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What's Ahead for Home Loans in 2010?

This year could bring significant changes from 2009 for those seeking home loans. Over the last year, home prices fell to 2003 and earlier levels in many parts of the country. In addition, home loan rates declined to the lowest levels on record and this combination led to the highest home affordability levels ever recorded. Here's a recap of what happened in 2009 and what you need to know for the year ahead.

Would You Like a Sweetener with that Rate?

Interest rates throughout 2009 were artificially low. That's because in late 2008, the Federal Reserve put into place a program for purchasing Mortgage Backed Securities with the intention of lowering mortgage rates. They were successful with reported rates by Freddie Mac falling below 5.00% several times in 2009.

Without this program mortgage rates would have been at least 1.00% higher, and potentially even higher than that. Did you know that a change of 1% in a home loan rate impacts the amount someone can borrow by roughly 10%? For example, if rates are in the low 5.00% range today and they shoot up to the low 6.00% range, $250,000 home buyers may become $225,000 home buyers. 

Look for rates to return to 2008 and previous levels as the Fed ends the program on March 31, 2010. While rates will not immediately increase to 6.00% or higher, know that without additional intervention, rising rates are inevitable. Expect that under worst case scenarios, rates could dance around the 7.00% range.

Show Me Your Docs

Contrary to what you may see or hear in the media, money is widely available for people who want to finance their homes. There is one caveat, though. People need to be able to demonstrate that they qualify for the loan amount they are pursuing and that they have been willing to repay debt they have accepted in the past.

To obtain financing today, a borrower needs to supply the lender with all documentation pertaining to their income, liquid assets and potentially items related to their credit reporting. The best preparation path to follow is to gather most recent paystubs for 30 days of earnings, two years W-2s with complete tax returns and three months statements, all pages, for any liquid assets used for qualifying.

The free-wheeling days of borrowing whatever people thought they could repay are gone. While some exceptions may be granted for strong compensating factors, total debt to income level will be capped at 45%.

Have We Hit a Bottom in Housing?

If you simply look at the data that is reported, one could surmise that the bottom in U.S. home prices was hit in 2009. One nationally respected index for home price reporting, the S&P/Case-Shiller Home Price Indices, indicates that home prices turned for the better around mid-year in 2009.

While all markets are different and some may continue to show signs of weakness, most communities have demonstrated strength and should continue to do so. However, some potential headwinds do exist for the second and third quarter of 2010, following the expressed expiration dates of several stimulus programs: The Mortgage Backed Securities purchase program and home buyer tax credits, both of which are directed at the housing and the mortgage markets.

Foreclosures and short sales will also continue to influence many of the hardest hit markets as unemployment and resetting adjustable rate mortgages weigh on distressed homeowners.

Dates to Remember

Two dates lie on the horizon that will impact interest rates and potentially home prices. The first program scheduled to end is the Federal Reserve's program for purchasing Mortgage Backed Securities. Announced in November of 2008, the Fed began purchasing $1.25 trillion in mortgage bonds in 2009 which will culminate at the end of March. As the intention and result of this program was to lower rates, mortgage rates will likely begin to rise after the program concludes.

In addition, April 30, 2010 is the last day to enter into a home purchase contract and still potentially qualify for a federal income tax credit of up to $8,000 for first-time home buyers and up to $6,500 for repeat home buyers. The credit can be claimed only on contracts that close by June 30, 2010.

Act Now...Not Later

While no one knows for certain what the future holds, one thing does appear clear. Home loan rates and home prices both will be higher in the future. If you or anyone you know is looking to purchase or refinance a home, waiting could be costly!

What's Up With Mortgage Rates This Week?

Rates have shown a little more volatility this week. First they improved early in the week and then reversed course and rose yesterday afternoon. I was able to lock in my pipeline yesterday morning just before lenders started re-pricing for the worse. Uncertainly over the 3/31/10 deadline for the Government's program of buying Mortgage-Backed Securities (MBS's) fueled the rise. On the other hand, good demand for yesterday and today's Treasury auctions helped improve pricing. Today we had a weaker than expected Retail Sales report and slightly higher unemployment claims influencing the pricing of MBS's. Te net result compared to last week is about 1/8% improvement in rates.

The Importance of Yesterday's Fed Announcement

Yesterday the Fed announced that they will leave interest rates unchanged for the foreseeable future so mortgage rates should stay low, right? WRONG! How's that?

The Fed said they still plan to discontinue their program of buying Mortgage-Backed Securities by March 31^st. It is this plan, and nothing else, that is keeping mortgages rates artificially low by about 1%. In other words, if the Government stops buying MBS's at 4.5% - 5.%, then rates will rise to a rate that other investors will want to obtain if they are to buy MBS's instead of much safer Treasury Notes and Bills. We know from experience that investors in MBS's want a rate about 1.5% higher than 10-Year Treasury rates. Since Treasury Rates will rise along with the Fed Funds Rates, mortgae rates will rise too.

To illustrate the immediate impact on the Fed's statement yesterday, the Fed announcement was released at exactly 11:15 and within seconds MBS bond prices immediately nose-dived. And since rates move in the opposite direction of price, rates went up proportionately.  

It is important to note the speed at which the market reacts to the news. Fortunately in this case, the professional MBS's traders anticipated the Fed Announcement not to continue the MBS purchase plan so although yesterday's rise seemed dramatic, the actually impact on rates is less than 1/8%. But it is most likely the beginning of an upward trend in rates.

If it was me, I wouldn't hesitate to lock in at today's rates. The impetus for higher rates in the near future is much greater than the hope for lower rates.

I track the movement of MBS prices and rates every day, all day long, to try to obtain the best moment in time to lock my clients in. Most lenders and loan officers take your application, lock it in and move on. I always strive to get the best for my clients.

What's Up With Rates This Week?

Condo Pitfalls! What You Need to Know When Buying or Selling a Condo:

The condo market is hot right now and the reason is simple - they cost less than a detached home. First-time homebuyers and investors alike are gobbling them up. My pipeline is full of pre-approvals for buyers looking for the right condo to buy. 

Buyers, Sellers and Realtors should be aware of certain lender guidelines when it comes to buying a condo. These guidelines are set forth by Fannie Mae and Freddie Mac, the two government-owned agencies responsible for providing mortgage money to all lenders. Therefore their rules apply to all lenders. Be aware of these conditions so you’ll have no surprises.

Here’s what you need to know:

·         For existing condominium projects, at least 51% of the units must presently be owner-occupied. If more than 50% of the units are owned by investors, the unit you want to buy may be unfinanceable.

·         No more than 10% of the units in a project can be owned by a single entity.

·         No more than 20% of a project can consist of non-residential space (such as commercial space).

·         No more than 15% of a condo project’s units can be more than 30 days delinquent on HOA dues. 

·         The homeowners association must have at least 10% of its budgeted income designated for replacement reserves and adequate funds budgeted for the insurance deductible.

·         Fannie Mae and Freddie Mac require a .75% add-on fee (this is to points, not rate) unless the buyer makes a down payment of at least 25 percent. Investors will pay an additional 1.75% in points. 

·         Pending litigation by a homeowner against the HOA or litigation by the HOA against the developer is almost always a deal-killer so be sure to ask if there is any pending litigation. 

·         Fidelity insurance will be required for condos with 20 or more units, ensuring that homeowner association funds are protected. 

·         Borrowers must obtain a condo-owners insurance policy unless the master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condo-owners policy, known as an HO-6 policy, covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.

·         For new construction and newly converted condo developments, 70% of the units must be pre-sold (closed or under contract).

·         New projects where the seller (builder or developer) is offering sale/financing structures in excess of Fannie Mae’s eligibility policies for individual mortgage loans. This varies according to the amount financed as a percentage of the purchase price.

How Do We Find Out If a Project Meets the Guidelines?

Lenders and Mortgage Brokers are required to obtain an HOA Certification form from the HOA or Property Management Company. Each lender has their own form but the questions are the same. Some HOA’s make the information available on a website called CondoCerts.com to which we subscribe. There is almost always a cost for obtaining the HOA Certification Form and supporting documents – usually $100 - $200.

In addition to the HOA Certification Form, the lender or broker will often need the projects Covenants, Codes & Restrictions (CC&R’s) Articles of Incorporation, By-Laws, the Budget, and Evidence of Insurance/Master Insurance Policy.

Awareness of these requirements will help to ensure a smooth closing. I encourage Realtors to obtain this information when listing a condominium and for buyers to ask for this information early in their shopping process. I’m always available to help too. Don’t be afraid to buy a condo. Just do your homework. A condo can be a great investment!

What’s Up With Rates This Week?

Mortgage Rates improved a bit more from last week driven by weak inflation data and rising unemployment claims today. Remember, bad news for the economy is good news for rates. In the meantime the debate continues over whether the Government will continue their program to purchase Mortgage-Backed Securities (MBS’s) beyond the deadline of March 31^st. It is estimated that the MBS purchase program is responsible for keeping mortgage rates artificially low by about 1%.

Please feel welcome to forward this information on to your clients, colleagues and friends. I value your feedback too.