Category: For Professionals

What is a point?

Posted on by Evan in For Professionals, General Mortgage Info., Mortgage Qualification

What is a point? A point is equal to 1% of the loan amount and is a fee that can be paid at closing in exchange for a lower interest rate for the life of the loan (in most cases the discount for paying a point is .125%-.375%). A point is disclosed on the Good Faith Estimate as an origination fee or loan discount.  At the end of the day it doesn’t matter to you what the point is called. The bottom line is you need to decide whether or not you feel the upfront investment of paying 1% point is worth the discount in interest rate that you will receive. If you intend on having this loan for the long-term (i.e. > 5 years) then paying upfront points may be a good idea. However, for shorter term outlooks it generally does not make sense.

We typically recommend to our clients NOT TO PAY POINTS (adjustable rate mortgages are an exception)because in our experience the upfront cost of 1% point does not justify the long term savings.  This is because we’ve found that most of our clients DO NOT keep their loans long enough to benefit from the modest interest rate discount that paying a point provides.  Empirical data also supports our philosophy as the article below from the Seattle Times suggests.

Seattle Times Article about Points:
Report: Buying points rarely pays off

CHICAGO — A new report claims that borrowers tend to purchase too many points when selecting a mortgage and end up paying more than they would have with no points and a higher interest rate.

The study was co-authored by Abdullah Yavas, Elliott professor of business administration at Pennsylvania State’s University’s Smeal College of Business, and Yan Chang, of Freddie Mac. The two considered 3,785 individual mortgages originated from 1996 to 2003, looking at the points paid, interest rates and loan length.

Data showed that, on average, those who buy points are overestimating the amount of time they will hold their loans. They tended to pay off their mortgages about 37.5 months too early for the purchase of points to pay off,
defaulting, moving or refinancing before hitting a break-even point so the strategy made financial sense.

By purchasing points, borrowers lower the interest rate on the mortgage. One point is equal to 1 percent of the mortgage, charged as prepaid interest. Points paid to purchase a primary residence are deductible in the year they are paid on federal income-tax returns; points paid to refinance must be written off over the life of the mortgage.

“We underestimate the possibility that we may refinance in the near future — or refinance again in the near future — and we underestimate the possibility that we may have to move, either for job relocation or other
reasons,” Yavas said.

Only 1.4 percent of borrowers who purchased points held their loans long enough to make it pay off; of those who didn’t buy points, only 1.5 percent would have been better off purchasing them, according to the study.

However, Yavas pointed out that the data cover a time of decreasing interest rates and increasing property values, which led to a lot of refinancing.

The report also found that borrowers who buy points often don’t treat them as costs they can never recover and so are less likely to refinance. When they do refinance, they often do it late, perhaps hoping to compensate for
the points paid.

If a borrower “paid too many points and the interest rates come down quickly, refinancing right away would be the same as accepting the fact that you shouldn’t have paid those points,” Yavas said.

Yavas took an interest in the topic after he decided to refinance his own home a few years back and considered the trade-off between points and interest rates.

John Burns explains housing cycles

Posted on by Evan in For Professionals, Housing & Real Estate

I came across this video and thought it did a good job of explaining the factors involved in creating housing cycles.

WSJ reports on “Paulson Plan”

Posted on by Evan in For Professionals, General Mortgage Info., Housing & Real Estate, Miscellaneous

The WSJ reported this morning that Treasury Secretary Hank Paulson will unveil an overhaul to the regulatory system for the financial markets on Monday. This should be very interesting. One of the provisions in the article calls for a Federal system for state monitored mortgage companies.

Here is the article:

Sweeping Changes in Paulson Plan
By DAMIAN PALETTA
March 29, 2008

WASHINGTON — U.S. Treasury Secretary Henry Paulson plans on Monday to call for sweeping structural changes in the way the government monitors financial markets, capping a broad review aimed at revamping a system of regulatory oversight built piecemeal since the Civil War.

If all the changes get made, they would represent a complete reworking of the U.S. regulatory system for finance. Such an outcome would likely take years and would also require major compromises from an increasingly partisan Congress. The proposal, obtained by The Wall Street Journal, is likely to trigger messy feuds over turf at a time when confidence in government supervision is low.

Even so, the blueprint could be a guide for future action. Senior Democrats have expressed in recent weeks that they also believe the regulatory system should be overhauled, potentially paving the way for possible deals.

Mr. Paulson’s plan will include merging some agencies, such as the Securities and Exchange Commission with the Commodity Futures Trading Commission, while broadening the authority of others, such as the Federal Reserve, which appears to be a winner under the proposal. Mr. Paulson is expected to recommend that the central bank play a greater role as a “market stability regulator,” with broader authority over all financial market participants.

Mr. Paulson is also expected to call for the Office of Thrift Supervision, which regulates federal thrifts, to be phased out within two years and merged with the Office of the Comptroller of the Currency, which regulates national banks. One reason is that there is very little difference these days between federal thrifts and national banks.

The Treasury plan has been in the works since last year but has taken on greater prominence since the onset of the housing crisis and ensuing credit crunch. Critics have blamed lax regulation at both the state and federal level for exacerbating the crisis.

A key part of the blueprint is aimed at fixing lapses in mortgage oversight. Mr. Paulson plans to call for the creation of a new entity, called the Mortgage Origination Commission, according to an outline of the Treasury Department’s plan, which was first reported by the New York Times. This new entity would create licensing standards for state mortgage companies. This commission, which would include representatives from the Fed and other agencies, would scrutinize the way states oversee mortgage origination.

Also related to mortgages, Mr. Paulson is expected to call for federal laws to be “clarified and enhanced,” resolving any jurisdictional issues that exist between state or federal supervisors. Many of the problems in the housing market stemmed from loans offered by state-licensed companies. Federal regulators, too, were slow to create safeguards that could have banned some of these practices.

Mr. Paulson is expected to repeat his assertion that the Fed should have much more access to information from securities firms and investment banks that might borrow money from the central bank.

Presently, insurance is regulated on a state-by-state basis, but the Treasury review is expected to call for the creation of an optional federal insurance charter that would be overseen by a new Office of National Insurance. Such an idea has been floated for years but never directly endorsed by Treasury.

In addition to some of the short- and medium-term changes, Treasury officials have also designed what they believe to be an “optimal structure” of financial oversight. It would create a single class for federally insured banks and thrifts, rather than the multiple versions that now exist. It would also create a single class of federally regulated insurance companies and a federal financial-services provider for other types of financial institutions.

A market stability regulator, which would likely be the Fed, would have broad powers over all three types of companies. A new regulator, called the Prudential Financial Regulatory Agency, would oversee the financial regulation of the insurance and federally insured banks. Another regulator, the Business Regulatory Agency, would oversee business conduct at all the companies.

Fed cuts .75%-WSJ.com article:

Posted on by Evan in Economics & Interest Rates, For Professionals, Housing & Real Estate, The Fed

Fed Cuts by Three-Quarter Point
By BRIAN BLACKSTONE and HENRY J. PULIZZI
March 18, 2008 2:19 p.m.

WASHINGTON — The Federal Reserve on Tuesday slashed its key interest rate to a three-year low and signaled more reductions are likely, unloading heavy artillery in its effort to keep the credit crunch from triggering a prolonged recession.

The three-quarter-percentage-point rate cut, though extremely aggressive by any historical measure, will disappoint many on Wall Street who thought a full percentage point was needed — a sign of the severity of the crisis that already claimed Bear Stearns and forced Fed officials to use Depression-era tools to create new lending facilities for brokers.

The Federal Open Market Committee voted 8-2 to cut the fed funds rate at which banks lend to each other from 3% to 2.25%, its lowest level since December 2004. The Fed also eased by that amount in a rare intermeeting move two months ago, which was the largest reduction since officials started targeting fed funds in the early 1980s.

Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher dissented, preferring “less aggressive action.”

The Fed also on Tuesday lowered the discount rate it charges banks and brokers that borrow directly from the Fed by 0.75 percentage point to 2.5%, leaving the spread over fed funds at a quarter percentage point.

“Recent information indicates that the outlook for economic activity has weakened further,” the Fed said in a statement, citing weakness in consumer spending and labor markets. “Financial markets remain under considerable stress,” the Fed added, and the “deepening” housing slump should weigh on the economy.

The Fed said growth risks remain and that it will act in a “timely” manner as needed, suggesting more rate cuts are probable barring an economic recovery.

As recently as a few days ago, economists had called for only a half-percentage-point reduction in the fed funds rate. Even that would have been an aggressive move coming just weeks after officials cut the funds rate by 1.25 percentage points over an eight-day period in January.

But as the financial market crisis worsened last week and economic data disappointed, investors steadily upped their rate-cut forecasts to as high as 0.75 percentage point by the end of last week.

And after the Fed on Sunday lowered the discount rate by one-quarter point, extended $30 billion in financing to J.P. Morgan to complete its takeover of Bear Stearns and announced new liquidity measures on top of others that could pump hundreds of billions of dollars into credit markets, many economists concluded that anything less than a full percentage point would disappoint markets and threaten a renewed downward spiral.

Many private-sector economists think the economy is already in a recession, albeit a mild one for the moment as consumer spending has yet to fall and exports remain supportive of overall growth.

But the signs are ominous for what Fed officials call an adverse “feedback loop” in which economic and market difficulties become self-feeding. Housing remains mired in a severe slump, as evidenced by a 16-year low reading Tuesday on homebuilding permits. Back-to-back declines in employment, weak retail sales and a surprisingly large drop in factory output suggest that housing weakness is spreading to other sectors.

Further freeing the Fed’s hand was a surprisingly tame consumer price report last week that showed no change in prices both overall and when food and energy prices were excluded. Inflation will surely rebound this month on the back of record-high oil and gasoline prices. But with the economy slowing, Fed officials expect price pressures to moderate.

“Still, uncertainty about the inflation outlook has increased,” the Fed said, and they will monitor it “carefully.”

The smaller-than-expected rate cut may also signal that officials are growing uneasy about the U.S. dollar’s decline against other major currencies, which has pushed up prices of commodities like oil that are priced in dollars.

A 0.75-percentage-point cut signals “that the Fed does not harbor benign neglect toward the dollar, as has been the impression of late,” said Miller Tabak strategist Tony Crescenzi in a research note before the Fed announcement.

New “conforming” loan limits are not likely to help

Posted on by Evan in For Professionals, General Mortgage Info., Housing & Real Estate

The Fiscal Stimulus Package that was signed into law back in early February of this year included a provision that would temporarily allow the GSE’s (Fannie Mae & Freddie Mac) to buy loans which carried loan amounts higher than the current conforming loan limit ($417,000) under certain circumstances. The amounts have finally been released and it turns out that the provision will likely provide little help to homeowners for a few reasons.

The provision which was designed to help homeowner’s & lenders with mortgages that were considered “non-conforming” refinance or sell their loans has a few limitations. In the end, I don’t see this helping too many folks. Here’s why:

*Only applicable to “high-cost” areas: The provision allows the GSE’s to buy mortgages with loan amounts up to $417,000 except for areas where the median home price exceeds $333,600. In these so called “high-cost” areas the new conforming loan amounts are equal to 125% of that area’s median home price not to exceed $729,500. Here is a list of the only areas impacted in Oregon, Washington, & Idaho along with the new conforming loan limits:

Portland/ Vancouver/ Metro- $418,750
Bend, OR- $447,500
Medford, OR- $422,500
Seattle/ Tacoma, WA- $567,500
San Juan County, WA- $593,750
Teton, ID- $693,750
Valley, ID (Sun Valley)- $462,500

*Rates are not comparable to conforming loans: This next limitation may change over time as more lenders begin to originate the new loan amounts but for the time being rates on these new conforming loan limits > $417,000 are not the same as if the loan is $417,000 or less. I went onto one of my wholesale investor’s websites earlier this morning to check rates on a loan amount of $418,750 in the Portland area. It turns out that the new conforming loan limit carried a 30 year fixed rate of 7.875% whereas a loan amount of $417,000 could be locked @ 6.00%! Therefore, the new conforming loan limits do not necessarily represent expansion of the previous loan limits but instead creation of a new “Jumbo” loan option that carries rates significantly higher than conforming loans.

*The timeline: The provision currently only allows the GSE’s to buy these new loan amounts if they were originated between the dates of July 1, 2007-December 31, 2008. This timeline could be expanded I suppose if HUD deems it necessary.

In summary, at this point because of the limitations of the provision it doesn’t seem to me that this provision will help many folks.

In case you want to check the new conforming limits in another area here is the website to go to- https://entp.hud.gov/idapp/html/hicostlook.cfm

Is the housing market good or bad right now?…..

Posted on by Evan in For Professionals, Housing & Real Estate

I sat in on a real estate sales meeting Monday morning. In the meeting there was a discussion about buyer psychology and how it’s been battered with fear. One of the realtors brought up a great question to ask when prospective buyers mention that they’ve read/ heard the housing market is bad, “Bad for who (i.e. buyer or seller)?” The bottom line is that it’s a great time to be a buyer. Here are some of top headlines in the Real Estate Journal (WSJ’s real estate publication):

* “Supply of Homes for Sale Rises”
* “A Good Time to Buy a House if You can Afford One”
* “Open Season For Bargain Hunters”

Now you tell me, is the market good for buyers right now?

Seller paid closing costs

Posted on by Evan in For Professionals, General Mortgage Info., Mortgage Qualification

For those of us familiar with the real estate sales process we know that it is very common for buyers to request that the seller pay all or a portion of their settlement charges. This reduces the amount of cash they have to bring to closing. Especially for first-time homebuyers who often do not have a lot of cash this is an important flexibility to make deals work.

Countrywide, one of the nation’s largest mortgage lenders announced today that they would no longer accept addendums to sales contracts where the buyer and seller are increasing the sales price in order to include seller paid settlement charges. Their concern is that the increase in price & loan amount are not dully backed by the market value of the property and therefore leaves them exposed to equity that does not actually exist.

Here is an excerpt from their announcement on what is acceptable and unacceptable:

SELLER CONCESSIONS (Question & Answer ): For now this guideline only exists with Countrywide. However, love them or hate them they are a bellwether in the mortgage industry and are probably only following the guidance that Wall Street is giving them. It is reasonable to assume that other lenders will likely follow in their lead over the next weeks/ months.

Q – Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This amount was never agreed upon, but a counteroffer was made to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaid. This is accepted by the seller and set as the terms of the transaction. I believe that this is an acceptable transaction.

A – Correct. And the closing costs paid by the seller must meet the 3, 6, or 9 percent limitations as usual.

Q – Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This price is accepted by the sellers. Later the transaction is amended to request a change in the terms to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaids which. This is accepted by the seller and set as the terms of the transaction. I believe under the CW policy this is NOT an acceptable transaction.

A – Generally correct. There may be times when the contract is final and then re-negotiated, e.g., a new home and additional upgrades being added, so that an increase in the price actually makes sense, there is a value add on both sides. In your example above, there doesn’t appear to be a reason for the seller to raise the price other than to cover the costs, so the borrower is technically paying his own costs and potentially increasing his property tax liability for no apparent reason. This is particularly a problem if the contract is final, the appraisal comes in high and then there is a subsequent increase in the purchase price and agreement for the seller to pay closing costs or to pay more…it would appear they were gaming a bit and this is unacceptable.

The lesson for guiding buyers and sellers through this is to ask buyers UPFRONT if they will need any seller paid settlement charges. This is another reason why we think it is important that your buyers meet with us PRIOR to going out and writing an offer on a home. We can sniff these needs out before it becomes an issue. Let us know if you have any scenarios or questions you’d like us to review.

Rate Update March 4, 2008 w/ industry updates

Posted on by Evan in For Professionals, General Mortgage Info., Housing & Real Estate, Rate Update


There are a lot of important topics to cover this morning:

*The mortgage industry is going through another round of credit tightening that will further restrict our ability to provide 100% financing. This time the tightening is being initiated by mortgage insurers. Watch today’s you tube video to understand who will be impacted.

*Yesterday Fannie Mae & Freddie Mac reached agreement with the NY Attorney General on new appraisal rules. Watch today’s video to see what the rules say and what it might mean for the mortgage industry.

*Surprise comments out of Ben Bernanke this morning could have huge implications on the mortgage industry and interest rates. Watch today’s you tube video to find out what he said why it could negatively impact mortgage rates.

There are more Fed officials speaking later today. As investors show more concern over inflation these speeches get more attention and can have a larger impact on the market.

Current Outlook: locking

New appraisal rules to come?

Posted on by Evan in For Professionals, General Mortgage Info., Housing & Real Estate, Mortgage Qualification

This is pretty big news for our industry:
http://online.wsj.com/article/SB120456185094007821.html?mod=hps_us_whats_news

The article linked above indicates that we could see huge changes in the way property appraisals are conducted in the future. Essentially, Fannie Mae & Freddie Mac, who ultimately dictate guidelines for a majority of mortgage financing, are agreeing to change the way in which mortgages are ordered in our industry.

Currently, the loan originator who is compensated when the loan is originated and has no liability for the loan if it performs poorly, is the party who orders the appraisal. Furthermore, typically the appraiser is only compensated when a loan closes. Therefore, the incentive system currently in place leads to pressure on appraisers to come up with value to make deals work. Undoubtedly this has led to fraud and the “stretching” of values in certain instances over the past couple years.

However, the impact of this agreement could mean longer turn times for processing loans as well as higher costs to consumers. The reason? I’m not sure how Fannie and Freddie propose to create a clearing house for appraisers but I have to believe that centralizing such a task and maintaining efficiency will end up being a major challenge.

The timing of this agreement is not surprising. As I’ve mentioned in past posts regulation and rule changes always seem to commence when the “crapt hits the fan”. As banks and investors count their losses for foolish loans made over the past couple years they answer by putting rules in place to restrict these practices in the future.

My answer to all of these problems would be something a little different. I think it would be best for banks and lenders to find a way to tie the loan originators compensation to the long-term performance of the loans they make.

Northwest Real Estate Markets buck national trend!

Posted on by Evan in For Professionals, Housing & Real Estate

The S & P/ Case-Shiller Home Price Index is a monthly survey of home prices in 20 of the top metropolitan areas in the United States. Earlier today they released their data for the 2007 calendar year. Despite record losses for home prices in most of the areas the report follows Portland, Seattle, & Charlotte, NC were able to buck the national trend by showing modest year over year appreciation.

These were the only 3 markets of the 20 that the index follows which did not record losses to home prices in 2007. Here is a link to the press release for the report:

Year End Numbers Mark Widespread Declines According to the S&P/Case-Shiller® Home Price Indices

The S & P/ Case-Shiller Home Price Index Report is viewed by many to be the best gauge of home prices for major metropolitan markets because the methodology for calculating home prices changes includes the broadest range of data.