Archive → May, 2010
Let’s Talk About EEM’s – Be Green!
EEM’s or Energy Efficient Mortgage is a product that has been around for some time but is not widely used or understood. This is a way for someone purchasing an older home or a rough REO to improve features of the home at a very low cost. The program allows for borrowers to finance energy efficient improvements to the home as part of the first mortgage and the additional amount financed are NOT factored into the LTV or the DTI calculations. With an EEM, you can finance up to the greater of $4,000 or 5% of the property’s value not to exceed a total of $8,000. This allows for the purchase and installation of energy efficient appliances, weather stripping and dual pane windows to lessen the homes green footprint.
So why is this program not more popular? Because:
- Not many Originators and/or lenders know about it of understand the product.
- Since they do not understand it – they don’t tell anyone about it!
Imagine purchasing a 30 year old home and all of the kitchen appliances are run down and out dated. Apply for and get approved on your standard convention or FHA loan, add the cost of the new appliances on to the loan amount, and post close have a completely updated kitchen. The cost is financed into your first mortgage at the same rate and the interest is now fully tax deductible. Not a bad option and one that more home buyers would take advantage of “if” they knew it existed.
We do know it exists and we wnat YOU to know it exists so we can continue to offer solutions and incentives to home buyers. The EEM can be used in conjunction with conventional and FHA financing and we have even successfully paired it with VA financing asa well! If you are interested in finding out more abouty this product then please comment on this post and I will follow up with additional information on the program.
Lastly, remember that LQI (Loan Quality Initiative) is coming June 1 and may have a profound impact on transactions going forward. For a refresher on the program and a little entertainment you can click on this LINK to view a video synopsis of what is coming down the pike!
Have a great Memorial Day Weekend!!
A Simple Explanation of The European Economic Crisis
Short and sweet today! Watch this video as it explains it all in clear language!
A Simple Explanation of the European Economic Crisis
I hope that helps to clear up any confusion!
Volatility Reigns
Stocks go down, rates improve, stock rebound, rates worsen, and so on and so on and so on! The yo-yo continues this week as we see the inverse relationship between stcks and rates play out day after day. Expect more volatility in the days to come. On tap for economic news is:
| time (et) | report | period | Actual | Consensus forecast |
previous |
|---|---|---|---|---|---|
| MONDAY, May 24 | |||||
| 10 am | Existing home sales | April | 5.77 mln | 5.63 mln | 5.36 mln |
| Tuesday, May 25 | |||||
| 9 am | Case-Shiller home prices | March | -0.5% inc | N/A | -0.9% |
| 10 am | Consumer confidence | May | 63.3 | 59.0 | 57.7 |
| Wednesday, May 26 | |||||
| 8:30 am | Durable-goods orders | April | 2.5% | -0.6% | |
| 10 am | New-home sales | April | 425,000 | 411,000 | |
| Thursday, may 27 | |||||
| 8:30 am | Jobless claims | 5/22 | 458,000 | 471,000 | |
| 8:30 am | GDP revision | 1Q | 3.5% | 3.2% | |
| Friday, may 28 | |||||
| 8:30 am | Personal income | April | 0.4% | 0.3% | |
| 8:30 am | Consumer spending | April | 0.1% | 0.6% | |
| 9:45 am | Chicago PMI | May | 61.0% | 63.8% | |
| 10 am | Consumer sentiment | May | 73.4 | 73.3 | |
After a very rock day, mortgage backed securities closed unchanged for the day which overall was good news for the rate front. The current market still represents an excellent opportunity to purchase or refinance a home.
Believe it or not – Credit Criteria Can (and will) Get Tighter
Yes it is possible and it is coming to your friendly neighborhood lender! Fannie Mae’s Loan Quality Initiative (LQI) launches on June 1st and we in the industry are waiting to see how much more difficult underwriting and lending can become. For an introduction and overview of this initiative, you can follow this LINK to read the Fannie Mae announcement.
When a borrower applies for a refinance or purchase loan, we get to ask them to supply every piece of paper possible in order to document their identity, income, assets, and expenses. Mosat importantly, we need to be diligent in counseling those seeking financing on what NOT to do during the course of the loan process. What not to do:
- DO NOT apply for any additional credit of any kind! (This creates an inquiry on the crdit report which must be researched to establish that no new debt has been incurred).
- DO NOT get all excited about moving into your new house and go out and charge a new coauch, chair, matress, barbeque, or ANYTHING on any of your revolving accounts!
- DO NOT go out and purchase a shiny new vehicle to park in your garage!
So why is all of this important? Because under Fannie Mae’s LQI, we will have to perform a final credit pull at funding in order to determine that no new debts have been incurred over the course of our processing the loan application. We, the lender, must warrant that the debt used in analyzing the credit worthiness of the borrower is all the debt that our borrower has. In the past, we would pull a credit report and as long as we closed within 90 days all was good and their was no additional scrutiny.
The final credit pull will be used to determine if their have been any inquiries (applications for new accounts) or if any revolving account balances have gone up. Changes will cause delays in the closing of loans and could jeopordize the loan approval at the 11th hour of a transaction. It is unclear what Fannie’s stance will be in regards to changes in credit scores. Take an example:
The borrowers credit score is 720 on a $500,000 purchase with 20% down. On the closing credit pull let’s say the score goes down one point to 719. The price hit for a 719 vs a 720 score is .75 points! On this $400,000 loan that means the overall cost for that 1 point credit score drop would be an increase in closing costs of $3,000! Once again, we do not have information as to how this type of situation will be dealt with by Fannie in the implementation of the LQI.
Credit is tight and getting tighter. The message to perspective borrowers applying for a purchase loan or a refinance is to take a deep breath and stay motionless until the procedure is complete! Cash and carry and any and all purchases while your loan is in process and do not authorize anyone to pull your credit (other than the mortgage lender) for any reason whatsoever! Other than that, just sit back and relax during the loan process because we all know how simple it has become!
The Skinny on Rates!
Wow – what a difference Greece makes! Not just Greece but the entire European market bringing on fears of a financial collapse overseas coupled with concerns of a renewed global recession and you end up with a nice little flight to quality. This could leads to some great opportunities for embattled homeowners in need of refinancing as well as persepctive home buyers looking to jump into the market. Keep an eye on Europe and the stock market for signs of the future of mortgage rates.
It loooks like bigger government and financial reform are on the horizon for all of us. The Senate passed their version of the Financial Reform Bill which must now be reconciled with the House version before moving on to the President’s desk. I understand the need for some changes and regulation but it just seems that we are heading down the road to “Big Brother” and a government that is too big with too much control. Follow this LINK for details on the Senate bill.
Part of the bill sets forth standards for underwriting and guidelines for lenders to follow in regards to the borrowers ability to repay. The exact language used is:
“A determination under this subsection of a consumer’s ability to repay a loan described in paragraph (1) shall include consideration of the consumer’s credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer’s equity in the dwelling or real property that secures repayment of the loan.”
This effectively rules out any return to equity based lending (stated income) regardless of down payment for any government insured or regulated loans. If “make sense” guidelines are to ever come back into play it will have to be through the private sector. I am not advocating a return to the guidelines that got us here but I do feel there is a need and a place for stated income loans when the borrower is self employed or retired and has established an asset base comensurate with the income stated. Stated income loans for salaried and hourly wage earners was simply an invite to overstate income for qualifying purposes.
So we are going down the road of more regulations that will ultimately lead to tighter credit standards. Not a good end to the week and certainly not a good way for us to improve work flow and service levels in the mortgage industry! Thanks and have a great weekend.
Monday Morning Ramblings
It is Monday May 17th and we have more rain on the way! Did Seattle move south to the bay area when we were not paying attention!?!
The FDIC did their normal Friday “thing” and took over failing banks across the country. On the list from this last Friday was Southwest Community Bank (MO), Midwest Bank and Trust Company (IL), Satilla Community Bank (GA), Ameris Bank (GA), and Liberty Bank (MI). That puts the grand total for the year at 72 and counting. If you are curious and want to see a complete list of FDIC take overs, you can click here to be directed to the website.
The morning has started off like a yoyo with the MBS market and as of this moment we are back in positive territory at +6 bps. There is a slew of economic data being released this week so it could end up being a wild ride! The rleases scheduled for this week are”
| Date | Report | Consensus | |
| May 18 | Building Permits (MoM) | 0.68M | |
| May 18 | Housing Starts (YoY) | ||
| May 18 | Producer Price Index (MoM) | 0.1% | |
| May 18 | Producer Price Index (YoY) | 5.6% | |
| May 18 | Producer Price Index ex Food & Energy (MoM) | 0.1% | |
| May 18 | Producer Price Index ex Food & Energy (YoY) | 0.9% | |
| May 18 | API Crude Oil Inventories | ||
| May 18 | ABC/Washington Post Consumer Confidence | ||
| May 19 | MBA Mortgage Applications | ||
| May 19 | Consumer Price Index (MoM) | 0.1% | |
| May 19 | Consumer Price Index (YoY) | 2.4% | |
| May 19 | Consumer Price Index Ex Food & Energy (MoM) | 0.1% | |
| May 19 | Consumer Price Index Ex Food & Energy (YoY) | 1.0% | |
| May 19 | EIA Crude Oil Stocks change | ||
| May 19 | FOMC Minutes | ||
| May 20 | Continuing Jobless Claims | 439K | |
| May 20 | Initial Jobless Claims | 440K | |
| May 20 | Leading Indicators (MoM) | 0.2% | |
| May 20 | Philadelphia Fed Manufacturing Survey | 21.5 |
Keep an eye out for the inflation data as that could prove to be the biggest market mover during the week. If you are in the process of getting a mortgage loan, now is not the time to be playing the market. Rates are good and everyone shoudl consider locking in at the earliest possible point in the transaction. Yes there is always the chance that you may “miss the bottom” but who is to say that we aren’t already there and you can expect volatility to continue. The uncertainty in the European market and the shaky economic conditions worlwide will continue to lead to fluctuations in our market. Thanks and have a great week.
Conforming Loan Limits – A Historical Perspective
Time for a little trip down memory lane and a look at the confoirming loan limit and a brief history. OFHEO (Office of Federal Housing Enterprise Oversight) has the oversight of Fannie and Freddie and, in the past, the conforming limit was based on an actual formula and was somewhat predictable. Due to the challenging economic times, all that has changed! The history of the limit value is:
Conforming Loan Limits
Per Fannie Mae:[2]
| Year | Historical Conventional Loan Limits | High Cost Area | ||||
|---|---|---|---|---|---|---|
| Single Family | Two Family | Three Family | Four Family | Second Loan | Single Family | |
| 2009 | $ 417,000 | $ 533,850 | $ 645,300 | $ 801,950 | $ 208,500 | $ 625,500 |
| 2008 | $ 417,000 | $ 533,850 | $ 645,300 | $ 801,950 | $ 208,500 | $ 625,500 |
| 2007 | $ 417,000 | $ 533,850 | $ 645,300 | $ 801,950 | $ 208,500 | $ 625,500 |
| 2006 | $ 417,000 | $ 533,850 | $ 645,300 | $ 801,950 | $ 208,500 | $ 625,500 |
| 2005 | $ 359,650 | $ 460,400 | $ 556,500 | $ 691,600 | $ 179,825 | $ 539,475 |
| 2004 | $ 333,700 | $ 427,150 | $ 516,300 | $ 641,650 | $ 166,850 | $ 500,550 |
| 2003 | $ 322,700 | $ 413,100 | $ 499,300 | $ 620,500 | $ 161,350 | $ 484,050 |
| 2002 | $ 300,700 | $ 384,900 | $ 465,200 | $ 578,150 | $ 150,350 | $ 451,050 |
| 2001 | $ 275,000 | $ 351,950 | $ 425,400 | $ 528,700 | $ 137,500 | $ 412,500 |
| 2000 | $ 252,700 | $ 323,400 | $ 390,900 | $ 485,800 | $ 126,350 | $ 379,050 |
| 1999 | $ 240,000 | $ 307,100 | $ 371,200 | $ 461,350 | $ 120,000 | $ 360,000 |
| 1998 | $ 227,150 | $ 290,650 | $ 351,300 | $ 436,600 | $ 113,575 | $ 340,725 |
| 1997 | $ 214,600 | $ 274,550 | $ 331,850 | $ 412,450 | $ 107,300 | $ 321,900 |
| 1996 | $ 207,000 | $ 264,750 | $ 320,050 | $ 397,800 | $ 103,500 | $ 310,500 |
| 1995 | $ 203,150 | $ 259,850 | $ 314,100 | $ 390,400 | $ 101,575 | $ 304,725 |
| 1994 | $ 203,150 | $ 259,850 | $ 314,100 | $ 390,400 | $ 101,575 | $ 304,725 |
| 1993 | $ 203,150 | $ 259,850 | $ 314,100 | $ 390,400 | $ 101,575 | $ 304,725 |
| 1992 | $ 202,300 | $ 258,800 | $ 312,800 | $ 388,800 | $ 101,150 | $ 303,450 |
| 1991 | $ 191,250 | $ 244,650 | $ 295,650 | $ 367,500 | $ 95,625 | $ 286,875 |
| 1990 | $ 187,450 | $ 239,750 | $ 289,750 | $ 360,150 | $ 93,725 | $ 281,175 |
| 1989 | $ 187,600 | $ 239,950 | $ 290,000 | $ 360,450 | $ 93,800 | $ 281,400 |
| 1988 | $ 168,700 | $ 215,800 | $ 260,800 | $ 324,150 | $ 84,350 | $ 253,050 |
| 1987 | $ 153,100 | $ 195,850 | $ 236,650 | $ 294,150 | $ 76,550 | $ 229,650 |
| 1986 | $ 133,250 | $ 170,450 | $ 205,950 | $ 256,000 | $ 66,625 | $ 199,875 |
| 1985 | $ 115,300 | $ 147,500 | $ 178,200 | $ 221,500 | $ 57,650 | $ 172,950 |
| 1984 | $ 114,000 | $ 145,800 | $ 176,100 | $ 218,900 | $ 57,000 | $ 171,000 |
| 1983 | $ 108,300 | $ 138,500 | $ 167,200 | $ 207,900 | $ 108,300 | $ 162,450 |
| 1982 | $ 107,000 | $ 136,800 | $ 165,100 | $ 205,300 | $ 107,000 | $ 160,500 |
| 1981 | $ 98,500 | $ 126,000 | $ 152,000 | $ 189,000 | $ 98,500 | $ 147,750 |
| 1980 | $ 93,750 | $ 120,000 | $ 145,000 | $ 180,000 | N/A | $ 140,625 |
| Limits for Alaska, Hawaii, Virgin Islands and Guam are 50% higher. Virgin Islands was designated a high cost area in 1992 and Guam in 2001.Prior to 1984, second mortgage limits were the same as first mortgage limits. Subsequent legislation reduced the limits to 50% of first mortgage limits. Fannie Mae had no second mortgage program before 1981. | ||||||
In addition to remaining stagnant at the $417,000 level for the past four years, the high cost limit has been opened to additional areas besides Alaska, Hawaii, Virgin Islands, and Guam. To access the conforming loan limits or the FHA loan limits on a county by county basis, you can click here to be directed to the HUD website that allows you to search for your particular market.
I don’t know what possesed me but just thought a little trip down memory lane woudl be interesting! Have a great weekend!
One Perspective on the Future of the Housing Market
There is a lot of speculation in the market as to the future of housing prices for the balance of 2010. As with any issue, you can find arguments on both sides of the equation, or in this instance, on all 3 aspects of the argument:
- Housing prices will experience another round of declines
- Housing prices will stabilize
- Housing prices will start to rise
Pick your poison! The reality is that we have had a decent housing market over the last 6 to 10 months largely due to government incentives and intervention. This has been in the form of tax credits, relaxed guidelines by HUD, and the recently ended Fed MBS purchase program. The question that remains is without the stimulus and as we transition to a traditional mortgage market, where will rates go and what will happen with home prices? The other “elephant in the room” is the potential surge in inventory as lenders work through the “shadow inventory” we hear about in the form of forclosed upon homes not yet onm the market. Coupled with the expectation of a higher fopreclosure rate in 2010, it woudl seem there are a lot of factors that woudl tend to push home prices lower.
For an interesting perspective on this issue, CLICK HERE, for a full report.
Thanks and have a great day!
ARM’s are not ALWAYS a Dirty Word!
With the continued run of low interest rates there is a phenomenon that has gone largely unnoticed lately. That is the fact that the spread between the benchmark 30 year fixed mortgage and ARM’s (adjustable rate mortgages) has become quite large. This leaves an opportunity for perspective home buyers to buy more house and/or have a significantly reduced payment for a 3 to 10 year period. This can be a great option if you are looking at an ownership period that fits within the fixed rate period of the ARM. I am not referring to any of the “exotic” products that helped lead us into this economic mess but rather good, old fashioned, full doc, sanity based ARM’s!
Let’s take a look at what is available under the FHA loan program. I’ll concentrate on these as these are the most attractive adjustable products on the market today. FHA offers bot a 3/1 and a 5/1 ARM with as little as 3.5% in down payment requirement. The index they are tied to is the 1 year treasury constant maturity and they carry a margin of 2.00 to 2.250 (very low by conventional loan standards). Centering on ythe 5/1 ARM, currently we have a start rate of 3.750%! This is how a typical ARM works:
- Current Index Value .390%
- Margin 2.250%
- Implied Rate 2.640%
The loan itself has caps of 1/1/5. This means at the first adjustment the rate can go up or down no more than 1% (this would be at the end of the 5 year fixed rate period). Thereafter, the loan adjusts every 12 months with a maximum movement of 1% each adjustment and can never go up more than the 5.000% cap over the life of the loan (maximum lifetime interest rate in this example would be 8.750%). When looking at the implied rate above, if you were at the end of your five year fixed period and were to adjust today, your rate would move towards the implied rate or in this case would go down from the starting 3.750% rate to 2.750%! Over time there is likelihood that the ARM rate will go up but on this particular FHA program any borrower would safe for a targeted ownership period of 5 to 7 years and could save significantly on interest costs.
With a comparable fixed rate loan at 4.875%, the interest savings on the 5/1 ARM over the first 5 years would be approximately $13,883 and your actual loan balance on the ARM would be $3,968 lower when compared to the fixed rate loan. These numbers are based on a $250,000 loan amount.
No negative amortization, no dangers of recast, no prepayment penalties, no hidden whammies, just a good old fashioned conservative ARM that can save money in the form of reduced monthly payments, reduce interest costs, and make that dream home more affordable and comfortable!
What’s On Tap for the Week
Following Thursday’s and Friday’s dramatic sell off on the stock market this morning opened up with a bang and the Dow closed off up over 400 points. This type of volatility sure makes like exciting! Interest rates benefitted last week from the stock sell off and the “flight to quality” reaction on the part of investors. One encouraging sign is that the big rally today did not spark a large sell off on the MBS markets and for the most part, interest rates remained unchanged today.
Tomorrow we get hit with a Treasury auction and then not a lot in the way of news until we hit Friday with some potential market movers. Friday will bring data on:
- Retail Sales
- Industrial Production
- Consumer Sentiment
This could lead to some swings in interest rates depending on what side of the fence these numbers come in on. Remember when we are looking at rates and economic data, typically bad news is good and vice versa from a rate perspective!
Lost in the haze of the news on stocks was Friday’s jobs report with an unexpectedly large jump in non-farm payrolls. The numbers showed that there were 290,000 jobs created last month yet the unemployment rate went up from 9.7% to 9.9% overall. This was the result of individuals who had previously given up on looking for a job, perceiving better opportunities and re-entering the work force by seeking employment. One interesting aspect from behind the numbers is that over the past 3 months, 65% of the jobs added have been part time jobs. This does not bode well for consumer spending and stimulating the economy as the part time aspect of many of these jobs is more out of desperation than choice.
Our industry continues to get some great press! Click here to read about the Virginia man that was sentenced to 5 years as the “ring leader” in a scam that resulted in losses of at least $9 million. Or you can click here to read all about our uncle Fannie Mae having to ask the Treasury for an additional $8.4 billion in aide after posting an $11.5 billion loss for the first quarter of 2010. And lastly as of Friday, 4 more banks bit the dust. Gone to the great banking center in the sky are 1st Pacific Bank (CA), Bank of Bonifay (FL), Towne Bank (AZ), and Access Bank (MN). Overall this represented a hit of about $214 million to the FDIC!
That is all for now and have a great Monday and a strong rest of the week.