The Good News About Rising Rates: While we’ve had many false starts of rising rates over the past few years, this time it looks for real. In the past few months, mortgage rates have risen about one-half percent. That’s not much and it’s still well below historical averages. The Fed expects to raise the Fed Funds rate four times this year. Since the Fed doesn’t directly control mortgage rates and mortgage rates move in anticipation well ahead of the actual event, some of that future increase is already baked into today’s mortgage rates. What’s the Good News? Having been in the mortgage business for over 40 years, I’ve been through lots of these cycles. What I’m observing now is no different than what I’ve seen in the past. Rising Rates mean:
Innovative Loan Products: In the past few months I’ve seen a major trend toward Alternative or Non-Traditional mortgage products. Instead of relying solely on Income as we have for the past several years, I now see make-sense loan programs enabling borrowers to qualify based on factors such as reserves in their savings and retirement accounts; monthly cash-flow verified solely with bank statements; residual income; and; rental income of their investment property. We even have “Stated Income” programs again for qualified borrowers. These changes are particularly favorable toward self-employed borrowers. Wider Rate Variation Among Lenders: An overall reduction in the number of loans being originated leads to more competition among lenders. As lenders compete for a larger share of the smaller pool of borrowers, I’m witnessing the largest variation of rate and cost among lenders in the past several years. Some cut rates or costs more than others.to attract more borrowers. As Brokers, we know who has the lowest rates and costs. Lower Credit Standards: When lenders have more business than they can handle, they raise the qualifying standards. When they need to increase loan volume, they lower their minimum credit score requirements, raise the Loan-to-Value ratios and become a little more liberal in their overall qualifying criteria. A Shift from Banks to Mortgage Brokers: The big banks typically offer only the most conservative products and the most stringent underwriting criteria. Regulation may prevent them from offering non-traditional loan programs and from lowering their underwriting standards. As such, the momentum shifts toward mortgage brokers and non-banks that have access to a much wider array of lenders and programs, lower rates and more flexibility. Self-employed borrowers may benefit greatly. Don’t be alarmed that these factors will lead to another meltdown like we felt nearly ten years ago. Remember that the pendulum swung so far in the other direction that it became difficult for even well-qualified borrowers to get a loan. The new programs have many safeguards built into their guidelines. Underwriting must still make sense. A favorable credit history, good reserves, steady employment and sufficient equity are all evaluated. A borrower deficient in one area, they may be required to be more efficient in another. As mortgage brokers, we are aware of the new products, the lenders that have the best rates and costs, and have the experience and expertise to get loans approved in a timely, efficient manner. If you have had difficulty refinancing in the past, it’s times to give it a new try while rates are still low.
Today’s Reverse Mortgage:
This year marks the 30th anniversary of the creation of the Reverse Mortgage. Although today’s reverse mortgage bears little resemblance to the original, it still carries an unfair negative stigma from its earlier days.
The biggest myth about Reverse Mortgages is that the bank or lender will own your home. This is simply not true! You will retain ownership and equity in your home just the same as if it had a traditional “forward” mortgage or no mortgage at all. Your heirs will also retain the equity if they inherit the home.
Why the Recent Surge in popularity of Reverse Mortgages?
Reverse Mortgage originations are up 26% in the first half of this year vs. the same period last. Why?
· 83% of Americans have not saved enough for retirement
· People are living longer
· Seniors want to age in their own home
· Consumers are becoming educated to improvements that have made the Reverse Mortgage program even better
· More Financial Advisors are touting the benefits of the Line of Credit feature that grows in value over time - providing access to more money for the senior homeowner in the future.
What is a Reverse Mortgage / How does a Reverse Mortgage Work?
Simply put, it is a way for seniors age 62 or older to utilize some of their home equity without having to make monthly payments. Equity in their primary home can be taken “tax-free” in a variety of ways and can be used for any purpose. Common uses include: improved cash-flow during retirement; improved quality of life; repairs or improvements to the home; prepare for emergencies; paying for health care; and establishing a Line of Credit that grows in value in case funds are ever needed later in life. Sophisticated affluent borrowers are using it for estate planning advantages too. And, it can also be used to finance a new home purchase.
The amount that a Senior can obtain depends on their age, the value of the property; prevailing interest rates and the type of reverse mortgage program they choose. Jumbo Reverse mortgages were introduced a couple of years ago and can provide loan amounts up to $4 Million.
The Reverse Mortgage does not have to be paid back until the last surviving borrower no longer lives in the home, the home is sold, or it passes on to their heirs. The portion of the available funds utilized by the borrower accrues interest but can never exceed the value of the home. Once the last borrower ceases to live in the home, they or their heirs have up to one year to sell the home and pay off the reverse mortgage. Or, they can pay off the mortgage and keep the home.
Today’s Safeguards:
Most Reverse Mortgages are insured by the Federal Housing Administration (FHA). The insurance provides protection against the home ever being worth less than the amount owed on a Reverse Mortgage. Before anyone can obtain a Reverse Mortgage, the homeowner must undergo telephone Counseling provided by an FHA approved counseling agency. Borrowers must undergo a Financial Assessment to make sure they can afford to pay their property taxes and homeowners insurance. If not, funds will be set-aside from the Reverse Mortgage to pay for these expenses. The FHA program provides flexibility in how the homeowner can obtain the funds— a lump sum payment, monthly income, taken as needed with no set amount or retained in a Line of Credit that grows in value.
The Process:
Get educated; find out how much you are eligible to receive; assess your alternatives; obtain the required counseling; and, decide how you want to structure your loan.
Due to the various improvements and safeguards, todays Reverse Mortgage borrowers are less likely to be at the end of their financial rope. Instead, they are likely to be planning their retirement by looking for ways to leverage their home equity and strengthening their overall retirement plan to age in their own home.
Richard T. Cirelli is an independent mortgage broker with over 40 years of mortgage experience. He is the owner of RTC Mortgage Corporation based in Laguna Beach. He has been originating Reverse Mortgages for over 12 years. Rick can be reached at 949-494-4701 or rick@rtcmortgage.com.
3 Trends to Drive the Mortgage Market in 2018
It may seem early for 2018 predictions but Freddie Mac's Economic and Housing Research Group are out with their forecast for next year.
They expect the economic environment to remain favorable for housing and mortgage markets, with moderate economic growth of about two percent, solid job gains, and low mortgage interest rates.
They see three trends driving the 2018 mortgage market:
They further say: Increases in the volume of purchase mortgages will be the result of modest gains in both home sales and home price growth. Thus far in 2017, home sales are the highest in a decade, but are unlikely to grow by much going forward.
Inventory problems will continue to limit sales in the short term and longer-term trends like the aging of the population and declining mobility across all age groups will hold down existing home sales.
Anticipated increases in mortgage rates will slow down refinance activity. The primary reasons for refinancing are: to obtain lower rates; shorten the term of the loan; and, to obtain additional cash to remodel, consolidate debt, or pay off student loans.
Chart of National Home Appreciation Rates 2000 – 2018 (est)
Looser Underwriting Guidelines?
It’s taken a while but the pendulum is swinging back to a much more reasonable happy-medium when it comes to underwriting guidelines. We all know that it was practically non-existent underwriting criteria that led to the collapse of the mortgage and financial markets several years ago. Then, the pendulum swung so far the other way that it seemed almost impossible to get approved for a mortgage. Now, things have become more reasonable. Some are even saying it might be too loose again.
Regardless of your opinion, here are some of the more recent changes that are making it easier to qualify for a mortgage. Keep in mind that these changes pertain to “conforming” loans originated by lenders and sold to the Government agencies known as Fannie Mae and Freddie Mac. Therefore, it pertains to almost all loans originated by any lender with loan limits up to $636,150 in the highest priced markets such as Orange and Los Angeles counties and most of the Bay Area counties in California.
Here’s a quick summary of some of the changes:
Less Self-Employment Documentation:
In some instances, self-employed borrowers can now be approved with just 1-year of tax returns instead of 2 years.
Higher Debt-To-Income (DTI) Ratios
Applicants with compensating factors may now receive approvals with a Debt-To-Income ratio up to 50%. Previously, the cutoff was 45%.
Lower Down Payments/Higher Loan-To-Value Ratio’s
There are programs allowing as little as 3% down.
Appraisal Waivers:
In certain refinance transaction, the appraisal can be waived altogether, saving the borrower hundreds of dollars. We will see this apply to Purchase transactions soon too.
Disputed Tradelines:
If a borrower disputed certain information in their credit report, we used to have to get those disputes cleared, adding to the time and effort it took to receive loan approvals. This is no longer the case.
Lower Credit Scores:
Many lenders have lowered their minimum FICO scores for qualifying. The minimum score allowed by Fannie Mae/Freddie Mac remains 620 but lenders often impose their own higher limit. Lower limits may be a result of lender trying to increase their lending volume as the number of refinance and purchase loans have slowed down this year.
Keep in mind that these changes do not pertain to all loans and all lenders. Each lender has the right to create their own stricter guidelines than what The Government Agencies permit. But, these changes do apply to most of the lenders that we work with.
Give us a call to see how they impact your particular situation.
I was recently quoted in an article by the Los Angeles Times (click here to read article) about the simplified mortgage application process being touted first by Quicken Loans' "Rocket Mortgage" and now by LoanDepot. Do they really have something faster and unique or is it just another way of utilizing the technology that we all have at our fingertips? I'm going to take a cynical view. When you break it down, it's really nothing special! I already have the same technology available as a mortgage broker and I believe I can process a loan faster than these two big originators. How Does It Work? Perhaps the biggest complaint among borrowers in recent years is the amount of paperwork that it takes to properly process a loan. Every page of every bank statement, two years of income history including tax returns, W-2's, current paystubs, recent mortgage statements and on and on. In an effort to streamline the process, reduce the burden on borrowers and, to take advantage of new technology, Fannie Mae has introduced a system whereby the lender, rather than from the borrower, can obtain certain documents directly from banks and employers, bypassing the borrower, with their permission of course. Many lenders have already updated their internal systems to access this documentation directly from the source. Does It Work? Yes, it works for the simple borrower. I'm talking about borrowers that are employed, salaried and get paid the same with each paycheck. And there is no significant moving around of their down payment money, no gift funds, etc. In other words, borrowers with self-employment, multiple sources of down payment funds, etc., probably won't work. Does It Save Time? The early feedback says "no". What I hear from a friend that originates loans at one of the call centers at Loan Depot, it can take a week or two to get the documentation needed from the banks and employers. But, I can always get what I need from my salaried borrowers in a day or two. And tech-savvy millennials can get it to me in a minute or two. Additionally, many borrowers in our California market are more complex with multiple sources of income, self-employed, etc. I wouldn't leave obtaining and analyzing even slightly complex files to technology and unskilled processors. Where's The Personal Touch? I've learned over the 40+ years of experience that the "personal touch" is needed when clients are making probably the biggest purchase of their lives by getting a mortgage. Explaining the process, explaining why certain documentation is needed and holding their hand throughout the process is important. If it's a purchase transaction I can't imagine trusting the details to a faceless internet process.
Now that the initital post-election shock is over, what are rates doing? You'll recall that we had an immediate .75% rise in mortgage rates following the presidential election. Optimism over the expectation of a stronger Trump-led economy, higher inflation, the assumption that the Fed may raise the Federal Funds Rate three times in 2017 and a super-strong positive reaction in the stock market all led to the rise. But, as with most news events, the initial reaction was an over-reaction and the markets seem to be settling down. Mortgage rates have come down about .25% and the market seems to have adjusted to what will probably be a mortgage rate range in the low 4% area for the next few months. Here's a look at the trend of rates for the past 12 months. Fannie Mae's chief economist, Doug Duncan, says that rising interest rates will not stop home prices from increasing. Duncan claims that as long a income is growing, home prices will grow, irrespective of interest rates. Home-Buying Retirees Shouldn't Overlook Reverse Mortgages Buying a new home with a reverse mortgage is an often overlooked strategy by retirees who could potentially benefit from borrowing against their home equity instead of raiding their savings to cover the purchase price with a traditional mortgage, according to a recent article from U.S. News & World Report. Many consumers, and even real estate agents, are unaware of the program or describe reverse mortgages as being useful only for those who cannot get a regular mortgage on thier own. For retirees who want to remain homeowners, but not in thier current homes, the article notes that a Home Equity Conversion Mortgage, i.e., Reverse Mortgage, may help ease the financial pain of the purchase. I've been originating Reverse Mortgages for 12 years now. I've seen lots fo changes in the program, particularly in recent years, and the most recent changes have been to the benefit of the borrower. Financial advisors have embraced the product as an excellent financial planning tool now. Please give me a call to learn more.
Daily Rate Lock Advisory
Last week I wrote about the Trump Effect on mortgage rates as we've seen about a .50% rise in mortgage rates since the morning of the election. If you missed it, here is a link: http://www.rtcmortgage.com/The+Trump+effect+on+mortgage+rates. I'd also like to thank the many people that sent such positive feedback on the article. I always welcome your comments. The stock market continues to enjoy the "Trump Bump" with the S&P 500 up over 3% since the election as money managers rotate funds from bonds (including Mortgage-Backed Securities) to stocks when the stock market is rising. Optimism over an improved economy under the Trump Administration is not the only factor that influences mortgage rates. The potential for inflation and the future decisions by the Fed are also weighing on interest rates right now too. Review the information below for a better understanding of what drives mortgage rates:
It's been a few weeks since the election and you would think that the financial markets would be settling down. But, so far that does not seem to be the case. What Was Expected? While the election was thought to be close, the financial markets were clearly expecting a Clinton victory. To the financial guru's, that meant continued heavy entitlements, higher taxes, low GDP growth, low inflation and the possibility of a recession in 2017. All of this led to ultra-low interest rates. Prior to the election, mortgage rates were around 3.5% for the benchmark 30-year fixed rate mortgage. What Happened? As we all know now, Trump won and, it surprised the market makers. Now, if Trump's Republican Congress gets their way, we should see lower taxes - both personal and corporate taxes; no more 3.8% Obamacare tax; less regulation; and fiscal stimulus that has so far been absent from the weak recovery over the last eight years. Initial Market Reactions Based on the above, money quickly moved out bonds, including Mortgage-Backed Securities, and into US stocks. The move out of bonds was particularly large with mortgage rates rising .50% or more! What is Likely to Happen Next? Was the rise in mortgage rates too much too fast? Was it an over-reaction? Only time will tell. The Mortgage Bankers Association of America (MBA) predicts the interest rate for a 30-year fixed rate mortgage will average 4.2% in 2017, increasing gradually from this year's average of 3.5%. It also expects the Federal Reserve will raise the federal funds rate in December and three more times in 2017. They also forecast an increase in home-buying in 2017 as due to the potential for higher home prices and higher rates. The next Fed meeting is December 14th. They are expected to raise the Federal Funds Rate by .25%. That is almost a certainty. My guess is that they won't give any hints about possible future rate hikes yet. It's just too soon to tell what the Trump Effect will be despite the optimism over his intentions and a faster-improving economy. I do think that most of the damage is done for now. And, maybe it will settle somewhere between the lows just prior to the election and where they stand for now. It is important to remember that mortgage rates can and do change daily and they react instantly to financial news and speculation. The recent rise in interest rates assumes this already is already happening; therefore; rates can only rise so far before getting too far ahead of the actual economy.
Here is a look at the weekly Freddie Mac Survey of Mortgage Rates this year:
Everybody is talking about the Fed’s next move and what that means for rates for the rest of this year and beyond. I guess I can’t help but talk about it too.
The problem is that nobody knows and it seems even harder than ever right now to predict the outcome. Not even the heads of the Government enterprises Fannie Mae and Freddie Mac agree. And their predictions don’t match the chief economist of the Mortgage Bankers Association either.
First, let’s take a look at their forecast, announced just last week at a national conference in New York:
· Fannie Mae forecasts a flat to slightly declining rate environment for the next 2 years with rates hovering around 3.7% for the standard 30-year fixed rate mortgage with loan amounts up to the national limit of $417,000.
· Freddie Mac believes rates will rise to about 4.08%
· The MBA predicts an average rate of 3.95%.
Granted, it’s not a huge difference between the low and the high predictions and rates have remained in a very low historical range for over 8 years now. But small differences and borrower perceptions make a big difference in the volume of home sales and mortgage applications.
And there are factors beside the Fed Reserve that are influencing the markets now such as; the rate of economic growth, the Presidential election, housing inventory, and more.
Rates today according to the weekly Freddie Mac rate survey are at 3.64% with an average cost of .5 points.
NBC Nightly News Spotlights Reverse Mortgages
I’ve been originating Reverse Mortgages for many years but the growth in this product has increased dramatically this year. That’s because various news outlets have reported on reverse mortgages and the program changes that have now made these loan products safer and more effective retirement planning tools. Perhaps none, however, have given reverse mortgages such an enormous viewership platform as a recent NBC Nightly News segment that aired this month.
Click Here to see the news clip:
http://www.nbcnews.com/nightly-news/video/could-getting-a-reverse-mortgage-help-you-save-money-672035907762
Highlights of the report:
Having originated Reverse Mortgages for over 10 years, I agree that it is a much more desirable product. In fact, many of my clients have utilized the Line of Credit feature which requires no initial draw and grows in value over time.
I now have a Jumbo Reverse Mortgage Product too that allows loan amounts as high as $3,000,000
If you think you or someone you know might benefit from a Reverse Mortgage feel free to call me for a free consultation and presentation.
Financial tech is growing in popularity but when it comes to mortgage advice, a traditional approach wins hands down. A recent poll found that while most people seek information online for recipes (79%) and medical advice (75%), only (32%) trust the internet with their finances. Having a great website can help attract clients, but when it comes to mortgage advice 70% of respondents said they would talk to an advisor before pursuing financial advice. That beats financial websites (41%), parents/family (36%) and real estate agents (25%). What Turns Them Off? About 50% said the glut of information online puts them off and although 89% feel it is easier to find information they need online rather than seek it out from other sources, an overwhelming 73% say even though the information is helpful, they will still always seek advice from an expert. In my 40 years of mortgage experience, I can assure anyone that only an "expert" can provide the kind of advice that consumers can depend on to make what is probably the the largest financial decision of their life. Mortgage Brokers can not only offer the best expert advice but also have the largest array of products and services to meet their borrower's needs.
Mortgage Brokers took the unfair rap for the bad mortgage loans that led to the mortgage and financial market meltdown around 2008. But it's the big banks that beat the system the most. It was recently announced that Wells Fargo will pay the US government $1.2 billion for hiding bad loans ahead of the housing market crash. The mortgage lender's certification of thousands of loans which were given FHA insurance led to taxpayers footing the bill when the loans were defaulted. A statement from Manhattan U. S. Attorney Preet Bharara said: "Wells Fargo enjoyed huge profits from its FHA loan business, the government was left holding the bag when the bad loans went bust. Wells Fargo, one of the biggest mortgage lenders int he world, has been held responsible for years of reckless underwriting." Similar settlements have already been reach between the government and Goldman Sachs, Morgan Stanley and JP Morgan Chase.