Monday, October 13, 2008

Charlottesville - Albemarle Area Real Estate Market - Q: Are Mortgages Available? A: Yes!

We're pleased to have a guest today: Jason Crigler from Crown Mortgage Services in Charlottesville. The blog this loan officer writes, along with another officer, Michael, is The Mortgage Buzz. It covers Central Virginia's mortgage landscape, but also has a regional take on the economy, in addition to noting and commenting upon global financial events.

As we've said before, the Bubble Blog isn't anti-owning. We're anti-bubble economy and pricing, and opposed to looking at a house as an ATM machine or profit generator. But we think owning a house is important for community--it gives folks a stake in their area, a sense of pride and belonging.

With all the blaring headlines about the world-wide credit crisis and financial institutions holding on to their cash, we wondered if the mortgage industry had ground to a halt. So we emailed Jason.

Crown Mortgage is an "Upfront Mortgage Broker," which means that they discuss their rates and approach before the mortgage is written. No "hidden fees." The association of Upfronts came about in response to concerns about mortgage brokers "taking advantage" of uninformed buyers; it's a consumer advocacy group.

We first began discussing mortgage availability over a week ago and, as Jason notes,

"In that time we have witnessed events that will have a significant impact on our economy and our lives for some time to come. The credit freeze and stock market plunge will undoubtedly change the landscape of financing. And while the mortgage business has remained relatively unchanged during the recent financial turmoil, it is still hard to say “how much and how wide”."

Jason continues,

"As I mentioned in a blog post from last week (thanks to your questions)[September 6 - BB], mortgage availability has changed little over the last several months. The federal government now controls 85+% of the mortgage market through Fannie Mae (FNMA), Freddie Mac (FHLMC), HUD, USDA & VA loan programs. And despite the lingering controversy surrounding the Fannie/Freddie bailout, the home financing system is more stable at this point than it would have been otherwise."

Speaking to the issue of guidelines: "I can say with confidence that there’s not a loan officer (or real estate agent for that matter) around that hasn’t dealt with the contraction of mortgage programs and loan guidelines. Before the credit crisis (Summer 2007), there were thousands of mortgage programs offered by hundreds of mortgage lenders and banks, and these were not Fannie, Freddie or FHA loans. These were subprime, low/no doc, and other alternative mortgage programs."

"A year later many of those lenders and banks are out of business and those loan programs no longer exist. While there are still a very few other mortgage products out there (even less over the last week), Fannie, Freddie, FHA (Federal Housing Administration), USDA (US Department of Agriculture) & VA (Veteran's Affairs) loans account for all or nearly all home loans currently being originated by your average loan offer. So with the alternative mortgage programs that many borrowers depended on during the refi boom and housing bubble now gone, there are millions that don’t qualify for the programs that are left. And Fannie/Freddie/FHA have had to tighten loan guidelines as well, which adds additional borrowers to the ranks of the unqualified."

A few examples of Fannie/Freddie tightening guidelines:

1.) eliminated 100% financing
2.) stricter DTI (debt-to-income) limits
3.) more stringent appraisal requirements

Now, let me get to your questions:

1. Qualifying, a bit more info:

Fannie/Freddie/FHA are still intact and there have been no funding issues for these types of loans. Lack of money for these types of loans is not the issue, it’s lack of demand (or qualified demand). If you qualify for a conventional or government loan you can get one. But there’s no question that there are a lot of folks who don’t qualify – one reason some go into foreclosure (can’t refi out of a subprime or alt-A into a conventional/govt loan).

2. What about interest rates?

There's volatility in the market. The MBS [Mortgage-Backed Securities, where mortgages are bundled then sold to investors -- BB] market has been extremely volatile in the last several weeks, and particularly last week. US bond markets (including MBS) are closed today [Monday, 13th] due to the holiday, but we’re probably in for another week of big swings [after Wall Street's Worst Week Ever - BB]. We were at a low of 5.75% (30yr fixed) on Monday and ended up above 6% on Friday.

The MBS market determines mortgage rates, not the stock market or Treasury Bills. Many folks try to determine what rates are or will do based on stocks or treasury bonds, but this past week was a perfect example of how that doesn’t work. The stock market tanked as did the MBS market, which led to higher mortgage rates.

The basic idea is that there is a flight to quality when there’s a stock selloff – investors sell stock and buy bonds (including MBS). What we saw was investors selling everything, including MBS and at times Treasuries (though there was still demand for Treasuries).

MBS act like other bonds. When prices go down (fewer buyers than sellers – high supply), the interest rate goes up. And when prices go up (more buyers than sellers – high demand), interest rates go down.

Rates, historically speaking, are quite low. I know that sounds like a quote from a REALTOR commercial. But it's true. The average 30yr fixed rate since 1978 is around 9.5% (Freddie Mac).

I don't have any statistics or other evidence to support this, but I believe many of the new homeowners who have entered the market in the last 5-6 years have a "standard" for mortgage rates that is way off. We've been so used to low rates for so long that anything over 6.5% is high. I say this because I'm one of those folks. Also, I've talked to a lot of borrower over the years, and when rates have been in the mid-6 range they cringe. Yet what many don't talk about is, "what if rates go back to 7, 8, 9+ ?"

2a. What about refi's?

Demand for refis is a function of rates and guidelines. If rates are low(er), then refis increase. But tightened guidelines can dampen the effects of a rate drop, since fewer borrowers qualify. Not to mention we just got out of a major refi boom 3-4 years ago, so many homeowners took advantage of the low rates (low/mid 5% 30yr fixed) back then.

3. Is 20% down going to become reality, or do you think now that there's a "bailout" there will still be 97% LTV?

Loans for 97% LTV are still available, but it’s just hard to say if that will continue to be the case. Fannie/Freddie’s 97 depends on private mortgage insurers to insure the amount over 80%, and some of these companies have already quit offering insurance to 97%. FHA, on the other hand, provides its own insurance and does not rely on private MI. But even FHA will be reducing their LTV in 2009 – max LTV of 96.5% goes into effect January 1st. And USDA still offers up to 102% of the appraised value.

Government loans are playing an unprecedented role and the US economy depends on them to help stabilize the housing market. While any lender balks at lending their own money out at high LTVs (90+%) in this market, I expect that we’ll still see them as long as the federal government feels that it needs them and is able to prop up the housing market.

4. Major Media outlets keep shouting about the "Credit Freeze" -- with good reason. Do you think local community banks are hanging on to assets as much as big banks?

I can’t speak to any bank’s internal operations, but I don’t think any financial institution is going to come out of this completely unscathed. Yet I wouldn’t be surprised if small community banks end up faring better through all this compared to regional & national banks. Many community banks originate loans like non-bank mortgage brokers – they sell/transfer loans down the line to larger banks or investors. Community banks certainly don’t have the exposure to all the toxic assets and investments of their larger counterparts. We have a number of strong community banks in the Charlottesville area, and I expect they’ll do quite well despite the national and global economic pressures.

5. Are you writing many FHA loans?

My company does not originate Federal Housing Administration (FHA) loans, although we do offer the other traditional govt programs –Veterans Administration (VA) & US Department of Agriculture (USDA). For us it was a business decision since FHA lender/broker approval requires significant financial investment on a yearly basis. In the nearly six years I’ve been in the business I can count on one hand the number of clients that have either requested or could have used/qualified for an FHA loan. Of those clients I helped, I was able to put each one into a conventional mortgage with the same or better terms (rate/points combination) than an FHA. But that’s just my experience. I know a number of loan officers who’s FHA volume is at least ¼ of their business and growing.

FHA loans are more popular now than ever. And from what I hear local FHA activity has followed the national trend. Generally, this is attributed to the demise of subprime and the increased authority provided by Congress over the last 12 months.

6. Can a USDA loan cover a "farmette" out in the county? What are the minimum criteria (acreage, production, being a business, etc)?

The USDA single family housing program (SFH), which is their most well known and utilized mortgage program, does not allow income producing land or structures, including hobby farms and farmettes. However, USDA administers a Business & Industry Guarantee Loan program which covers some income producing property.

USDA SFH eligibility is based on income (limit is 115% of median area income) and property location. There is no acreage or loan limit.

6. Do you have any observations about pricing (in the past, present, future), supply, and when the housing market will "stabilize" or where prices will go? This can be totally subjective.

Ah, the million (or trillion) dollar question – at what point will the housing market stabilize. Honestly, I don’t know what I think. I’ll leave that up to the experts, like Nouriel Roubini.

But I do subscribe to the school of thought that real estate is local – national trends don’t provide a true indication of how a local market will behave.

[Bolding, as usual, is ours.]

Many thanks to Jason for his time and knowledge. Be sure to check out his blog, The Mortgage Buzz.

And this is a timely topic, of course, with all the media attention paid to the economy. Check out REALCentralVA's post on mortgage availability.


Tony said...

wondering why USDA is in the loan biz? if it's not for productive farms is it just to make some money? or was the original idea to help rural non-farming families?

a bit clueless about mortgages, but now feel like i know much more. thanks.

jason said...

You got it. USDA's rural housing program was created to help low to moderate income rural residents obtain affordable home financing.

But I don't know about the program's profitability.

Jennifer said...

Over at the Real Central Virginia blog the mortgage post said there are loans where the borrower can have a 65% debt to income ratio DTI.

1. I somewhat understand DTI but it seems like some places put in different elements in the calculation. I've seen some that include student loans and some that don't. Is there a standard for this?

2. My brother (who recently bought a house) says 65% is a crazy DTI. Is it and if so isn't there a higher possibility of default?

Jason said...

Any given lender may have their own DTI or other limits. But conventional and government loan programs, now 85%+ of the mortgage market, have their own which may be more or less restrictive. In order for a lender to sell the loan to Fannie/Freddie/FHA etc it needs to fall within those limits. Fannie/Freddie (Agency) do not publish exact DTI limits - the only way a lender can find out if a borrower's DTI is acceptable or not is to use Agency automated underwriting systems. Approval is based on multiple factors in the borrower's file.

1.) Agency guidelines require student loan payments to be calculated in DTI, whether the student loans are in deferment or not. FHA allows student loans to be excluded if in deferment for 12+ months.

2.) I agree. 65% is crazy, especially when you consider the fact that it's based on gross income. My understanding & experience is that Fannie/Freddie aren't accepting 65% anymore, more like ~60%. But I could be wrong.

If they're buying the billions of subprime and Alt-A loans that the news reports suggest, I'm pretty sure they're adding a quite a few high DTI loans to their books.

Montpellier said...

I'm more interested in knowing what they're requiring for downpayments and what measures are in place to come up with decent comps for the appraisals.

Anonymous said...

Interested in the appraisal aspect too. What are the different approaches to appraisals?

If things were over priced 2-3 years ago what does an appraiser do now for lending standards? How are they seeing things differently?

Jim Duncan said...

Montpelier and Anonymous - I just asked a very respected local appraiser to write a story about what appraisals are doing locally ... I'd asked earlier this year, but the year's gotten away from a lot of us.

Hopefully I'll have it by next Friday for publishing on Monday.