The Greatest Buying Opportunity of our Lifetimes?

A record drop in home prices combined with record low mortgage rates, may result in 2009 being the best time to buy a home since the Great Depression.

BLOOMFIELD, MI – With record drops in home prices (from their peaks) combined with record low interest rates, 2009 may go down in history as the best time to buy real estate in our lifetimes.

Of course, many real estate agents ALWAYS say it’s a great time to buy real estate as their income depends on selling homes. But, The Housing Affordability Index (HAI) chart here supports their claims this time. It shows that nationally, this is the best time to buy a home since 1971, when this data started being tracked. The index takes into account housing prices, mortgage rates and wage income to determine affordability for first time buyers with no home to sell.

The experts who publish the Case-Shiller Index are predicting that housing prices will continue to fall in 2009. So many home buyers may be tempted to wait until housing prices bottom out before buying.

Two challenges with that line of thinking:

1.) Wages are expected to also fall due to rising unemployment. As more and more workers are laid off, people will compete for the fewer remaining jobs, allowing employers to lower wages. Mortgage rates will also increase at some point in response to all the bailout money the government is spending. Both of these factors work against the benefits of falling housing prices. So, there’s no way to predict where the index will go in the future.
2.) Timing the bottom of the housing market is almost impossible. Did you know when the housing market peaked? None of the experts did. So, it’s safe to assume no one’s going to be able to predict the bottom of the market until AFTER it’s rebounded.

So, what should a potential home buyer do?

The best advice I can give a buyer is to make sure YOU know your budget and don’t spend every penny of savings to get into a home. Then forget about timing the market and go buy a home. Just be careful.

I’m always amazed that buyers come to me and are perfectly willing to let ME to tell them what THEY can AFFORD! Folks, you should know your budget way BETTER than me! All I, or any mortgage person, can do is tell you the MAXIMUM amount of trouble we can get you into. The industry methods of determining your maximum amount, don’t even take into account how many children you have! It’s common sense the more children you have the tighter your budget. Homebuyers should determine a maximum monthly housing payment (including property taxes & insurance) their budget can comfortably support, BEFORE talking to a mortgage person. If you feel you need help determining a solid budget, there are plenty of nonprofit organizations waiting to help you.

With the uncertain job markets, the lending industry is requiring more homebuyers to have emergency reserves to qualify for a mortgage. Again, some common sense is needed here. Buying a home and living paycheck-to-paycheck is a recipe for disaster! Unexpected things go wrong with homes all the time and cost money to fix. If you buy a foreclosed home, you buy it as-is. The greatest home inspector in the world can’t catch everything, nor should they be expected to. Likewise, the best home warranty won’t cover everything. So make sure you have some savings to fall back on if something breaks or if there’s a job layoff.

Nothing’s sadder in real estate than to see a foreclosed property get foreclosed on again.

Today’s real estate market offers great opportunities. Homebuyers need to hire the best qualified real estate agent and mortgage professional they can find, to help them minimize their chances of becoming another foreclosure statistic and instead, properly take advantage of the chance of a lifetime.

Is your Mortgage “Expert” Keeping up with Industry Changes?

Changes in mortgage guidelines are occurring at a record pace. Many in the industry are not keeping up, causing painful lessons for consumers.

BLOOMFIELD, MI – Most consumers have come to believe all that matters in getting a mortgage is shopping for the lowest rate & closing costs. Every lender is the same, their expertise & experience mean nothing.

Sadly, this past week three homebuyers found out differently, the hard way.

They all had the same story – after being pre-approved by their lender, they had found a house, signed a purchase contract, applied for a mortgage with their lender, and halfway through the transaction, had their mortgage application rejected.

Each lender also had the same story - they claimed a recent change in mortgage guidelines was the reason for their rejection.

I got involved as they were each referred to me, to somehow save their transactions.

The sad fact was that in each case, the guideline change the lender blamed had actually occurred months ago, not recently, and I could do nothing for their transactions. I did email them proof that the guideline changes had occurred months before and recommended they confront their lenders for a return of their application fees.

Why do these things happen? Don’t all lenders follow the same guidelines? Isn’t getting a mortgage the same everywhere?

From early 2002 until April, 2007 getting a mortgage was very easy as mortgage guidelines were extremely loose. Many lenders joked that if a consumer had a pulse, they could get them a mortgage. People of all backgrounds, with no experience, jumped into the mortgage business for the easy money.

Then the Mortgage Meltdown hit, followed by the Real Estate Bubble popping, the Credit Crunch and the Recession we’re in now.

Today, mortgage guidelines are very different than they were April, 2007. Subprime, Zero Down, No Doc, Stated Income, Option ARM, are all gone along with loose mortgage guidelines.

Many mortgage people that got into the business after 2001 are struggling to adjust to the new lending environment. They’re used to just asking questions about FICO scores, income and assets. They don’t know how to ANALYZE a transaction to even ask the right questions to avoid nasty surprises, much less keep up on industry guideline changes.

Many of them claim to be experts by citing their time in the business, number of completed transactions or their ability to deliver the “best” price. I don’t see how any of that type of “expertise” helped the three homebuyers who got rejected this past week and had their home purchase dreams shattered.

Michigan passed a law April, 2008 requiring all loan originators (except those at federally charted banks) to pass a test by April 1, 2009. The test is heavily weighted with questions on federal & state lending regulations and underwriting guidelines. Many are failing it or are avoiding taking it until the last possible moment.

So, if you’re looking for a mortgage to buy a home or refinance, maybe you should be searching for more than just the lowest rate and fees. Maybe you should be asking loan originators what their credentials are and for proof they’ve passed the state test.

Banks Sneak in the Backdoor for more Fed Money

Mortgage rates should be lower than they are. Why are banks smiling about this?

BLOOMFIELD, MI – On November 25th of 2008, the Federal Reserve announced a program to reduce the cost and increase the availability of credit for the purchase of houses.

Over several quarters, the Federal Reserve will buy up to $100 billion of direct obligations of FNMA, FHLMC & GNMA, and purchase up to $500 billion in mortgage-backed securities (MBS) that the entities sell on Wall Street.

The move is designed to put a floor under the housing market and break the vicious cycle of foreclosures pushing housing values down, causing more foreclosure, pushing prices down further.

The Fed started their purchases at the beginning of January and in response, mortgage rates dropped to 50 year lows.

This is great news for potential homebuyers as these historically low rates combined with marked down houses probably represent the best buying opportunity in a generation.

It’s also good news for homeowners as those with equity in their homes can refinance to lower their mortgage payments.

Increasing home sales, a refinancing boom – sounds like the clock’s been turned back to the “good old” days of a few years ago!

Well, this time around is very different for many obvious reasons and some not so obvious ones. Anyone notice that most banks are teetering on the brink of bankruptcy or insolvency? They’re not lending as eagerly as in the past, despite the government handing out $700 billion in TARP funds. Banks are desperate for money wherever they can get it. As such, they’re making this refinance boom dramatically different from previous ones.

Take a look at the chart below. It compares wholesale mortgage rates with those the consumer sees. The wholesale rate is represented by the FNMA 60 Day Delivery Rate, as best a wholesale rate as can be found. The weekly FHLMC Primary Mortgage Market Survey represents the consumer rate. Note that the survey has a “fee” component also.

The chart shows an overall widening between the two rates beginning in late November. Also notice the FHLMC survey shows consumer fees have increased since the end of October.

What’s going on? Well, to generate higher profits banks are keeping the improvements in wholesale rates while also raising mortgage fees (this is why it’s very difficult to get a no-cost refinance).

Remember, many banks are struggling to survive. They’re looking to increase revenues any & every way they can.

What’s interesting about this is that they’re taking advantage of the Federal Reserve’s purchase of MBS to lower mortgage rates for consumers. The Fed is spending taxpayer dollars to lower wholesale mortgage rates, but the banks are keeping the money, just like they’re keeping the TARP funds they received and were supposed to loan out to save the economy.

It’s just another sneaky way for the banks to get more money out of the government and taxpayers.

Media Hype Creates Mortgage Expectation Bubble

News stories are only covering half the facts on falling interest rates, creating unrealistic consumer expectations.

BLOOMFIELD, MI – Everywhere you turn today is news about how low mortgage interest rates have fallen. Whether newspapers or internet, you can find coverage on the topic. People are talking about mortgage rates on the radio, TV, at work, everywhere.

The trouble is, all is not as the media so simply portrays it.


As the chart above show, this is the fourth major drop in interest rates Americans have seen since 1982. Back in 1982 mortgages were very labor intensive with handwritten applications, documents done on typewriters and everything sent by what we now call, “snail mail”. From application to closing could easily take 8 weeks, often longer. Many homebuyers took advantage of the increased purchasing power as a result of the lower rates, but many more existing homeowners took advantage of the lower rates to lower their mortgage payments.

With each successive drop in interest rates since then, consumers have benefitted from the increased use of technology by the mortgage industry. Computers, faxes, websites and email have all sped up the mortgage process, making mortgages cheaper, dramatically easier to obtain and increasing product options – until now.

The refinance opportunity that started at the end of 2008 brings the lowest rates in over 50 years, but it also brings challenges not seen in over 30 years.

Falling home values, tightening lending criteria, fewer loan programs & options, higher down-payment requirements and more, are challenges many borrowers have never experienced.

You’d never know this though from following the media hype about the drop in interest rates. Most articles about the topic rarely mention that borrowers face a brave new world of qualifying for these low rates.

Reality Check
Traditionally, the mortgage rates lenders offered were the same for all borrowers as long as they qualified for the corresponding mortgage program. Either the borrower had the credit, income and assets to qualify or they didn’t. That all changed on March 1, 2008 when FNMA announced Loan-Level price Adjustments (LLPA) on their products to compensate for increased risk.

Effective June 1st of 2008, even though a borrower may qualify for a mortgage program, their mortgage rate now depends on their FICO score, Loan-to-Value of the property and on refinances - more for taking cash out. At the extremes, some borrowers may pay up to three discount points more than others (keep in mind a discount point is not a percentage point).

Imagine the surprise of millions of borrowers being told they’re approved for their mortgage, but not at the advertised rate they applied for.

Unfortunately, it gets worse. On December 29, 2008, FNMA announced major changes to their LLPA’s that go into effect April 1, 2009. Because of the lag time from application to close and then lender delivery to FNMA, many lenders have announced they will implement these higher costs January 12th.

Want to finance a condo? If you finance more than 80% of the value it’ll now cost you an additional 0.75 in discount points regardless of your credit score. How about taking some cash out of your home? It could cost you as much as three additional discount points. There are now also hits for manufactured homes and subordinate financing.

The timing of this FNMA announcement is very odd in light of the Feds actions in buying Mortgage-Backed Securities to lower mortgage rates. One part of the government is trying to lower rates to help the housing market, while another part is raising the cost of those same rates.

Another bit of news the media has neglected to report is that “no-cost” refinances are almost a thing of the past. FNMA and the banks are changing the pricing model of the industry to discourage these types of transactions. Why? To stop what’s called, “portfolio runoff”. The rates offered by the industry have built-in assumptions that once a loan is closed, it’ll stay on a lender’s books for at least a minimum number of months. In previous refinance “booms”, lenders got burned by borrowers refinancing every 2-3 months and lost a lot of money. So, borrowers looking to refinance will have to either roll refinance costs into the loan amount or pay them in cash.

Rates hit Record Lows!

The Fed follows through on their Mission of Buying Mortgage-Backed Securities to Drive Rates Down.

After rising the last 2 weeks, rates have plunged this week in response to the Fed's buying binge.

See the graph below:

Keep in mind this is a graph of MBS prices, which is inverse to mortgage rates. Notice the peak today (as of 4pm) exceeds all previous high marks.

We are seeing challenges though in getting these prices to translate to lower rates.

Lenders are getting slammed with refinance applications and are holding back on passing on all the pricing benefits to better rates. This is one way they control the number of loans submitted.

On top of that, lenders laid off tens of thousands of employees in 2008 and are short on manpower.

We are advising all our clients to get their applications in with us so we can start the underwriting process, while we watch the rates to lock in when it makes sense.

Gotta run and take care of clients:)

New Year’s Resolutions for the Mortgage Industry

What are the chances of repeating last year’s actions and getting better results?

January 3, 2009 -- BLOOMFIELD, MI – What a challenging ride the year 2008 was. A worsening mortgage meltdown, the nationwide decline of real estate values, lack of credit liquidity causing a banking bailout, a bailout of the domestic auto industry, rising unemployment and the beginnings of a worldwide recession. Did I miss anything important?

The real estate and mortgage industries were decimated by the deteriorating economy, not to mention almost 25% of home owners nationwide watching their biggest investment going upside down.

One of the definitions of insanity is doing the same thing over and over again, hoping for different results. What changes can be made so that the industry has better results in 2009?

1. Registration and testing of all loan originators, including those working for federally chartered institutions.

WHY: Although borrowers should ultimately be held accountable for their ignorance and greed in taking out mortgages they couldn’t afford, a percentage of mortgage professionals did some serious misleading and worse. A mortgage is no more a commodity item than a 401k, yet consumers took mortgage advice from loan officers with little or no training. Several federally chartered organizations, most notably WAMU and Countrywide, had “sweatshop” refinance operations. Both these organizations were involved in lawsuits filed against them for mortgage abuses.

2. The return of common sense underwriting. There seems to be a lot of pressure on underwriters to be perfect, causing a lot of good mortgage applications to be rejected or picked apart. FNMA/FHLMC should issue some guidance on this.

WHY: Underwriting guides were too loose in recent years, but now the pendulum seems to have swung the other way. The government’s stated goal is to unfreeze the credit markets. Hypersensitive underwriting practices work in opposition to this.

3. FNMA/FHLMC should create a streamline refinance program that does away with appraisals & income verification modeled after HUD’s FHA Streamline program. FHA Streamline allows no cash out, but only requires that mortgage payments for the last 12 months have been on time. I’ve written about this several times before and there was a news leak on December 10th that it’s finally being considered.

WHY: Homeownership really boils down to affordable payments. Most people lose their homes, or walk away from them, when they can no longer afford the payments. Allowing homeowners upside down in their homes to still refinance and lower their payments, will keep more homes out of foreclosure. Slowing foreclosures will slow the dropping of real estate values, which will improve consumer confidence that’s now at a record low.

4. FNMA/FHLMC should remove their current limits and allow real estate investors to buy up foreclosed homes and rent them out. The limit is now 4 mortgages backed by FNMA/FHLMC, but with restrictions it should be unlimited.

WHY: The pool of qualified homebuyers has dramatically shrunk with the end of zero-down programs, easy credit requirements (both extremely abused) and the increasing number of consumers with foreclosure blemishes. This is one of the reasons we have excess real estate inventory. Many of these same people though, would like to rent a home, even rent-to-own it. Qualified investors are best suited to accomplish this. They just can’t get commercial financing due to the credit freeze. To avoid abuses, investors should only be allowed to buy foreclosed properties, have deed restrictions against reselling for 12-24 months and have either significant experience or liquid reserves.

5. Even though the program was a bit ill-conceived by politicians, lenders should embrace HUD’s Hope for Homeowner’s program (H4H) to avoid foreclosures.

WHY: The H4H program allows lenders to refinance nonconforming loans through FHA at 90% of the home’s current value. These loans usually won’t qualify for FNMA/FHLMC and are in danger of foreclosure. The current lender does have to write off the difference, but this is usually less expensive than the property going through foreclosure & being resold or being sold through a short sale.

6. Creative rules should be conceived that will motivate lenders to better staff their loss mitigation departments.

WHY: Ever tried calling a lender concerning a short sale, loan modification or foreclosure? You get to speak to someone with little training, reading from a limited script, that can’t make a decision. If you mail/fax/email something to them, it has a high probability of getting “lost”. In actuality, the easiest thing for these overworked individuals to do is to claim they never got what you sent. If the government is serious about doing more to keep homeowners in their homes, creative penalties need to be instituted to motivate lenders to solve this problem.

I’m sure some of these ideas will be addressed and some may end up not being feasible. We do need to do something though, or we’ll be worse off at the end of 2009 than we were at the end of 2008. Send me any ideas you may have.