MORTGAGE RATES REPORT

What's The Cost Of Renting?

Does buying REALLY make sense?  In this goofy real estate market there really are some costs associated with renting instead of buying a home.  Opportunity costs but costs nonetheless.

Why are folks buying homes today?

1- They're cheap. It's going to go up in price. It won't be for awhile but still a good reason to buy .
2- You can write off your mortgage interest.  That's not true for most home buyers today.
3- A fully-amortizing loan is like a forced savings account.  Illiquid savings account but I'll buy that.
4- The US Government is bribing people to buy homes.  We'll harvest that $8,000 tax credit.

Let's run some numbers.

June was considering a Pacific Beach condo for $278,000.  She currently pays about $1,000/month in rent.  She's considering this condo purchase with a VA loan because she's a veteran of the US Army.  Her total payment, including the property taxes and HOA fee, would be about $2200.  June's a nurse who makes $80,000.  She's single so she currently takes the standard tax deduction of $5,700. She plans to hold the home for five years and expects to sell it for 15% more than today's price; she'll net $296,000 after sales expenses (in 2014).

What is the cost of NOT purchasing the Pacific Beach condo today?

1- Let's assume June's right about the appreciation.  She stands to make $18,000 in five years; that's about $300/month.

2- June doesn't fully benefit from mortgage interest deduction.  If she stays put, she can write off $5,700/year (479/month).  She will have paid about $75,000 in interest over the next five years or $1250 per month.  When we back out her standard deduction ($479/month), her benefit of buying the home is that she can write off an extra $771/month.  She'll also be able to deduct her property taxes (289/month) for a total MARGINAL income deduction of $1,060.  That saves her about $365/month in income taxes.

3- June will pay that loan down to $257,000.  That builds equity up of about $350/month.

4- The effect of the $8,000 legal bribe is about $133/month, over five years.

5- June's closing costs are $6,000. Amortized over five years, that's an added expense of $100/month

June's opportunity cost of NOT buying, exclusive of appreciation, is $748.  Subtract that from the $2200 payment and her payment "feels like" $1452.  She gains $352/month by renting instead of buying.

The big question is...will June make 15%, over five years, by owning this home?

or...can June negotiate a lower price, by about $45,000, so that her monthly payment drops about $350/month?  At $233,000, June is actually losing money by renting.

Don't Fight the Fed: June 2009 Rates Won't Break 5%

If you've been paying attention, you know that I have the heart of a trader.  I try to offer analysis  rather than opinion.  Last week, I felt the bond traders were overreacting to optimistic economic news and commentary by politicians.  I generally ignore those folks and focus on the Fed.  I said that one of the first rules of investing was "Don't Fight The Fed"; I won't.

This morning's par mortgage rates (with 1%origination fee):

Conventional:      5.375%
FHA/VA                    5.50%
Jumbo(>$417K)   5.875%          

Last November, The Fed released this:

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.  Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.  This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Yesterday, Fed Chairman Ben Bernanke said this:

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast.

Bernanke might just be off the "support the MBS market" bandwagon.  If he ain't opening the Fed checkbook, expect mortgage rates to naturally gravitate towards the 6% plus level by the end of the year.  This won't happen immediately so there will be periods of market overreaction, which will cause me to issue a "float" recommendation.  Generally speaking, my bias has changed from "there will be sunny days tomorrow", for mortgage rates to "there may be a storm-a-brewin'".

I've got you locked if you're closing your loan before June 21.  Today, I'm locking anyone who is closing by July 15, 2009.  The past two weeks have been a fun ride and many of you got 5% mortgage rates by being patient and nimble.  The tacit change in Fed bias has me too worried right now; lock all loans at application.

Apply online now.  It's really simple and should take about 20 minutes.

FHA & VA Mortgages Are Assumable

One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable.  What this means is that a buyer can "take the payments over" from a seller, if the existing loan is a FHA mortgage or VA home loan. 

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%.  I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher.  Left unchecked, inflation could drive mortgage rates into double digits by 2012.  The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough...unless you can offer the buyer a below market interest rate.  Let's assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan.  His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%.  The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that's over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market).  Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called.  Pragmatically, that doesn't happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years.  You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash.  That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.  Low prices and historically-low mortgage rates make these loans a consideration when comparing them to a conventional loan.

Hope For Homeowners Program Slow Out of the Gate

Alan Zibel of the Associated Press reported that the results of the FHA Hope For Homeowners Program is underwhelming:

But the early results are discouraging: the government received only 42 applications in the program's first two weeks, according to the Federal Housing Administration. The low turnout was first reported by the industry newsletter Housing Wire. Since the applications take about 60 days to process, no loans have been approved yet.

There were quotes from a former Clinton official, current White House Press Secretary, and yours truly, the ever positive industry cheerleader:

Brian Brady, managing director of mortgage banking and brokerage firm World Wide Credit Corp. in San Diego, said the industry could well accelerate its use of the program in the coming months. Many in the industry "are probably just waiting to see how it works ... Mortgage banking is a monkey-see, monkey-do business. Everybody waits for someone to do it first."

You can read the full story on:

Forbes
Business Week
Yahoo! Finance
CNN Money
CNBC
MSNBC

FHA Hope For San Diego Homeowners

The FHA Hope for Homeowners loan program was released this month. The stated goal of the plan is to help homeowners, who are paying mortgages that are significantly more expensive than when they bought the home (due to rate adjustments), get a home loan they can afford.

Key components of the FHA Hope For Homeowners loan program are not limited to but include:

• An appraisal will be performed and the maximum loan amount will be 90% of that appraised value.  All subordinate liens will be extinguished and the exiting lienholder will have to agree to a loss of principal.
• The current housing payment must be more than 31% of the homeowner’s gross monthly income.
• The homeowner must not have misrepresented his/her income on the original loan application.
• The homeowner must get a new 30-year fixed rate loan and qualify based upon documented income.
• The homeowner must agree to an declining equity sharing agreement (for the existing equity), with the FHA, for a specified period of time.
• The homeowner will share in future appreciation with the FHA.
• The program is completely voluntary; existing lienholders don’t have to participate.

Mary Miller compiled some comments from Mortgages Unzipped authors which demonstrates the difficulty of the program. Loan originators may be hesitant to work with you because of the low probability of a successful funding.  That low probability is due to the fact that existing lienholders may have to take significant writedowns.  I wouldn’t blame an originator who refuses to participate in the FHA Hope For Homeowners Program; loan originators aren’t paid on unsuccessful fundings.

Nonetheless, we welcome loan applications, under the FHA Hope for Homeowners, for Californians in “upside-down mortgages”.  We recently hired a team member with the skill set to work with lenders’ loss mitigation departments.  That specific expertise, combined with our long history as a HUD lender, leads us to believe that we can assist folks who desperately want to retain their California home.  We offer this program with a few conditions:

• We must determine your maximum qualified loan through full income documentation at application.  If you can qualify for a loan amount that might be a reasonable offer to the existing lienholder, we’ll proceed to an appraisal.
• You must pay for the appraisal and credit report upfront; that should be about $500.  The appraised valuation is a key component of the program so that valuation must be established prior to the offer to the existing lienholder.
• We expect to earn a 2% fee, whether paid by you or the new lender ( through yield spread premium). That’s twice the amount we earn for new loan originations.  We think this higher fee is reasonable considering the amount of work required and the low probability of loan funding.  We only receive this fee if we are successful in funding your new loan.

The FHA Hope for Homeowners Loan program offers Californians a chance to stay in their homes at a reasonable price.  If your intention is to live in your home for 5-10 years, this may be a workable solution for you.

While the plan isn’t perfect we know that certain sub-prime lenders have sold their loans at a significant discount and will welcome any and all offers that allow them to make a profit.  For example, if you have a loan with First Franklin, this program might make sense for you.  First Franklin was purchased by Merrill Lynch, in early 2007.  Merrill Lynch sold these loans, for 33 cents on the dollar, this past summer.  What that means is that they sold your $500,000 loan to an investor for $165,000.  If we have to approach First Franklin’s loss mitigation department with a $350,000 payoff for that $500,000 loan, the new investor stands to more than double his money in a few months.  That’s a reasonable proposition to entertain.

Not all loan servicers will be that cooperative, though.  We believe that our connections with Wall Street and secondary mortgage market investors will be a distinct advantage to you, the beleaguered California homeowner.  The FHA Hope for Homeowners Loan program isn’t perfect but it may offer you significant relief.  Please contact me if you have questions about it.

Originally posted on Mortgages Unzipped

FHA ARMs More Attractive Than FHA Fixed Rate Loans

Did you know you could get an adjustable rate mortgage through the FHA-insured loan program?  ARMs are a dirty word in the media today.  As millions of homeowners have their ARM rates adjusted, the press peddles fear, causing new home buyers to overpay on the FHA home loans.

Let's look at my favorite, the FHA JUMBO 5-year ARM at 5.625% versus the FHA JUMBO 30 Year fixed rate mortgage at 6.375%.  That's a .75% difference in rate and for a JUMBO loan, that adds up to some substantial savings!  On a $600,000 mortgage, the interest savings, over the five year period, is over $20,000; that's the price of a low mileage, gently-used BMW.

The risk of a five year ARM is the reset.  If you funded a FHA JUMBO 5-year ARM today, the rate (and payment) would adjust in January, 2014.  The risk, however, is nowhere near the reset risk of yesterday's Alt-A and sub-prime home loans.  Rate adjustments are based on two factors:  index and margin.  FHA loans can be offered with a LIBOR or Treasury Index and have margins that range from 2.25% to 2.75%.  Peter G. Miller, syndicated columnist, believes the lowest margin may be the best choice:

While indexes move up and down, you at least want to compare the LIBOR and Treasury measures. If the LIBOR margin is within .25 to .50 of the Treasury index, then either index might be attractive. But if the margin gap is more than .25 to .50, then you might favor the Treasury index, if the margin is less than .25 to .50 then the LIBOR might be a better choice.

The view here is that a lower margin is best because the margin is fixed for the life of the loan. That said, who knows how indexes will move in the future?

The other risk for a rate adjustment is the "cap".  Simply put, a "rate cap" is the maximum allowable adjustment, up or down, for the rate (and payment) when the five year period is up.  FHA loans have two interest rate cap structures:  a 1/5 for 3-year ARM periods or a 2/6 for longer periods.
 

In our example, if we obtained a 5/1 FHA JUMBO ARM at 5.625%, the rate could adjust as high as 7.625%, in 2014.  It could adjust as high as 11.625%, if interest rates went straight up for eight years (and never came down).  If that were to happen, bank savings' rates would skyrocket from today's 3% to over 9%.  There IS a silver lining amidst any storm cloud.

FHA loans are easy to refinance.  The FHA streamlined refinance program allows for a homeowner to refinance her FHA loan with no income or asset documentation.  This common-sense approach grants a FHA loan approval if the homeowner can demonstrate that her last twelve mortgage payments were timely.  It can even be offered without an appraisal.

In California, the average hold time for a home is 5-7 years.  This means that the average Californian will most likely sell his home during that period.  If you're a first-time homebuyer, chances are that you're leaving a LOT of money on the table by insisting on a FHA JUMBO 30 year loan rather than a 5-year ARM.  Do your homework and compare costs.