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More Jumbo Money!

I am seeing more lenders offering Jumbo loans - above the maximum Fannie Mae/Freddie Mac limit of $729,750. Some lenders will go to $2 Million and some even offer loans to $4 Million and higher.

This is great news for the higher priced markets that have been left out of the government's stimulus packages that increased conforming and FHA loans from $417,000 to $729,750.

The reason is that some of the bigger investment banking firms are allocating some money to the securitization of jumbo loans. Some of the names I've heard mentioned are Chimera Investment Corp., The Carlyle Group, PIMCO, and Goldman Sachs. Most of the firms working on a jumbo Mortgage-Backed Securities (MBS's) hope to originate recently funded loans that were underwritten to today's stricter guidelines. Until now, the few lenders willing to make jumbo loans had to be able to keep these loans on their own balance sheet. They also had to increase their reserves in case of future default. Therefore, most banks just couldn't afford to offer jumbo loans.

The securitization of Jumbo's still has a long way to go but the signs are very encouraging. Just a few months ago I was reading articles saying it could be years before there were buyers for Jumbo MBS's.

This is all good news for those of us in high-priced markets.

Update Regarding Stricter Documentation

A few weeks ago I wrote about the trend of lenders requiring more and more documentation. It's a result of Fannie Mae and Freddie Mac forcing lenders to buy back loans that are less than fully documented or just outside their guidelines. Having to buy back loans will put a lender out of business faster than almost anything except for fraud. So, you can see why lenders are over-conditioning now. They can't afford not to. I also just read that some investors are now paying upwards of 85 to 90 cents on the dollar for performing loans that have been sent back to the originator because-for one reason or another-they violated Fannie Mae or Freddie Mac underwriting standards. These buy-backs may not be a total loss but I can assure you that no lenders want to lose 10% or 15% either.

An interesting development is that there are now some large investor pools that are intentionally originating loans that are just outside the Fannie/Freddie guidelines at rates that are only slightly higher - say .25% to .50% above the low rates for standard loans. Their strategy is that once these loans are seasoned for a year or two, the performing loans would then be eligible for sale into Fannie or Freddie loan pools.

I have sources for the "just outside the guidelines" loans and at rates just slightly above the best rates. I think this is a great opportunity for those with slightly high Debt-to-Income ratios or Loan-to-Value ratios. It's also an opportunity for self-employed borrowers that don't quite have meet the two-year self employment requirement of Fannie and Freddie.

California Re-establishes Buyer Tax Credit

California Gov. Arnold Schwarzenegger has signed legislation that re-establishes and extends the state's $10,000 tax credit for homebuyers, a program that proved so popular last year that it ran out of money eight months before it was set to expire.

The measure sets a $10,000 credit, up to 5% of the purchase price, for buyers of newly built homes and a similar credit for first-time buyers who purchase existing homes. The credit will be available on "personal residences" purchased between May 1 and Dec. 31, and "principal residences" acquired between Dec. 31 and Aug. 1, 2011, as long as long as they were purchased pursuant to a contract executed on or before Dec. 31.

The $200 million allocated for the program, which is offered in addition to the revised and extended federal tax credit, will be split evenly between new homebuyers and buyers of existing houses. The credit comes with two caveats. It must be claimed in equal installments over a three-year period and buyers must live in the homes they buy for two years or forfeit the benefit.

The tax credit should help push prospective buyers off the fence, clear out inventory and jump-start the homebuilding industry, which will help create jobs and reinvigorate the state's economy.

It is expected that the state credit will have the same positive impact on the market as the federal write-off. Nearly 40% of first-timers said they wouldn't have purchased a home if the federal credit buyers were not offered.

Mortgage Rate Update:

Laguna Foreclosures Jump 66.7% Over Year

By, Kelli Hart, Orange County Register

The number of homes lost to foreclosure in Laguna Beach increased 66.7% over last year - the 10th highest increase in the county - recent MDA DataQuick foreclosure activity statistics show.

Though quarter-over-quarter foreclosures dropped slightly by two homes, the year-over-year figures jumped considerably for this beach town where finding a foreclosed home is often like finding a needle in a haystack.

Not so much anymore, in fact, some of these new foreclosures are hitting the beach market now.

The chart below breaks down the number of homes lost to foreclosure in Laguna Beach and the quarter-over-quarter and year-over-year change.

The number of homes with a notice of default filed, which triggers the foreclosure process after one or a series of missed mortgage payments, decreased by 24.4%. This actually supports the increase in foreclosed homes, because some of those homes in default eventually became foreclosures once the homes were taken by the banks.

The chart below breaks down the number of homes that received a notice of default in Laguna and the quarter-over-quarter and year-over-year change.

Local mortgage expert Richard Cirelli, president of Laguna Beach-based RTC Mortgage Corporation, makes the following observations based on this data:

• "Laguna Beach saw a larger appreciation rate than other markets during the boom years so there are more people with equity here than most other markets. As long as there is equity, owners are more likely to find a way to keep making their payments.
• "Laguna Beach has a higher percentage of executives and business owners and therefore a higher income than most other markets and presumably more cash reserves too. Many also owned other properties that they may have liquidated in order to survive. Now, that money has run out.
• "The low interest rates over the past few years were only for loans less than $729,750. Many Laguna buyers and homeowners owe more than that and therefore there are no programs to enable them to refinance to obtain a lower rate and payments. And if they did have a small enough mortgage, they probably couldn't document sufficient income to qualify.
• "The Loan Modification programs that were created were mostly geared to those that had Fannie Mae or Freddie Mac loans which were capped at $417,000 prior to the Stimulus Package increases to $729,750. There has been little if any relief for larger mortgage holders."

Mortgage Rate Update:

As expected, this week's Fed meeting has adjourned with no change to key short-term interest rates. The post-meeting statement didn't bring any changes to the key verbiage that some had hoped to see. The Fed did say that the economy is improving, but did not change words from the previous statements that would have indicated they were expecting to start raising rates sooner than later. While not many people expected them to adjust rates at this meeting, some analysts are growing impatient and fear that waiting too long to start raising rates will cause more problems, particularly inflationary as the economy gains steam. This issue is widely debated but was the focal point of this meeting, so some market participants and economists are disappointed by its results.

Overall, the immediate reaction to the Fed statements have been fairly neutral for the bond market and mortgage rates. Rates for 30-year fixed rate mortgages less than $417,000 are still under 5%.

How Do Lenders Prevent Fraud?

Income and Employment:

It was lenders lack of documentation that got us into this mess a few years ago. Now that "stated Income" loans are gone there are ways that the lender can protect themselves from fraudulent documentation.

IRS Form 4506-T. All Borrowers are required to sign this form as one of the up-front loan Disclosures at the time of application. This form enables the Lender to obtain a summary of an individual's tax information to verify the income stated and documented in the loan application. To the best of my knowledge, all lenders are verifying the income with the IRS on all borrowers - whether employed or self employed. With the IRS validation it's virtually impossible to submit fraudulent paystubs, W-2's and Tax Returns.

It should be noted that it takes the IRS 6-8 weeks after tax returns are filed to make the data available to lenders. Therefore, newly filed tax return transcripts may be unavailable. In these cases the lender will use the two previous year's tax transcripts and ignore the most current year. This could be to the detriment of a self-employed borrower that has had an increase in income during the most recent year.

In addition to obtaining the Tax Transcripts directly from the IRS, lenders also perform a Verbal Verification of Employment prior to the loan closing to make sure the Borrower is still employed. For self-employed borrowers they verify the existence of their business through an independent source - websites, phone books, etc.

Appraisals:
Even though HVCC (Home Valuation Code of Conduct) has taken away the loan originators ability to select the appraiser, lenders are still taking it a step further by ordering what is called an AVM - Automated Valuation Model. Lenders subscribe to online AVM services to obtain a quick range of value to compare against the appraisers value. These AVM's also provide comparable sales for the lender to compare against the comps chosen by the appraiser. Lenders may then ask the appraiser to comment on why they omitted certain comps.

Assets:

The standard method of documenting a Borrowers down payment or cash need to close a transaction is with the two most recent bank statements. It is not uncommon for a lender to ask for one more recent statement before closing. Large Deposits must be explained and documented to make sure the down payment isn't borrower on a purchase transaction.

As with everything else in this business, it is imperative to work with an experienced mortgage broker that knows the lenders requirements, anticipates the documentation that will be required and has multiple lenders to choose from. Direct Lenders just don't have the flexibility to pick and chose the right source for their borrower's files.

Other Checks and Balances:

There are numerous other methods that lenders use to prevent fraud. Most common are the Occupancy Certification. All lenders require this form to be executed and it warns that not occupying a property that was applied for as a Primary residence constitutes mortgage fraud and can be investigated by the FBI. Occupancy Fraud was the most common type of fraud before the use of this form about a year ago. Interest rates on non-owner occupied are always higher than they are for owner-occupied or Primary Residences. New credit reports just prior to funding are sometimes used as a double-check.

When in doubt as to whether you or your clients will qualify, just give me a call.

New California Homebuyer Tax Credit

The State of California has allocated $200 million for homebuyer tax credits. This bill comes just as the Federal Government's First-Time Homebuyer Tax Credit Stimulus Program expires at the end of April. The bill allocates $100 million for qualified first time home buyers of existing homes and $100 million for purchasers of new, or previously unoccupied, homes. The eligible taxpayer who closes escrow on a qualified principal residence between May 1, 2010 and December, 31, 2010, or who closes escrow on a qualified principal residence on and after December 31, 2010 and before August 1, 2011, pursuant to an enforceable contract executed on or before December 31, 2010, will be able to take the allowed tax credit. This credit is equal to the lesser of 5% of the purchase price or $10,000, taken in equal installments o ver three consecutive years. Purchasers will be required to live in the home as their principal residence for at least two years or forfeit the credit (i.e. repay it to the state).

Mortgage Rate Update:

Rates have continued to edge higher again this week. The Government's stimulus program of buying Mortgage-Backed Securities (MBS's) came to an end on March 31^st. During the past 15 months, the U.S. has purchased $1.25Trillion MBS's issued by Fannie Mae, Freddie Mac and Ginnie Mae - the 3 Government-owned enterprises that are responsible for nearly 100% of the mortgage market. The MBS purchase program kept mortgage rates around 5% for the past year for the benchmark 30-year fixed rate loans up to $417,000.By the way, our Government was responsible for about 80% of all Mortgage-Backed Securities purchased from these entities. Now that that biggest buy has exited the market, it will be left to other institutional and foreign governmental entities to pick up the slack. These other potential buyers will want a higher yield than the 4.5% - 5.00% that our Government has received. And, at some point our government will need to start selling their MBS's which in turn increases supply which will create a new problem as these MBS's compete with U.S issued Treasury Securities for the investors dollar. Fortunately, the U.S. doesn't intend to flood the market with their MBS's anytime soon.

In the meantime, I've observed a rather large increase in intra-day volatility meaning that there are large swings in both directions in mortgage pricing each day now that the Government is out of the picture. Therefore, timing is everything. I subscribe to a few services that alert me to pending changes in mortgage pricing during the day which helps me to lock in my clients' loans at the most opportune time. I'm happy to say that I have my entire pipeline of loans locked in ahead of the recent rise in rates.