Advice, Community & Common Sense

As the economy continues to struggle and home values start to stabilize, I want to continue to provide you with an overview you can trust.  I have always put the consumer first, and will continue to do so.  I hold a responsibility to help educate consumers about this industry, and keep you updated on some of the guideline and pricing changes that are impacting the mortgage industry. 

Every day when I talk to friends about purchasing or refinancing, I realize I live in a bit of a bubble in terms of knowledge about what is going on.  What I mean by 'bubble' is I tend to think everyone has a general understanding from the recent news media that mortgages are becoming more difficult to obtain. However, the media does not explain in detail why this is happening. Below I have outlined some of the specifics on exactly why mortgages are not as easy to get as they once used to be.

It’s important to note that my business is 100% "‘A’ paper" business, meaning I have never done sub-prime loans.  So, the woes that you have heard about sub-prime loans are not what I am speaking of; the changes that I am pointing out are for ‘A’ paper loans….. your type of loan!

 1. Lenders are becoming even more cautious of home values.  They are placing tougher measures on the appraisers to only use relevant and recent comps, and are allowing minimal adjustments in their valuations.  There are, unfortunately, a lack of quality comps due to short sales and foreclosures.  This is making it increasingly harder to get the value needed in order to refinance. 

 2. Lenders have lowered the loan-to-values (LTVs) needed to refinance and purchase.  This means that your home actually has to be worth MORE than it did a year ago in order to do a similar refinance under current guidelines.

 3. Credit scores below 720 are receiving hits to the rate equal to about 1/8% to 1/4%.  A 720 score used to be viewed by lenders as an excellent score, which it is, but lenders now want to see an even higher score for the premium 'A' paper rates.

 4. Very few lenders are still doing "stated income" or "no income verified" loans today, meaning all income must be documented. This is making it difficult for most self-employed borrowers to refinance or purchase at the lowest and best rates versus just one year ago.

 5. Starting January 2009, the conforming loan limit is decreasing to $625,000 from the current $729,750 temporary loan limit in most of California.

 6. Home equity loans are becoming more and more difficult to get as lenders shy away from being in the more vulnerable 2nd position.  Additionally, current home equity line borrowers are having their lines of credit taken away or amounts reduced making it more difficult to access the equity in your property.  The lenders in 2nd position are taking the brunt of the hit from increasing foreclosures, so this trend will continue.

 7. Cash out options are becoming severely limited in both dollar amount and loan-to-value limits.  Cash-out is perceived as increased risk because less equity is available to cushion a lender against a foreclosure sale in the future, if needed.

 8. As the Federal Reserve Board looks to increase the Federal Funds Rates to fight future inflation and/or to keep propping up the US Dollar, so will the "Index" that all ARM products are based on, impacting you when your loan rolls over after the fixed period expires, or a 'negative amortization' loan recasts after its first 5 year period.

 9. Economics 101:  So far 274 banks and lenders have exited the mortgage market with more leaving each and every day.  Fewer banks and lenders mean less competition.  Less competition means higher interest rates.

 10. Freddie Mac just imposed a 75 basis point hit (think 3/4%) to pricing last Friday on all agency jumbo loans ($417,000 to $729,750), translating to a Rate increase of 1/4%.  Fannie Mae has announced that they will follow soon making their hits applicable starting 11/1/08.  This gives us 2.5 months to take advantage of the lower Fannie Mae pricing without these delivery hits.

Many clients ask my advice on whether rates are going to continue to go up or will they be coming down anytime soon.  I think the bond market, in general, may be somewhat stable near-term. However, all of the other factors stated above, in particular the pricing hits, will continue to increase the rates.  When fear is driving a market, caution reigns supreme.  What also doesn’t help is the price of oil now trading up $5 from yesterday above $121/barrel which is reigniting fears of inflation and pushing the rates up again. These are the types of uphill battles we face right now which is why I think a 30 year fixed under the temporary terms offered by Fannie/Freddie is a good option, especially if you are keeping the home longer than 10 years.

At the end of the day, it is a question of risk.  Are you willing to take a risk that the tighter restrictions and increase in mortgage pricing are somehow going to be reversed before you need to buy or refinance? 

The good news…..FHA has stepped in to fill some of the gaps where Fannie Mae and Freddie Mac have lost ground. FHA loans have traditionally been for first time homebuyers and to refinance existing FHA mortgages, but that is no longer the case.  Since FHA loans are now going to higher loan-to-values (LTVs), lower credit scores and allowing more cash out, they are becoming increasingly more popular and significantly more useful to the traditional ‘A’ paper borrower like yourself.  We can help determine which option may be best for you.

Remember that if you do buy or refinance now and we are lucky enough to see better rates in the future, we will always be watching for any chance to provide you with a cost free loan.  Meanwhile, you have reduced your risk and you can sleep at night. 

Please let me know if you would like me to look at your situation and provide options.  Thanks for reading, and, as always, I look forward to hearing from you or your family, friends and co-workers.