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Jumbo lending ‘alive and well’ in Laguna

As we turn a more focused lens onto the Laguna Beach housing market, it’s important to explore the types of financing available in this market and the types of transactions being made.

This is a city where homes for sale soar to the tune of $30 million, and a city where the average active listing price is $3.8 million.

To help us better understand Laguna’s mortgage industry, Certified Mortgage Planning Specialist Richard Cirelli with Laguna Beach-based RTC Mortgage Corporation discusses jumbo loans:

“First of all, I would like to dispel the myth that there is no “Jumbo” financing”. Jumbo financing to $2 million or $3 million or more is available to qualified buyers with down payments of 20% to 30% in Laguna Beach and other high-priced markets. The definition of a “Jumbo” mortgage is one that exceeds the maximum loan limits for “conforming” loans that are saleable to Fannie Mae, Freddie Mac or insured by the Federal Housing Administration (FHA). The maximum conforming loan limit for a single family house in Orange County is $729,750. Accordingly, a “Jumbo” loan would be defined as loan that exceeds that amount.

A search of all sales transactions in Laguna Beach in 2009 reveals 91 homes that sold for more than $1 million and were either bought with cash or financed with Jumbo loans (this sample excludes properties that may have been bought for more than $1 million using conforming financing with loans less than $729,750). Of these 91 sales, 53 transactions (58%) were bought with cash and 38 (42%) were financed with Jumbo loans. Of the 38 Jumbo- financed transactions, only 5 appear to be financed by the seller or other private parties. Therefore, 33 transactions were financed with institutional loans. Fourteen different banks were responsible for those 33 financed transactions.

As previously mentioned, 14 different lenders provided Jumbo loans in Laguna Beach last year! As opposed to “conforming” loans where every lender offers the exact same product with no variation in underwriting guidelines, Jumbo lenders don’t all underwrite to the same criteria. Therefore, it’s important to work with a mortgage broker such as RTC Mortgage Corporation that has access to multiple lenders and knows the nuances of each lender and their guidelines. All lenders do require documentation of income to qualify but Jumbo lending is alive and well in Laguna Beach.”

Why Did Mortgage Rates Rise this Week?

I can't help writing about rates again this week. The anticipated rise in mortgage rates may have begun. Only time will tell whether it's a trend or an aberration but rates shot up by .125% - .25% over the past two days. I've been saying for months that mortgage rates have to rise as we near the expiration of the Government's Mortgage-Backed Security Purchase Program. But, that's not all that drove rates this week.

Here's a list of the contributing factors:

·         The Fed's surprise announcement today to raise the Discount Rate - the rate they charge banks. This announcement actually came after the markets closed but it must have leaked out earlier to professional traders because the MBS markets did nothing but get worse as the day went on.

·         Hotter than expected inflation news - The Producer Price Index (PPI) for January was released this morning. This report measures the cost of goods at the wholesale level. Tomorrow the CPI is released. This reports measures inflation at the retail level. If it's higher than expected, expect the Bond and equity markets to be worse tomorrow. Inflation is the arch-enemy of interest rates.

·         Record amounts announced for next week's Treasury auction and lower foreign demand for U.S Treasury's during the past week. China and other country's were less willing to buy our debt. To entice them back into buying, we must offer higher rates. If Treasury rates rise, mortgage rates must rise too in order to compensate or the higher risk associated with MBS's vs. the "safer" investment in Treasury's.

·         Stabilizing Stock Market. As the stock market rises it pulls money out of bonds and into stocks. As money flows out of bonds, including MBS's, it drives the price down and rates up.

·         In the Minutes just released of the Fed's January meeting, some of the Fed Governors argued to change the Fed policy statement to suggest that they should to begin raising rates modestly. They didn't agree to do that which makes today's surprise announcement even more surprising.

·         In their last meeting, some Fed Governors said that the Fed should begin to sell off their stockpile of Mortgage Backed Securities as the recovery gains strength.  With the Fed buying program ending, and the Fed now potentially turning into a seller of MBS's.Bond prices will very likely come under more pressure.

It's not important that readers understand these points. But, what is important is to recognize how quickly the markets can and will turn on news - good or bad. And that is why it is so important to deal with a mortgage professional that understands the conditions that influence rates, watches how the markets react to the various stimuli, and acts to lock in his client's rates at the most advantageous time. We can't be perfect but we must do everything we can to provide the best terms possible to our clients.

I subscribe to four services that alert me to pending changes. As long as a client trusts me to work in their best interest I am almost always able to save them money. All lenders offer the same product at essentially the same rate. But that rate is continuously changing. And, as it changes, different lenders are faster or slower to adapt to those changes - creating an advantage or disadvantage between one lender and another. As a mortgage broker, I have choices and some lenders make better choices than others, particularly during volatile markets. A direct lender can't offer choices and therefore operates at a disadvantage. They offer their own rate and there's no flexibility to choose another.

Mortgage Rate Update:

Today was one of those days when most lenders re-priced for the worse 3 or 4 times during the day. I'm writing this at the end of the day and therefore the rates below are worse than they would have been first thing this morning. The release of tomorrow's CPI index for January will dictate the direction of tomorrow's rates. Let's hope it's a good report that suggests less inflationary pressure and contradicts today's PPI report. Please don't hesitate to contact me for an update.

BTW, Mortgage Rates are still very near historical 50-year lows. Don't get caught up in worrying about a .25% rise in rates. There are still lots of reasons to buy a house now while rates are low and home prices are low.

The Cost of Regulation

Over the past year several new Regulations have been introduced by the Government in order to protect the Borrower from unscrupulous loan originators. While I'm sure our Government had good intentions, they result in considerable extra expense to the consumer.

HVCC: The Home Valuation Code of Conduct:

This Regulation prohibits mortgage originators from choosing the appraiser. Now, in order to request an appraisal, we must use an Appraisal Management Company (AMC). The AMC's randomly assign the appraisal to a "local" appraiser.

Since the AMC is a middle-man in the process, they keep a percentage of the appraisal fee charged to the borrower - typically 40%. The Appraiser then gets 60% of the fee which is much less than what he/she was paid prior to HVCC. In order for there to be enough money to pay the AMC and the Appraiser, the cost of the appraisal has increased from an average of $400 to an average of $550. Additionally, the randomly selected appraisers are often under-qualified and unfamiliar with the local market that can cause lower appraised values. Not including the cos t of low-appraised values and the impact they have on Buyers & Sellers:

ESTIMATED COST OF HVCC TO CONSUMER: $150

MDIA: Mortgage Disclosure Improvement ACT

This Regulation requires certain Disclosures to be made before any fees can be collected except for the cost of a Credit Report at the time of application. The collection of the Appraisal Fee and therefore the ordering of the Appraisal must be delayed until after Broker and the Lender have provided certain Disclosures to the Borrower. The Lender is allowed 3 days to send the Disclosures and must allow 3 additional days for the Borrower to receive the Disclosures if using the U.S. Mail. If the rate or other costs increase during the process, a new set of Disclosures must be re-ordered resulting in another waiting period before the loan can close.

The result of this Regulation is that loans now take longer to close. When a Broker or Lender locks in an interest rate they must lock it for a set period of time - 15, 30 45 days, etc. The longer the lender guarantees the interest rate, the higher the cost. If a loan typically took 30 days to close and now it takes 45 days due to the Disclosure regulation, the additional cost to extend the rate lock is .125 - .250 points. On a $400,000 loan that equates to $500 - $1000.

 ESTIMATED COST OF MDIA: $750

GOOD FAITH ESTIMATE/RESPA REFORM

Mortgage Originators are now required to provide a Good Faith Estimate (GFE) of Closing Costs at the time of Application and the Estimate for many of the costs can not vary from the final cost. If the final cost is more than the original estimate, the loan originator must pay the difference. Not only are the loan fees subject to $0 tolerance, but Title, Escrow and other fees are subject to just a 10% tolerance.

In order to protect themselves, Lenders, Title and Escrow Companies are "over-disclosing" their fees in order to provide a cushion for unexpected costs that were unknown at the time of application. I estimate the typical over-disclosure by Brokers & Lenders at $1000. Escrow and Title companies are over-estimating by about $250 each. Once the Borrower accepts the higher fee at time of application, it's unlikely that the Lender, Title or Escrow Company will voluntarily reduce it.

 ESTIMATED COST OF GFE: $1500

PROCESSING FEES:

The new Regulations require additional work by Brokers and Lenders. Accordingly, Lenders have increased their fees by $100 to $200 per loan. Additionally, Loan Processors are charging more to process a file due to the extra time involved - typically $100 per loan.

 ESTIMATED COST OF ADDITIONAL PROCESSING FEES: $250

ESTIMATED GRAND TOTAL OF ALL NEW REGULATION: $2650