Although I promised a six-week sabbatical from my blogging while I worked on my relocation and my new office, I have decided to jump in today and write because I need to clear something up. I felt this was necessary based on many conversations I have had with borrowers over the past week and, in part, what I am seeing on the news.
The media would have you believe that our country's financial system has fallen flat on it face and that there is not any money left out there for those that want to borrow. This is simply not true.
Again, this is simply not true.
Of course some of the credit markets, mainly those affecting big businesses - such as Commercial Paper and other short-term financing - are having difficulties right now, but First Omni is still here and still has plenty of money to lend qualified borrowers.
Here's an article I found online today that says - perfectly - what I wanted to tell you:
by Holden Lewis of Bankrate.com
Credit Crunch? Mortgages still available
Mortgages are still available, despite talk of a credit crunch.
Qualified borrowers can find conforming and FHA-insured mortgages easily. Jumbo mortgages are more scarce, but available. Rates went up in the last week, which is another way of saying that credit is tighter. But the mortgage marketplace isn't frozen, at least in part because of federal intervention.
"There's almost no difference in the availability of money compared to a year ago, with the exception of jumbos," says Jim Sahnger, mortgage consultant with Palm Beach Financial Network in Stuart, Fla. "The main difference is that you have to provide documentation, such as W-2s, tax returns and bank statements. Welcome to the full-doc world."
Credit standards have been getting tighter all year, reducing the number of people who qualify for loans. It's hard to quantify how many people have been disqualified merely because of more strict lending standards.
As Sahnger mentioned, one prominent change has to do with documentation of income. A year or two ago, a borrower with an excellent credit history and no change in employment might have been able to refinance a mortgage without having to provide proof of income -- even on a full-documentation loan. Those days are gone, mortgage lenders say. Bring in W-2 forms or income tax statements, or get turned down for a loan.
Borrowers need better qualificationsThe income-documentation requirement is part of a yearlong trend in which mortgage insurers and Fannie Mae and Freddie Mac have added fees and restrictions, little by little. Each change knocked a few more people from the ranks of qualifying borrowers.
Take the mortgage insurers, who protect lenders from the costs of borrower default when borrowers make down payments of less than 20 percent. Last year, the mortgage insurance companies began publishing lists of "restricted markets," where home prices are declining. Borrowers have to make bigger down payments and have higher credit scores to get mortgage insurance in restricted markets.
The mortgage insurers have tightened the screws slowly, adding cities and states to the lists of restricted markets and increasing requirements. In the latest example, Mortgage Guaranty Insurance Corp. recently boosted the minimum credit score needed to buy a house in a restricted market. In August, the minimum score was 680. Beginning in October, the minimum score will be 700.
At the same time, MGIC tinkered with down payments on second homes. In August, you could buy a second home in a restricted market with a 5 percent down payment. Starting in October, that same home requires a 10 percent down payment.
Fannie, Freddie and feesMortgage financing giants Fannie Mae and Freddie Mac have been adding restrictions, too. Before they were taken over by the federal government in early September, Fannie and Freddie had been on a months-long campaign of adding fees that were then passed along to borrowers either directly or through higher mortgage rates. The Fannie terminology for these fees was "loan level price adjustment."
That trend might reverse soon, courtesy of the federal government. James Lockhart heads the Federal Housing Finance Agency, which now oversees Fannie and Freddie. He told Congress this week that the mortgage finance companies' mission to support affordable housing "had been impaired," partly because of the added fees that had made mortgages more expensive.
In a sign that he wants to rescind some of those fees, Lockhart told the Senate Banking Committee that he has instructed the new heads of Fannie and Freddie "to examine the underwriting standards and pricing. They have begun to do so, and I expect any changes to reflect both safe and sound business strategy and attentiveness to the Enterprise's mission."
Jumbos are scarceIt's not all good news. The marketplace for jumbo mortgages has been in disarray for more than a year now, and it isn't getting better. Jumbo rates are higher than rates on conforming loans (mortgages of $417,000 or less).
"Jumbos are harder to get. To me, that market is scarce," says Bob Walters, chief economist for Quicken Loans. If there are any jumbo deals to be had, they come from banks and thrifts that keep the loans instead of selling them on the moribund jumbo secondary market.
"Jumbo still exists, but in a horrifying format," says Dick Lepre, senior loan consultant with Residential Pacific Mortgage in San Francisco. A few lenders offer 30-year, fixed-rate jumbos at 8 percent or more. That rate is too high for today's borrowers. For jumbos, "the most common thing that we do is a 5/1" adjustable-rate mortgage, Lepre says.
Early this week, a 5/1 jumbo ARM was available from Lepre at a starting rate of 6.375 percent, with a one-year prepayment penalty. To qualify, the borrower had to have good credit and "fairly strong reserves" -- as much as 12 months' worth of house payments in readily available savings. That loan was from Union Bank of California, a regional bank based in Los Angeles.
At the same time, Citi was charging more than 9 percent on a 5/1 jumbo ARM -- plus more than 2 discount points. Chase was charging high rates, too. "Citi and Chase just don't have any appetite for jumbo loans right now," Sahnger says.
Lepre and Sahnger are brokers, and they say brokers are the best source for jumbo loans because they have access to the reduced number of lenders that are offering them at affordable rates.
It's important to remember that, "Qualified borrowers can find conforming and FHA-insured mortgages easily." This means that you can contact me if you are still interested in getting a home loan!
This week's post is the second and final part of series started last week. Last week's topic was entitled, How Did We Get Here and it explored a period of time that starts in 2001 - the beginning of the modern mortgage industry - to 2007 - the peak of the housing bubble. The week, as the title suggests, I will talk about where we are today.
Investor Demand Drops
As home prices fell and the mortgage-delinquencies and foreclosures rose, investors saw the major losses in their mortgage-based investments. This led to a sharp decline in demand for those mortgage-based investments through the world. Because of this, mortgage origination projections for 2008 are $1.9 trillion, down over 50% from a high point of $3.9 trillion in 2003.
Mortgage Lending Standards Tighten
As a reaction to rising credit investment losses, the lending standards are returning to more prudent levels. The tightening of these standards coupled with the reduced equity from falling home prices in some markets has greatly limited the number of qualified new home buyers and refinance opportunities for current homeowners.
Borrowing Power Decreases
The tightening of mortgage standards has also impacted borrowing power. As you may have guessed, the low- and no-doc options mentioned last week are no longer available. Recently, the typical borrower's buying power has dropped sharply; some say as much as 50% from it's peak in early 2007.
Home Prices Fall
Prices of existing homes continue to soften in many markets. Foreclosures have risen, and home sales are falling leading to excess surplus in the housing inventories.
To return to the trended growth rate of 1.4 percent, home prices must decrease an average of 34 percent from their peak reached in early 2007.
Additionally, it's projected that housing prices must return to or fall below 2.6 times the median income level.
When Will the Market Stabilize?
Given the fluid nature of the values and the external influencing factors of the mortgage industry - regulations, interest rates, economic conditions, availability of credit, etc. - to pinpoint an exact timing for the industry to reach the bottom of this cycle (not crisis, but cycle) is more of an art than a science.
The best forecasting calls for the restoration of equilibrium to the mortgage industry in the first half of 2010. However, pending government intervention may impact the timeline for the return of stability to the market as well as to investor confidence much sooner than that.
A special thanks to T2 Partners Management LP (www.valueInvestingCongress.com) and JP Morgan Chase and Company (www.chase.com) for the data that was used for this blog entry.
This is part one of a two-part series on what has really happened in the mortgage market. Today, I will talk about the events that happened to get us to next week's topic: where we are today.
To understand where we are today, we must first look at a period of time that starts in 2001 - the beginning of the modern mortgage industry - to 2007 - the peak of the housing bubble. Mortgage lending guidelines were drastically loosened due to a mounting demand for mortgage-based investments. This led to a surge in borrowing power, home prices and mortgage origination.
Investor Demand Skyrockets
Wall Street firms rapidly realize that mortgage products were profitable and, in turn, created a demand for more and more mortgage-based investments. Lenders and their secondary-market investors then relaxed their lending guidelines to generate higher mortgage loan volumes. With more borrowing power, buyers were then enticed by the allure of stretching for larger homes, second homes and investment properties. Homebuilders saw the potential as well and built new homes at a record pace.
Borrowing Power Surges
Prior to 2001, the typical borrower could qualify for a loan amount that was roughly equal to three times their before-tax income.
Beginning in 2001, borrowing power surged based on:
Rising income levels
Falling interest rates
Higher allowable debt-to-income ratios
Interest-only mortgages
Low- and no-doc mortgage options
Low- and no-downpayment options
Increased credit availability
With these loosening mortgage guidelines, from 2001 to 2007, borrowers could qualify for a loan amount that was roughly equivalent to nine times their before tax income. Wow!
Home Prices Soar
As borrowing power increased exponentially, so did the prices of homes. From 1975 to 2000, the Compound Annual Growth Rate (CAGR) for home prices trended at 1.4 percent. From 2000 to 2007, that rate trended at 7.6 percent. Home prices were driven up by unsustainable increases in borrowing power.
Mortgage Lending Standards Ease
In addition to expanded guidelines, lenders and their secondary-market investors also lowered their credit standards. Subsequently, borrowers were introduced to 100% financing, interest-only loans and limited-to-no documentation loan programs.
Next week, I will talk about the ramifications of the above issues and where we are today after these consequences have been realized.
Rent or Buy?
For those of you that are homeowners, please share this with your renting friends!
For many people, buying their home makes the most sense, and for many others, renting is the better choice. To help determine which is best for you, it's wise to first determine if you can indeed afford to buy. Once this is done, you then need to look at other factors, including the time you intend to stay in the new home, the likelihood of your new home appreciating and any increase you may see in property taxes.
Below are a few questions that you can answer to help determine what's best for you.
Down payment: What best describes your access to one?
I have zero savings and no access to one lump sum
Recommendation: You should rent due to your lack of access to cash.
Here's why: First off, there are little-to-no zero down payment programs in the current market place. Secondly, not having the funds available for a down payment, or for a "rainy day" will not look well when the underwriter reviews your overall credit risk.
Consider this: If you want to be able to purchase a home in the future, I would suggest that you start saving at the most aggressive pace possible. If you stick to your plan, you will see that it adds up quickly and, before you know it, you will be able to buy!
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I have some savings, access to a modest lump sum, or both
Recommendation: You may be able to buy in this case because there are many low-down payment options available.
Here's why: I said, "you may be able to buy..." because, aside from the assets you have or have access to, we need to look at other aspects of your overall loan portfolio such as debts, income, etc.
Consider this: To get started on a FREE pre-approval for a home loan, including an analysis of all the important details going into a home loan, please apply online or contact me to apply over the phone.
I have access to a substantial amount of money
Recommendation: Assuming the home will appreciate (or at least hold it's value), the taxes will not skyrocket and you plan to be in the home a while, buying would be a great option for you.
Here's why: Homeownership is a great idea for you because you can invest your money in an investment that typically does very well. Prices are low, rates are still low and it is a great time for first time home buyers to get into the market.
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