage.
• You can do a “mortgage-only” credit report with many lenders.
• If it’s within the first 3 years of the existing FHA loan, you can have part of the upfront mortgage insurance from your original loan credited to your closing costs.

Long story short- the new program is pretty lame, but the old-school FHA streamline is awesome. I’ve done several.

Looks like the mortgage bonds are doing pretty well today after losing a TON of ground over the last week or so. I have a lot of buyers out there shopping, so I know this is going to be a relief to a lot of them. They’ve been seeing rates going up and up and now, we should see them retreat a bit.

I think that overall, there is still a lot of pressure on mortgage backed securities and that we’ve probably seen the end of the sub-5% rates. This is definitely a welcome breather- for my clients, my agents that are showing and for me.