MORTGAGE RATES REPORT

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.

Contra Costa County Veterans: ZERO DOWN Up to $1,094,000

If you're buying a home in Contra Costa County, you need to let your REALTOR know that you served our country honorably.  There is a credit crunch going on and the new VA loan limits, for 2009, allow Contra Costa County veterans to purchase a home, with NO MONEY DOWN, up to $1,094,000.  Let me repeat that for you;

ZERO DOWN PAYMENT UP TO A MILLION DOLLAR PURCHASE PRICE IN CONTRA COST COUNTY

The word isn't out about this, yet.  Contra Costa County REALTOR Wendy Cutrufelli made this observation today:

Let me preface my response with the following information:  I am located in Contra Costa county (northern California) and VA financing hasn't been used in this market for close to 10 years.  So the fact that his realtor got a bank to accept VA financing AND pay for Section 1 repairs.......every fiber of my being wanted to tell this buyer to genuflect at his realtor's feet for accomplishing a miracle.

This is my fault, not the Contra Costa County real estate agents'; I should be screaming this message to them at the top of my lungs.  With a median price of $659,000 in Contra Costa County, more than half of the homes selling are covered by the new VA home loans.  With the higher limits, that percentage steadily increases as prices drop there.  Contra Costa County REALTORs would do well to ask homebuyers if the are eligible for VA home loan benefits.  After all, one in ten Californians between the ages of 21 and 55 have VA eligibility.

How do VA home loans work?  From an article I wrote on the HomeGain Blog:

The VA Home Loan Program is the only national 100% financing loan program. Veterans can purchase a home with no down payment and the seller can contribute up to 4% of the sales price for their non-recurring closing costs and impounds.

Often referred to as the VA No-No program, combining the max sellers’ closing cost contribution with a VA home loan affords buyers the chance to “get into a home”, for no money, at a below market rate.

There are no “stated income” options nor “interest-only” options for a VA home loan. Veterans must qualify on full income documentation. Their total monthly obligations (including the proposed mortgage payment) must be under 43% of their monthly income unless they meet the VA residual income qualification. Current service members receive an allowance for housing (BAH) and food (BAS) and those figures can be “grossed up” 115% for income qualification.

Appraisals are assigned by VA and ordered by the lender. Many lenders participate in a delegated underwriting program (LAPP) but some opt to let the VA underwrite the appraisal. General guidelines suggest that if the home is inhabitable, the loan can’t be made. VA appraisers, however, are not so stringent that the home needs to be “new home perfect”.

There is no minimum credit score requirement for a VA home loan although a 12-24 month history of good payments is required. Some lenders have imposed credit score minimums but a good mortgage broker always has a lender who will fund VA loans on the more relaxed VA-compliant credit requirements.

Frequently Asked Questions:

Are VA loans more expensive?

Heck no.  A VA home loan offers, with a loan balance under $417,000, offers rates that are equivalent to what a conventional loan costs.  Today, that interest rate is about 5.0%.  Loans from $417,001 to the $1,094,000 limit carry an interest rate of about 5.25%.  Compare that to the jumbo rates of 5.5% to 8% and the VA home loan program offers even better rates than the conventional loans.

Doesn't the VA funding fee make it more expensive?

I don't think so.  For a first-time VA home loan user, a 100% loan requires a 2.15% charge (added to the loan) but eliminates the need for costly PMI.  There are no 100% conventional loan options in Contra Costa County.

A 95% conventional loan (if you can get one) has an annual PMI charge equivalent to .875%.  The VA funding fee for a 95% loan is just 1.5%; that money is "recouped" in 20 months.  If you plan to own the home for at least two years, the VA home loan is much less expensive.

A 90% conventional loan requires an annual PMI charge equivalent to .625%.  The VA funding fee for a 90% loan is just 1.25%.  Again, the money is recouped in less than two years.

Do VA home loans have higher qualification standards?

Nope,  Quite the opposite. 

The appraisal can be a tad more onerous but that benefits you, the buyer, because they really analyze the property in greater depth than a conventional appraiser. 

The VA credit requirements don't have a minimum credit score but most lenders require a 620 credit score today.  Conventional loans become more expensive with credit scores under 740 and conventional loans over $417,000 require 660 credit scores.

Income calculations are more pragmatic as the VA home loan underwriters use residual income analysis in addition to the traditional debt-to-income ratios conventional underwriters use.  The VA also uses residual income analysis for determining "capacity".  From the VA website:

The primary method of evaluating a veteran's income is the residual income method.  Under this method, the underwriter determines that a veteran has sufficient income to cover day-to-day living expenses after paying housing expenses, taxes, and other debts such as car payments and credit card payments.

For example, if an 0-2 (with three years service) were receiving a base pay of $3484, a BAH of $2000 and BAS of $300, her total monthly income would be $5784.  We would deduct her taxes (on the base pay), of about $800.  She's single, without dependents so there are no childcare expenses.  This gives her contributory income of $5084.  If she had $1200 in monthly expenses (credit cards, car loans, etc), her contributory income is reduced to $3884.  The VA requires a residual income of $491.  In order to "trump" the debt-to-income ratio analysis, we would need residual income of 120% of that, or about $600; this would allow for a maximum housing expense of $3,200.

Using the "eight dollars per thousand" estimate, Lt (jg) Smith would be approved for a $400,000 VA home loan.

VA home loans offer Contra County Homebuyers a great chance to take advabtage of fallen prices and more generous underwriting guidelines.  I can't think of any other time, in my fifteen years of lending, where someone could buy a million dollar home with no money down.

Veterans in Contra Costa County can do that today.  Remember to remind your REALTOR that YOU are eligible and call me at (858)-777-9751.  You've EARNED it by proudly serving our great country.

PS:  Ask some of the Navy and Marine Corps veterans who I've helped about my VA home loan expertise.

VA IRRL Home Loan Refinance: Convert ARM to Fixed Rate

The VA offers loan guarantee programs that have made housing more affordable for so many veterans of our Armed Services.  If you have a VA home loan, we might be able to save you some money.

Introducing...the "streamlined" VA Interest Rate Reduction Loan.  If you have a VA home loan, you can refinance without an appraisal or income verification.  From the VA website:

WHAT IS AN IRRL?

An IRRL is a new VA-guaranteed loan made to refinance an existing VA-guaranteed loan( thus VA Streamline Loan), generally

• at a lower interest rate than the existing VA loan, and
• with lower principal and interest payments than the existing VA loan.
  

Generally, no appraisal, credit information or underwriting is required on an IRRL, and any lender may close an IRRL automatically.

INTEREST RATE DECREASE REQUIREMENT

An IRRL (which is always fixed rate) must bear a lower interest rate than the loan it is refinancing unless the loan it is refinancing is an Adjustable-Rate Mortgage (ARM).

The principal and interest payment on an IRRL must be less than the principal and interest payment on the loan being refinanced unless one of the following exceptions applies:

• The IRRL is refinancing an ARM
• the term of the IRRL is shorter than the term of the loan being refinanced, or
• energy efficiency improvements are included in the IRRL
  

A significant increase in the veteran's monthly payment may occur with any of these three exceptions, especially if combined with one or more of the following:

• financing of closing costs
• financing of up to 2 discount points
• financing of the funding fee, and/or
• higher interest rate when an ARM is being refinanced.
  

If the monthly payment (PITI) increases by 20 percent or more, the lender must

• determine that the veteran qualifies for the new payment from an underwriting standpoint; such as, determine whether the borrower can support the proposed shelter expense and other recurring monthly obligations in light of income established as stable and reliable, and
• include a certification that the veteran qualifies for the new monthly payment which exceeds the previous payment by 20 percent or more.

VA IRRL Home Loan Refinance: Documentation Needed

You are a veteran ,with a VA home loan on your property.  You want to refinance from a variable-rate loan (ARM) to a fixed-rate loan and keep the VA loan you have on your home.  Here's a list of what we'll need to refinance your VA home loan under the VA streamlined refinance (IRRL) program:

1- A copy of the most recent statement for your VA home loan (issued by lender)
2- A copy of your DD Form 214 (aka: your 214 or discharge paperwork)
3- A signed VA Form 1880- request for Certificate of Eligibility
4- The actual Certificate of Eligibility
5- A completed Universal Residential Loan Application (Form 1003)

Call me at 858-699-4590 and I'll help you assemble these documents.