Though it may feel like yesterday, it's been about half a decade since the housing bubble burst and the subprime mortgage crisis hit. In September 2008, the United States government took over Fannie Mae and Freddie Mac. Since then, the mortgage industry has undergone fundamental changes, experiencing both increased regulation and a large shift toward nationalization. To give you an idea of the size of these changes, in 2006 around 30% of mortgage loans in the US were backed by a government guarantee. This number rose to around 90% in 2012.
Private vs. Government Funding
As we move further from the financial crisis, it makes sense to start asking if and when the mortgage industry will return to a world where private money plays a greater role and government institutions such as Fannie, Freddie, and the Federal Housing Administration (FHA) play a smaller one. Recently, our representatives in Washington have begun to discuss plans to dissolve Fannie and Freddie and bring private money back into the game, and that's a good start. In the past few months, we've also seen a few encouraging trends in the jumbo mortgage market that could point toward a mortgage industry less reliant on government guarantees.
If you're not familiar with a jumbo mortgage, the entire concept revolves around the type of loans that Fannie and Freddie are willing to guarantee. Fannie and Freddie will guarantee loans only up to $417,000 in value (sometimes more, but not important for this discussion), and these are referred to as conventional mortgages. A jumbo mortgage refers to one with a higher loan amount, typically $417,000 to $750,000, and these are not backed by a government guarantee. Prior to the financial crisis, jumbo loans were priced around .25% higher than conforming. After the financial crisis, the gap has widened to as much as 1.8%, just one more indicator of the flight of private capital.
In September, something changed – by some measures, the rates on jumbo mortgages actually fell below the rates on equivalent conventional loans. This phenomena was covered in many media outlets, and you can read more detail here and here. As of this writing, the rates on a few popular websites are almost too close to tell the difference, with 30 year fixed rate conventional mortgages at 4.28% and jumbo 30 year fixed rate mortgages at 4.32%. Though it's only been one month, the fact that jumbo mortgage rates did not immediately diverge from conventional rates is a sign that we may be witnessing a trend.
There are countless ways to interpret the closing spread between jumbo and conventional mortgage rates. For example, banks with excess capital to lend may feel pressure to put this money to work, which one could argue is leading to higher demand for jumbo loans and thus lower rates. Another interesting interpretation, however, ties back to Fannie and Freddie. In recent years, both institutions have raised guarantee fees, the fees that are meant to compensate them for providing a guarantee on a mortgage. This makes conventional loans more expensive, which would help close the gap with jumbo loans in the other direction.
If you're in favor of more private market involvement within the mortgage industry, you may be wondering if falling jumbo mortgage rates are the first step in a path toward private options for conventional loan amounts. After all, at some point working with Fannie and Freddie may become prohibitively expensive, and the WSJ article linked earlier mentioned a mortgage lender encouraging borrowers to borrow more money to jump over conventional limits. It's far too early to tell, but this trend certainly deserves attention over the coming months.
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Last week, Bernard Bernanke startled many by announcing that the Fed will not wind down their bond buying program right now. The program is part of an overall stimulus package geared at bringing back the national economy. The Fed’s purchase of these bonds over the last few years has driven mortgage rates to historic lows. The assumption that there would be a reduction in bond purchases has caused 30 year mortgage rates to spike upward over the last few months.
Surprisingly, Bernanke revealed the Fed will continue bond purchasers at the current pace. What happened and what does it mean to mortgage interest rates?
What would have happened if they reduced bond purchases?
According to Bankrate.com:
“The Fed could have caused rates to shoot up this week if it had announced the tapering of its bond-purchasing program.”
Why did the Fed decide not to start winding down bond purchases?
Moody’s Analytics reported that there were three reasons:
- Subpar economic data
- Tighter financial conditions
- Uncertainty surrounding fiscal policy
What does this mean to a buyer applying for a mortgage?
Those at Bankrate.com explain:
“For now, borrowers have dodged another spike in rates. The Fed’s announcement might even cause rates to drop in coming days, says Paul Edelstein, director of financial economics at IHS Global Insight.
‘Mortgage rates should fall back — not massively, but to some extent,’ he says.
That doesn’t mean homebuyers and homeowners should wait for lower rates, mortgage professionals say.
Eventually, once the Fed lets the mortgage market and the economy start walking on their own, rates will probably head back to the 5 percent or 6 percent range, says Scott Schang, manager for Broadview Mortgage Katella in Orange, Calif.”
When will the Fed begin winding down bond purchases?
According to an article in the Wall Street Journal:
“Federal Reserve policy makers decided this week that the economy isn’t in the right place for them to start winding down their bond-buying program. By the time they meet in December, it might be.
The decision to not start winding down the bond-buying program now was close… The economy only needs to get a little bit better over the next few months for the central bank to get its nerve back. That should be an easy bar for the economy to clear.”
Bernanke himself has not ruled out that the Fed could still scale back the stimulus this year. He stated:
“If the data confirms our basic outlook, then we could move later this year.”
Ed Conarchy, a mortgage planner at Cherry Creek Mortgage in Gurnee, IL had a great quote in the Bankrate article:
“Remember that rates go up like a rocket and fall like a feather.”
Still, Bankrate.com itself probably put it best: Grab the gift before it’s gone!
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Nine must-dos after loan preapproval
While it may seem obvious that you need to keep paying your bills during the period between a loan preapproval and your settlement date, some would-be borrowers neglect their finances in the excitement of shopping for a home.
"A preapproval letter is typically valid for 90 days but with the disclaimer that if anything changes with your finances it can impact your preapproval," says Patricia Napgezek, a senior loan officer with Inlanta Mortgage in Brookfield, Wis. "After 90 days, we can do a renewal letter with a recheck of your pay stubs and credit."
Read the entire article HERE.
If you are considering buying a home or refinancing, give us a call, we'd be ahppy to put you in touch with a reputable lender. It's not always the best rate that gets you the best deal!
Steve Hill and Sandra Brenner
Windermere Real Estate/FN
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First-time homebuyers are a shrinking pool, making up less of the housing market.
Typically, they represent about 40 percent of buyers, but today their numbers have dropped to about 31 percent of buyers, according to housing data by the National Association of Realtors.
First-time buyers are the only group of buyers whose share of home purchases has not increased over the last five months, CNBC reports.
FHA mortgages, with low downpayment requirements, are a popular choice among this group of buyers, but the recent rise in FHA mortgage insurance premiums is hampering purchases.
Some sellers are also even refusing to accept offers from first-timers that include FHA financing, real estate agents report.
First-time buyers also face steep competition when targeting lower priced properties. Investors have flooded the market, snagging lower priced properties in all-cash deals that first-time buyers would typically be drawn to.
– Tom Kelly: Real Estate Today at MyNorthwest.com
Whether buying a home or refinancing a mortgage, your mortgage lender will require you to lock your rate on the amount borrowed no later than five days prior to closing.
Mortgage rate locks guarantee the interest rate for a “set” period of time, and the length of the lock essentially determines how long you have to close escrow. This is where consumers can often find themselves scrambling to meet the interest rate lock, so the costs don’t accumulate.
Rate lock options
As you do your loan comparison shopping, you’ll find mortgage rate locks vary in time length.
- 15-day lock: Provides the “lowest-cost rate” available in the market on any given day. The loan needs to be approved by underwriting to take advantage of this lock.
- 30-day lock: Fair market rate. This option is most commonly used for interest rate locking upfront before loan approval.
- 45-day lock: Used for transactions taking longer, whether the loan is approved or not.
- 60-day lock: Used in circumstances where the loan is prolonged, such as when one borrower is out of town for a period of time, whether the loan is approved or not.
The shorter the lock, the less risk the mortgage lender takes in tying up that money, which means a better interest rate for the consumer.
It’s not uncommon to see an interest rate variation by as much as 0.25 percent on the longer rate locks compared against 30-day and 15-day rate locks.
The longer the lock, the more risk the lender takes and the slightly more costly the loan can become, depending on the day you choose to lock in your interest rate. Lenders are always concerned about interest rate risk.
For example, let’s say you lock your interest rate today on a 30-year fixed rate mortgage at 3.25 percent for 30 days. If rates rise to 3.5 percent, the lender could make an extra 0.25 percent margin on the money you’re committing to borrow.
That means if your transaction takes 32 days rather than the locked 30 days, the costs to extend your loan can be upward of half a discount point expressed as a percentage of the loan amount. Using a $300,000 mortgage loan, an extension fee for additional time can run upward of $1,500.
Don’t be afraid to let your mortgage lender know that you’re shopping around and that you’re willing to lock in an interest rate that you deem to be fair and reasonable. A reputable mortgage lender knows consumers shop for mortgages, forcing them to be competitive to stay in business.
All lenders are under very tight underwriting restrictions from Fannie Mae and Freddie Mac, so locking in the mortgage rate does not guarantee that your loan will actually close escrow. Making sure you lender reviews your financials improves the odds, greatly.
Get a rate quote from a lender upfront and make sure it’s an interest rate that the lender can pull the trigger on if you say “go.” Be prepared to send your mortgage company your credit, debt, income and asset information so it can make sure that you can actually qualify for the amount of money you’re looking to borrow.
“What You Need to Know About Mortgage Rate Locks” was provided by Zillow.com.
If you’re in the market for a new home, chances are you’ll have to compromise at some point along the way. Maybe you’ll have to commute a little farther than you’d like in order to get the best value for your money. Or perhaps you’ll forgo a huge backyard to be closer to the city.
And when it comes to finances, you might find a disparity between how much house you want and how much house you can purchase given your gross monthly income and other factors.
Home loans are made against your ability to repay. While the mortgage loan is secured against the house, it is really made against your income. That’s what mortgage lenders look for — income to offset liabilities.
Simply put, the amount of income you need to purchase a house will vary by your payment comfort level, including any other monthly debt obligations you might have.
Mortgage payment: Principal, interest, property taxes insurance and mortgage insurance, if needed
Consumer debts: Minimum payment obligations on things such as auto loans, credit cards, student loans, personal loans and installment loans
Other debt obligations: Alimony and/or child support or any other court-ordered repayment obligations
Running the math
Here’s a simple formula to calculate the amount of income you’ll need to purchase a home:
Target mortgage payment + consumer debts ÷ .36 = Gross monthly income needed to qualify
Most lenders limit your debt-to-income ratio (how much of your monthly income pays debt) to between 36 percent and 45 percent. While the exact ratio varies by lender and loan type, it’s best to base your calculations on the lower end to ensure that you won’t overextend yourself financially.
So, if your target mortgage payment is $2,000 per month and you have consumer debts of $300 per month, you will need $6,388 gross monthly income to offset your housing expenses and consumer obligations.
Your down payment is another important factor in determining how much income you’ll need to buy a home.
Consider the following loan scenario using a purchase price of $300,000 (assuming no other debts) and the current rates on Zillow Mortgage Marketplace.
- Down payment: 5 percent ($15,000)
- Interest rate: 3.26 percent
- Approximate mortgage payment: $1,770
- Gross monthly income needed: $4,916
So at the end of the day how much income you need to purchase a home is predicated on your monthly income, consumer debt obligations and down payment.
Impact of debt
For every dollar of debt, you will need double that in income. So if you have a $300 car payment, you’ll need at least $600 per month or more in income to offset that debt.
Debt erodes income, and less income translates to less purchasing power.
So, does buying a home make sense?
Yes, so long as the amount you can borrow for your desired purchase price is in sync with your debt obligations and, of course, your down payment.
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Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, California. Scott has been seen in Yahoo! Homes, CNN Money, Marketwatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.