The days of fast money and anybody and their mama getting into the real estate business and hitting it big is over obi one kenobi...
And you know what I say?
Thank God! The reason is we need a marketplace of professionals; leaders; trend setters; and customer service oriented champions who know what they are doing and can take their business to the next level.
Don't mean to be so harsh here (actually I do and I hope the wannabe's feelings are hurt) but this industry suffered greatly by people being able to get in so easily, and do to all the fast money, booming economic conditions, title companies, brokers, realtors, everybody was just jumping in for the quick buck, ran around and caused a muck.
See my post on building a brand or chasing a check because I dig into this by talking about what kind of value you bring to the marketplace and pose the question are you just in it for the money or are you in it to build a brand and a presence or chasing a check?
The new housing market; the new economy; the new way of doing things will be far different than what it was before. We'll be in a wet, sloshy, and muddy waters for some time to come. Call this cycle the "cleansing"...
Because while the wannabe's are going to be stuck in the mud, trying to figure out why the same things; the same talk; marketing schemes, advertising; and using old tricks that work in a booming economy where EVERYONE gets a piece... are not working anymore.
The Champions are flying above looking down for just a second then back up focused on achieving their next level. See there are walkers and talkers ladies and gentlemen and their are people who talk a lot of "stuff" but are not getting the results.
What are you going to do in this new housing market? Are you going be those stuck in the mud or are you going to build your brand and following, and create your own economy out of the ashes and prosper for the next year?
Ignore the governments numbers - people will always need housing. Ignore the FED and the news talking about interest rates - interest rates can't and won't go anywhere for a while. Stop focusing on where the market is everyday - unless you're a stock broker; investment adviser or something because that's just a distraction...
What you need to do are these simple steps:
Have a clear vision
Decide on a strategy
Simplify and implement the strategy at the same time building value
Take MASSIVE freaking action.
Want to know the secret?....
That's it, there is no secret... YOU are the secret...
Clock's ticking....every second you let pass by with indecision is another second lost that you could be working on becoming the person you want to be.
So in conclusion; we are in a new housing market, a new economy, but the best part is WE make our own economy.. so lets get to it.
Just last week a warning was sent out regarding misleading mortgage advertisements. You can read full release here.. What this is saying is they've found some recent advertisements are misleading to consumers and not disclosing all the information about true costs and terms of the loan agreements.
I actually think this is a good thing. All the ads out there that show 1% interest rate or super low fees or whatever the case may be is very misleading and I can't tell you how many times customers tell me about these deals and I let them know that those are just bait and switch ads but you won't find out until deep into the process or it's too late and by that time you're pissed off.
Sometimes it works and sometimes it doesn't and they have to go and find out for themselves the truth. The problem is...now they don't trust anyone and that makes it hard to do business in the future...
...and we wonder why consumer confidence is low with lenders and loan officers in general.
Now all companies don't do this type of activity but you do see some "creative" advertising to get people to pick up the phone and call.
I take a different approach because what I have found is people just want you to be real with them.
They will do business with and buy from people they like and trust and if I can develop a relationship with them; they will not only do business with me but will send referrals.
Most companies are just in it for the quick buck and that should not be the approach.
You'll make money and get some business in the short run, but this isn't how champions and professionals do business and it surely will kill you in the long run.
Anyway...that's my two cents on it.
I aim to build value and confidence so that customer has a great experience. And truthfully, if you just explain things to people in plain English; all the terms, go over the benefits of how the loan will solve their problems and have a solution based presentation, people will come chasing you to do business with you.
I don't really have to prospect anymore I just get referrals from clients, agents, and other sources because they know I'm for real; I don't sugar coat, I know what I'm doing, and I give realistic expectations.
It's not rocket science here folks...
Just a little warning...for those of you who buy leads from these crap companies, I would stop because they have ads on the web for all kinds of ridiculous things that are misleading to get people to click and give up their information.
So as the CFPB comes cracking down if you're buying from them ---guild by association.
Plus their sold to multiple people and companies. The best way is to build your business organic which takes time.
Check out the release above on the CFPB site and look out for more announcements like this as the CFPB gets up and running on all cylinders inspecting the practices of the all the lenders and brokers out there.
Get ready we're headed for more changes in the future.
Who will win in this environment? The Champions will... all the weanies will be pushed out and quite frankly...can't wait to see ya go...
Are you ready for another one of my rants? lol, I promise it will be a good one.
Well here we are folks...first we had the Obamafi 1 (aka HARP 1.0), this come out in 2009 where people with mortgages backed by Fannie and Freddie could refinance into new lower rate mortgages to help
reduce monthly payments and prevent more foreclosures. The program was launched initially letting
homeowners refinance up to 105% of the homes value with NO add ons.
In the mortgage industry we have lingo - just like any industry - and the lingo related to add ons is loan level pricing adjustments; rate adjusters; bumps in pricing; and several other names. But the gist of it is - based on certain "risk" criteria - the rate would be higher or lower depending on this information and would be built
into the pricing of the rate to derive at a finalized price.
Well it was well intended at first until the Fannie and Freddie added a bunch of adjusters and people who
needed it most couldn't benefit as they had the lowest scores and highest loan to value (loan amount divided
by value of the home). So they were hit with massive bumps to the rate and it didn't even make sense to refinance. Well duh.....that's who it was for (the people who could benefit most) but what it ended up being is a cash cow fee generation system for Fannie and Freddie by putting these bumps into the rate and initializing an all out mini refi boom to extract needed cash to help the failing entities.
Obama's Refinance Plan Take Two
At any rate...time went by and we had it adjusted to 125% loan to value. Now we have HARP 2.0 or
Obamafi retake numero deuce where now the loan to value is unlimited! That means your loan amount divided by the value can be 200% or more...doesn't matter, it's unlimited. This again was another shot in the arm for the mortgage industry and banks are making money hand over fist on this program. Mini refinance boom two.
This was designed to help all the people who couldn't get in the first time under HARP 1.0 and who were under water more than 125%. A few programs exist; One was set up for loans serviced by your current lender (which had less restrictive guidelines since they already owned the mortgage) or you could switch lenders. Now that this plan has been out for a little bit and because the risk is a little higher (actually it should be better because if they would make it beneficial for all everybody's payments would be much lower), some lenders are making it a requirement that the loan being refinanced is serviced by them.
You can find the differences here below: See the vid.
NOTE: (Video is from youtube and posted by Kenney66)
Obama's Refinance Plan Take Three
The next plan involved changes to FHA's refinance programs. You can find this HERE This allowed the homeowner with an FHA backed loan who qualified for the streamline refinance, AND, who's mortgage was originated prior to a certain date, could revert back to the old mortgage insurance annual premium calculation allowing them to take advantage of low interest rates.
As you know FHA loans have been modified significantly over the past few years to help the ailing, failing, mortgage insurance fund as it is now WAY, WAY below Congressional mandated levels so the monthly premiums (also known as MIP and in the Conventional mortgage world PMI) have gone up and up and up so even if you could get a lower rate, the increase in the mortgage insurance didn't make it worth the money to refinance. So the new program has spawned yet another mini boom.
Obama's Refinance Plan (Take Four)
Obama's proposed new refinance program (you can find this HERE on the press release from the White House) is targeting all non GSE owned loans (Fannie/Freddie) to be eligible to refinance into lower rate mortgages. The proposed minimum credit score is 580 but will this be the same thing? High loan adjusters to the rate making it too pricey for people who really need it to take advantage? Time will tell if it's implemented.
They keep creating new mini refi booms coupled with Ben Bernanke's QE infinity program pretty much guaranteeing interest rates to stay low, we're seeing massive refinance volume.
The volume has spike so high, lenders can't keep up and they won't hire new people to deal with the volume so you have horror stories of loans taking 90-120 days or longer to close!
Again, this creating HUGE profits for the banks as they are selling these loans to Fannie/Freddie/and FHA and in turn the agencies are extracting more cash from the system to funnel it into the coffers because they're all BROKE as hell and bankrupt. Just like this country is but nobody wants to realize or admit it.
So What Next?
We're rolling into election time; we're starting to see reports of home prices increasing (I don't listen to a thing the government tells me) and the only people I see benefiting are the banks in this situation as people are refinancing which requires closing costs to be rolled back into their loans increasing your balance and stretching your term back out another 30 yrs.
True, this scenario does help some and true this will benefit some people but if they really wanted to help people out then get rid of ALL adjustments; do it with no limited costs so that the people with the lower scores can benefit like they did when the HARP first came out but was quickly....and I mean QUICKLY changed to requiring all kinds of adjustments to the reates preventing alot of people from saving money on their payments.
So my question is: Where is the cookie for all the people who actually need it?!
The mortgage industry has changed quite a bit from a few years and months ago...heck sometimes even just days ago. Changes are the norm so I'm writing this to help you with the application process as this day in age it's documentation, documentation, documentation and for some people this can become annoying and upsetting at times.
Do not get upset or frustrated as the industry, one loan at a time, is trying to restore confidence in the marketplace and to investors. The key to making the process smooth is several fold but the most important thing is your initial file quality at submission on your application for financing.
The more prepared you are upfront...... the better!
When your loan officer asks for something - get it turned in as quickly as possible so there isn't any delays in the process.
There is an extreme amount of pressure put on them to turn things around when documentation is delayed being turned in and will, and does, cause for the need of extensions to your closing. This can be unnerving and complicate things for you.
Stressed!
Everyone's situation is different and sometimes additional documentation is requested.
Realize that there are some issues, concerns, and compliance requirements on the back end that we as consumers don't see or always here about, so underwriters are checking, double checking, and sometimes over conditioning the loan files; but this is an attempt to make sure all compliance rules and regulations, file quality, and documentation requirements are being met.
When making application make sure you have all of your income and bank account information (to all accounts) available. Since each loan is different more documentation maybe requested and this is not all inclusive, so in preparation have ready:
The last three years of income tax returns (make sure page 2 is signed and include business returns if self-employed), w2's (all w2's for all jobs) and a full months of paystubs.
Be prepared to explain any changes in income or if you've had multiple jobs in the last 2 years
Bank statements should be all pages even if one says "intentionally left blank"
Be prepared to explain any credit inquiries you've had recently and if any new debt was acquired from this inquiries. People ask about this all the time but the idea is if more debt it out there that is unknown, this has an impact on your debt-to-income ratios and your ability to repay the mortgage
Be ready to explain any large and unusual deposits into your account (untraceable cash deposits are not acceptable) to prove they are from an acceptable source.
Explain any derogatory or late payments on other credit accounts and collections
Again, this is by no means all inclusive but is a short list of items you'll need and other things to be prepared for when meeting with your loan officer. The better quality your loan file is at submission, the smoother your process will be.
Remember - there are many parts of the process that are not under the control of the lender so communication is key as everyone is working toward the same goal - closing.
What is the next real estate trend? You can ask many and you'll get many answers. As a professional in the business I can tell you that I see renovation as the next trend for the coming years. Why?
Aged inventory - many houses are old, have not been updated which includes kitchens, bathrooms, plumbing, HVAC, and could really use a face lift.
Foreclosures galore! The market is saturated with foreclosed REO properties that need repairs.
Older homes with outdated floor plans or are too small compared to other homes in the area (by the way part of the renovation process can include adding square footage to the property through an addition to home)
Can add a personal touch to make it yours - turn a home you just like into one you love
Many homes with health or safety violations or hazards which can be remedied through renovation
Many many more reasons.
So what can be done about it? Well you can call it a secret (not really) but a program that has been around since the 80's - the 203k (no this isn't like your 401k) - allows the for the purchase of the property plus the cost for repairs to be rolled into one loan, one payment, and your maximum mortgage is based on the post-renovation value. This is a little known loan through FHA and 203k is simply just the section of the act (the National Housing Act) for the program just like the 203B is the "regular" or "normal" FHA loan we've all grown to know very well.
Especially since the housing debacle and Conventional financing has tightened up; more people are getting FHA insured loans.
So you can literally turn this
and even this
into this
and even this
Now you're probably thinking..."yea right, that looks nothing like the other houses." But yes you can do this (turn ugly into stunning).
You can do anything from light to moderate repairs (kitchen and bathroom updates) to more major renovations like foundation work, and even tearing the house down and rebuilding on the same foundation.
With the 203k you just can't do anything consdered "luxury" repairs in nature like a gazebo, hot tub, or install a swimming pool. The key to this is after-improved value - which is the home will be comparable in it's renovated state to other properties in the area.
This doesn't mean build a 6 bedroom home in a 3-4 bedroom market, however if you wanted to change the design and floor plan of the property and make a major renovation you can.
There are so many things you can do with this type of financing. By the way FHA isn't the only one that has this program available. Very close versions of this are available in the Conventional world through Fannie Mae and Freddie Mac but most lenders do not offer this type of financing.
I think you'll see that change as this piece of the market explodes over the next few years.
One word of advice that I caution people looking to obtain this financing:
MAKE SURE you are working with a specialist. The reason is they work with these loans daily and a specialist only originates these loans. You'll have many originators that "dabble" with these loans and only do a few a year vs a specialist who originates these on a daily basis so they are knowledgeable of the intricacies of the program and have a system in place to take you from application to closing with very few, if any, hiccups.
Don't be a guinea pig and search out a specialist. This should be your first question to the loan officer. If they are not a specialist ask if their company has one and if not - move on and don't waste anymore time.
Not all lenders have the same guidelines; some will have what is called credit overlays, meaning they have tighter guidelines than the published FHA guidelines on the program.
I will do a series of blog posts on this, since it will, and already is becoming, a hot topic. There is much to talk about, so you can be prepared and armed with information when approaching your lender for a renovation loan request.
As we get closer to the end of the first time homebuyer tax credit which has helped get first timers back into the market, we ask will it be extended. I'll agree this was badly needed (the first time homebuyers buying that is) because they are the first domino that leads to all the others falling into place. As sellers list properties for sale - they need the first time buyer to come in and buy their homes - which will lead to them buying someone else's, and so on and so forth. It's a domino effect that needs to begin with the first time buyer.
Will the government extend? I'm really not sure. As the residential market begins to stabilize Congress may not extend the credit as it would, yet again, add to the ballooning deficit which ended 2009 fiscal year at 1.42 trillion dollars. Wow! That's an amazing number; but since trillions and billions has been thrown around like a frisbee in the media lately, when you think of the concept of that much money, it just goes in one ear and out the other. This is boat load of money and its being projected by economists, the deficit will continue to rise unless either spending is lowered or taxes are raised or a combination of both. If you ask me I"m tired of taxes.
But any rate - Congress has a tough decision as we reach the final stretch here and we approach the November 30th deadline. Interest rates have been low all year except for a few weeks in May and beginning of June when we saw massive government auctions that took the market by surprise. Record debt flooded the market and buying just couldn't mop up the access - almost like dipping a sponge in a bucket full of water - the market just couldn't absorb it all so selling forced prices downward and yields up (making interest rates rise).
Now that we've enjoyed almost the whole year with low interest rates; what will happen in 2010? Well inevitably rates will have to go up as the FED exits stage left, and the market adapts to a major buyer disappearing, forcing it to stand on its own. With 1.25 trillion in MBS (mortgage-backed securities) the FED will eventually look to unload those securities which will cause even more downward pressure on bond prices equalling higher mortgage rates as a result. All year it seems as if investors have been trading on policy and not spreads. Will the FED hold its positions? Will it sell most or all of its securities? Who knows but the FED.
If you're in the market - now is the time to jump in and buy while historically low rates still remain. But that's not the only reason you should buy right now. As you know home prices have retracted since their highs of 2006 and owning home has many benefits of which building equity is only one. You have tax advantages along with knowing you've made a long term investment that pays dividends for years to come. Not everyone deserves a home and its something that is earned, and in my opinion, not guaranteed.
Inflation numbers are due out tomorrow for the prior month. Expectations are .2% increase but one interesting thing to note. The Bureau of Labor Statistics is going to include the subsidized Cash for Clunkers program $4500 dollar rebate as a way to reduce auto prices by the same amount. Hmmmmm.... now isn't that aggressive use of accounting techniques? Keep in mind the government is the one releasing these numbers and we are in a severe recession that many are calling over, but I just don't see how that's possible. So with a 1.8 trillion dollar deficit due to heavy borrowing, who would benefit from lower interest rates? Bingo! The government would.
See bonds are sensitive to inflation since bonds tie up investor money for long periods of time; but bonds can be resold on the secondary market and if prices are dropping due to inflation fears, investors lose money. The way bonds are calculated for their value is by using simple time value of money calculations. Its quite simple. A dollar today is worth more than a dollar tomorrow. So if an investor is going tie up their money for a longer time, they want a good return - or at least a return that is suitable for current market conditions. In times like this, investors flee to safety - in the form of bonds - which are usually safe investments. If inflation is higher than expected this is not good for bond holders because now their return - inflation adjusted - is much less than originally anticipated. So by the inflation numbers coming out in line or lower, its to much of the benefit of the government who still has to borrow very heavily in order to service the existing debt payments (interest) and the barrage of entitlement and social programs and wasteful stimulus programs.
But how does all this affect mortgage rates? Quite simple actually. MBS (mortgage-backed securities) compete with other bonds for investor cash and are susceptible to inflation worries just as other bonds are. What happens is MBS bonds are priced over treasuries in order to attract dollars and be competitive. Bonds have risk factors that investors have to take into consideration and credit default is just one such risk. MBS add another risk factor - early payoff. Mortgage loans in a low interest rate environment have a high propensity to pay off early. This eats into the returns of investors and therefore they need to be compensated for that risk. So what happens is MBS bonds are priced at a fixed spread over treasury yields in order to attract investors to assume that extra risk.
With gold hitting yet another high of $1,080 an ounce; the dollar is weak, and oil is up, this spells inflation. There are few schools of thought out there with respect to the definition of inflation but I side with the Austrian view of the vast expansion of the money supply that we've seen from the FED over the last 18 months IS inflation. I just don't see an argument here. When you expand the money supply and aggregate demand does not rise equally, and wages do not rise with this, you have inflation and rising prices - period. The price level has to rise in order to balance the increase of money in the system. Back when we were on the gold standard, massive expansion of the money supply could not be done like this because you could exchange your dollars for a fixed weight of gold keeping the FED and our law makers honest.
The first time homebuyer tax credit will likely be extended and maybe inclusive of all homebuyers not just first time. While I've enjoyed the short term benefit of the increase in volume, I know that we are just prolonging the pain that will eventually come. Housing isn't out of the water yet, however if you are in the market to purchase I suggest doing it now. Rates can't stay this low for long. Just one year ago before the FED intervened, interest rates were at almost 7% on a 30 yr and then plummeted to below 5% making the investment into a new home very attractive at this point.
Wow its been a very busy two weeks. Starting November 25 rates took a dive and have stayed down to levels not seen since the beginning of the refi boom in 2002. About mid week, rates had only been lower on 5 days in the last 50 years and 6 days where they were the same. this should be some great news for the market but we haven't seen alot of buyers jump back in yet.
I've been so busy with refinances working morning and night. While this is good for business, the whole purpose of the Treasury buying plan was to pull buyers back in helping to reduce our bloated inventory and stabilize home prices. I'm already starting to see some signs of stabilizing home prices and I think we've reached the lowest point we're going to see so and only back up is where we should focus our attention.
You'll hear alot of professionals and economists give their opinion on the market saying we're going to see more declines, mortgages are few and far between, and credit is so tight; just to name a few. I'm not saying credit hasn't been tight, I'm just saying that the media does make it sound alot worse than it is creating even more fear. Fear is the worst thing we need right now.
What happened in the mortgage market needed to happen to flush out the risky loans, bad mortgage brokers, and corrupt title companies. I'm not happy about the record foreclosures but little was done to regulate these people. The few bad apples ruin it for everybody else. Loans are plentiful, especially government insured loans like FHA, VA, and Rural Housing loans.
When shopping for a mortgage make sure you work out your budget, that you have at least 3.5% down (this will be the new FHA requirment Jan 2009), and take into consideration costs that are associated with buying a new home. Its been communicated by the media that you can't get a loan unless you have 20% down. This is simply not true.
I'm sure all of you have been seeing the news of how bleek the economy is. To me its blah, blah, blah, blah. But now the Treasury is stepping up to the plate in an effort to reduce mortgage rates to the point that people jump into the market and start buying or refinancing. This is going to pull the first time homebuyers back in and start getting some inventory off the market.
The Treasury announced a purchase plan of roughly 600 Billion dollars that they will use to buy mortgage-backed securities and government issued treasuries over the next couple of months. So what does this mean? How long will this last? I'm not sure but for those of you who don't know why this makes rates go down I'll explain briefly.
Mortgage rates are tied to mortgage-backed securities. These are bonds that are issued by Fannie and Freddie which contain securitized mortgage loans. Pools of loans are put together then packaged into securities and sold as bonds. Now there are three areas of risk with these, credit risk (default risk), IR (interest rate exposure), and early redemption (pre-payment). Now as rates go down, pre-payment is more likely because people can refinance into a lower rate. When pricing these bonds for sale we must take into consideration bond convexity. Bond convexity is simply the measure of sensitivity to the duration of a bond to changes in interest rates. So what does this mean? Well it means that to compensate the risk of payoff to investors these bonds are priced at a spread (fixed margin) over government treasuries, usually the 10yr bond.
So in order for the purchase of mortgage-backed securities to work effectively the Treasury will also buy government bonds to drive down their yields resulting in lower spreads, thus resulting in lower mortgage rates. They are hitting this thing from both sides
By purchasing both government and mortgage-backed bonds, the Treasury is essentially subsidizing mortgage rates. As they buy up these bonds, prices go higher resulting in lower yeilds. Lower yeilds mean lower mortgage rates. I can tell you its worked. I've taken eight loan applications over the last two days and I expect it to get better after Thanksgiving.
Keep in mind, when first time homebuyers are not buying homes this leaves the market flooded with inventory. The sellers of this inventory can't buy another home until they sell theirs and so on and so forth. So see the first time homebuyer is essential and will cause a domino effect once they've returned to the market.
Now not all first time homebuyers have vanished but most of them are on the sidelines not sure what to do. I can't stress enough that this is a cycle that we will come out of eventually. The government is doing what they can to stimulate the market and we should see housing begin to stabilize when inventory begins to come back down to healthy levels.
The trends, in some areas, are starting to show positive signs of improvement. The one thing the media leaves out is that there ARE STILL loan options out there and banks are lending. The media makes its sound as if financing has all but vanished. This is simply not true. If you are in the market NOW is the time to jump. Don't wait for it pass by. There has only been a handful of days in four decades where rates have been lower. Rates have dropped about a full point in the last two days. This doesn't mean they will stay down so make a move if you're on the fence.
Well we were all sold the fact the 700 billion dollar bailout was for troubled mortgage related assets. This topic should concern you since you and I will have to fit the bill for this as taxpayers. Now the money is being used to take minority positions in banks and other companies such as AIG.
Now you have the auto industry, city governments, state governments, and everybody else coming with their hands out looking for cash. The big three have been said to be burning through one billion dollars a month a piece. Now they want $25 billion dollars to get them through these troubling times.
Since when do we socialize losses and privatize profits? The TARP or Troubled Asset Relief Program was intended to buy toxic mortgage loans from struggling banks in attempt to help ease the credit crunch. Now the money is being used to take stakes in banks urging them to lend more. Instead banks are not lending and in some instances they are using this money to fund acquisitions of other banks.
Secretary of the Treasury Hank Paulson is now switching gears from his original plan and backed his decision by saying in an interview, "Our assessment at this time is that this is not the most effective way to use TARP funds," he told the nation Wednesday.
So what now? Wasn't the whole problem stemming from the mortgage industry with all these exotic mortgages and mortgage-backed securities? Frustrating as it is we must deal with it now. As you should be concerned about the actions of the government with the use of our taxpayer money I urge you to stay focused on your business.
Just to be clear mortgages have not dried up. Loans are still available to consumers. The percentage of FHA loans being originated is growing rapidly and will continue. These mortgage loans are never talked about by the media. So even though banks are struggling with bad loans on the books, this too shall pass, and the market will stabilize. If you are in the market to purchase a home now is still a great time to buy one.
Look at using FHA financing for purchasing your new home. If you have less than 20% down you will need mortgage insurance, you will come out better with FHA mortgage insurance anyway as this, in some cases, is half the cost monthly. FHA only requires a minimum of 3% down right now, then Jan 1 you will 3.5% down payment.
While conventional loans still have hefty delivery fees for credit score adjustments and loan to value adjustements, FHA rates will be more competitive.
I hear this all the time. Do you know what I hearing when I hear this? I hear the client asking what am I getting for my money? What service are you going to provide? I need more information.
I can't tell you how many lenders there in this market that have really low rates and fees. But I caution you when dealing with these companies; you will get what you pay for and you do sacrifice something to get the absolute lowest rate and fees. Many of these employees that work for them are paid by the hour and do not know a thing about the guidelines or different solutions that are available to you. They enter your information into a system that tells them whats best. There is no listening involved only data collecting.
These companies have a habit of selling not only your loan, but the servicing rights to your loan as well. What does that mean? The means your loan will get transferred to another lender, and possibly another lender after that.
Take Walmart for example. Walmart has the lowest prices but service is horrible proving that all they care about it sheer volume. You are not a customer to them, only a number. If they sell enough at a low price, they can make a profit.
H&R block is another example. What do you get with H&R block? You get the lowest tax preparation fees but do you get professional service? My point is when asking a lender for rate and fees, find out about who you are dealing with. Is your lender only a mortgage company? Are they a bank? Do you trust who you are doing business with?
What happened to service? To building a long-term relationship with your lender that not only stops with your mortgage; but also your checking, savings, investments, and insurance needs. The subprime mess is an example of not advising clients in the proper way on what solutions are best for them. Its our duty as originators to discuss the full details of the loan, including discussion on debt to income ratios, the responsibilities of a home owner - especially first time homebuyers - benefits and disadvantages, and resources to educate our clients.
Don't just settle for lowest rate and fees, please consider the long-term relationship with your originator and lender. Find out if they sell the servicing to their loans. They will have a servicing disclosure that will disclosure how many loans they've sold the servicing to in the last 3 years.
When shopping for a mortgage, shop for a professional. Why would you originate your loan with someone who doesn't even know how the market works? You are making the biggest purchase you'll ever make so make sure you dealing with a professional.
Ask questions, be informed of your choices, and make sure you trust your originator. Most lenders will have similar programs and similar rates, so think about the relationship. Shopping for a mortgage is not just about rates and fees.
So what in the world is going on with mortgage rates? We have so much volatility its hard to judge the direction. Keep in mind the market is highly emotional right now. From day to day you don't know what is going to happen.
I try to coach my buyers the best I can but sometimes the window of opportunity is only there for a couple of days and then gone again for a few weeks.
Many people do not realize that mortgage rates are determined by the secondary market for mortgage-backed securities. Let me explain what I mean and it will make more sense.
Lenders make loans to borrowers for mortgages, car loans, etc. Lenders can get their money from a few places. Deposits are the cheapest. This is why banks REALLY stress and focus on what is called core deposit growth.
Banks can also use short term funding like commercial paper or short term notes usually ranging from 90-120 days. They can also borrower from other banks. If the lender is publicly traded they can raise capital through the issuance of more shares or preferred shares. Preferred shares are a hybrid of stock and debt and are paid dividends by either a percentage or dollar amount per share. Example 8% preferred would pay 8% interest on the par value of shares held. If the pare value is $100, they would receive $8 dollars a share. If the stock is a $3 preferred, this would mean that the investor would get $3 per share regardless of the par value (example if the par value was $60). Issuing common shares would dilute common shareholder equity and is usually not seen favorably by investors with big positions within the company. This is a whole other topic.
So once the lender makes the loan they can either hold the loan on the books, a portfolio loan, sell the note to an investor such as Freddie or Fannie -- these are government sponsored entities with the sole purpose of providing liquidity in the mortgage market -- or they they can sell the note and then sell the servicing rights altogether. Selling the note and servicing provides fee income for the originator of the loan and then frees up the capital to go lend more moving all the risk to someone else.
Freddie Mac and Fannie Mae will then pool these loans together and package them into securities and sell them as bonds to investors worldwide. This is also to provide more liquidity to them so they can continue to buy more and more loans. The cycle just repeats itself.
Freddie and Fannie do have loan limits that are set by the Federal Housing Finance Agency, who on July 30 2008 was created by the Housing Recovery Act, to oversee Freddie, Freddie, and the Federal Home Loan Banks, to make sure the secondary market is functioning properly.
These MBS or Mortgage-Backed Securities are sold in the form of bonds. If you are not sure with how bond pricing works it can be a little confusing. When bond prices move up (which means investors are buying), the yield at which those bonds pay goes DOWN. Yes that's right price and yield move inversely from each other. When bond prices move down (which means investors are selling), the yield moves up. This can get really complicated because a bond has a stated interest rate or coupon, doesn't mean the investor will pay that. Market prices change all the time and if an investor wants a higher yield, that means the price has to come down.
So what does all this mean? Well it means that if the yields go up on the bonds, mortgage rates will follow the upward trend. This is because mortgages have a risk of prepayment either through selling the home or refinancing into a new loan. When this happens investors do not get the cash flow from the bond they anticipated so to compensate for that risk these bonds are traded at a spread of government bonds. Spread simply means a numeric figure, expressed in terms of basis points, over the index (the government bonds). Basis points are a fraction of percentages expressed as a unit of 100. Example 1 basis point is 1/100 of a percent. One hundred basis points would be equivalent to 1%.
Right now investors are skeptical of the condition of the economy and even though the government is pumping billions of dollars into the system it boils down to investors wanting higher returns for loaning their money. Bottom line don't play the guessing game. If you are in the market to purchase a home now is the best time to do so.
Why you ask? Even though we have price volatility, mortgage rates are still at historical lows and on top of that you have home prices that have fallen some 30% in some areas making more homes affordable. Don't waste time we will start to see home prices going back up soon so don't get left holding the bag trying to wait it out to the last minute and time the market.
As a warning please make sure you work the numbers of purchasing a home prior to making any offer. Speak with a professional, sit down and work out your budget. Make sure you can afford to make the payments and don't get caught in the trap many Americans did by splitting hairs just to buy a home. Homeownership is the American dream.
One of the things I want to talk about is FHA loans. This program up until earlier this year had maybe 2% penetration into the market place. Reason for this is the influx of money, from investors, into the mortgage market thus creating a plethora of alternative loan programs that were giving borrowers more options. These loans include no income verification loans, stated income an asset loans, piggyback loans to avoid pmi, and others.
The market became very creative and helped fuel a red hot real estate market that set record sales for 5 years in row. Many people don't realize that while the market was creative in providing alternative loan programs to borrowers, lax underwriting guidelines and fraudulent activity created the majority of the mess we now see today. A severe decline in home values played and is playing a major role itself. I'm not going to talk about a lot of bad news here I think we get enough of that already from the media. Lets face it bad news makes the front page. My intent is to provide information about a old but new program that many steered away from but now is one of the only high loan to value options left.
Lets talk about the benefits of an FHA loan.
1. No minimum credit score- FICO scores over the last 15 or so years have been used heavily by lenders to determine the creditworthiness of a borrower to repay a loan. Being in the people business for 7 plus years now and pulling credit and looking over credit reports I can tell you it doesn't give a very good indication. The system is designed to give you a snapshot in time of what borrowers score is and not a trend of creditworthiness. I say this because I've pulled credit on someone with a 700 credit score and 6 months later they have one late payment and their score dropped to 550. Now is that a good indication of the borrowers ability to pay back a loan? Let me answer that for you NO! With FHA you don't need a minimum credit score to qualify however common sense is needed here. A 400 credit score is highly unlikely to get approved. Now this year FHA has added risk-based premiums to their upfront mortgage insurance and that is credit score driven but overall there is not a minimum criteria for a score to qualify.
2. Low Down payment - With FHA, up until Oct 1, 2009, only has to contribute 3% down payment. After October 1 it goes up to 3.5%. The 3% can come from a relative as a gift or borrowers own funds. This is powerful because right now in the conventional world you need a minimum of 5%, if the property is located in a declining market as indicated by the mortgage insurance companies, you'll then need 10% down. Not to mention you need over a 680 credit score to get the mortgage insurance approved. You might be approved for loan but can't get the insurance. Which moves me into my next benefit.
3. Low mortgage insurance - FHA handles their own mortgage insurance so if you are approved your loan will have the mortgage insurance on it. FHA mortgage insurance also is at a lower expense then conventional and if you put 10% and take out a 15 yr fixed loan no monthly mortgage insurance is required.
4. No income restrictions - For the first time home- buyer group this is huge. Most first time home-buyer programs are designed to meet the needs of low to moderate income borrowers. Well if you make more than the income limit these programs are unavailable to you. FHA has no income restrictions to qualify.
5. Purchase or refinance new or existing 1-4 unit homes - This is a big plus. You can still get 97% on the purchase of a 1-4 unit primary residence. Conventional requires more down payment on multi-unit properties. On cash out refinances there are limitations to loan to value.
6. Financing for manufactured homes - With the credit tightening in the mortgage market some areas have an ample supply of manufactured homes. The same 97% guidelines apply on these but they must meet FHA guidelines and be on a permanent foundation.
7. You can use a non-occupying co-borrower - This is a forgotten rule but if you can have a non-occupying co-borrower, as long as they are a relative, sign on the loan and the borrower can still get the maximum financing of 97%. This is limited to 1 unit properties if the ltv is over 75%. Certain restrictions apply.
These are just a few of the many benefits to FHA financing. It provides a solution for many borrowers needs and helps them fulfill the American Dream of owning a home. I've been in the industry over 4 years now and I love providing solutions for my clients to purchase their first or next home. I get great joy out of what I do.
Stay tuned for more of my blogs and industry news. I've never been a big fan of bad news I like to spread good news but we are facing problems in the housing industry but i believe it when I say its a cycle and we'll survive this storm and come out of it with better times. Remember the market is what you make it. There are still many opportunities out there you just have to change your marketing strategy, do things a little differently, try something new to see what works and what doesn't.
Never become victim of all the bad news because you can sure find a lot of it. Now is the time to become more proficient at what you do and become a trusted adviser to your clients and business partners.
God Bless
"Whether you think you can or you think you can't, either way you're right"
The days of fast money and anybody and their mama getting into the real estate business and hitting it big is over obi one kenobi...
Don't mean to be so harsh here (actually I do and I hope the wannabe's feelings are hurt) but this industry suffered greatly by people being able to get in so easily, and do to all the fast money, booming economic conditions, title companies, brokers, realtors, everybody was just jumping in for the quick buck, ran around and caused a muck.
The new housing market; the new economy; the new way of doing things will be far different than what it was before. We'll be in a wet, sloshy, and muddy waters for some time to come. Call this cycle the "cleansing"...
The Champions are flying above looking down for just a second then back up focused on achieving their next level. See there are walkers and talkers ladies and gentlemen and their are people who talk a lot of "stuff" but are not getting the results. 
