Friday, December 12, 2008

Mortgage Rates & Availability December 2008 Charlottesville / Albemarle and Beyond

Part II - Q&A - The Mortgage Buzz

We're fortunate to have Jason Crigler from Crown Mortgage Services contributing. Jason is a loan officer who, along with Michael Martin, writes The Mortgage Buzz, a blog about--you guessed it--all things mortgage.

Don't miss Part I, which ran on Tuesday, December 9. We're discussing recent actions by the Fed, buying $500B of mortgage-backed securities and injecting $100B of capital into banks. This immediately brought rates down to 5.5%, a level not seen in more than four decades.

8. Does the Fed's action bring jumbo mortgages down, too, and to what rate? (Could you first define a jumbo for readers who may not be aware of the distinction.) You mentioned on REALCentralVA that there seemed to be a slowdown in jumbo purchases around here...and there ARE a lot of properties available that need jumbos.

The term "Jumbo" is used to describe a loan amount that was higher than the conforming (Fannie/Freddie) maximum loan limit, which has been $417,000 since 2007. In March of this year Fannie and Freddie increased their conforming limit for many MSAs [Metropolitan Statistical Area - BB], up to a maximum of $729,750. Seventy counties across the US saw the conforming limit go to the max. The Charlottesville MSA’s limit was raised to $425,000. But what has happened is that the original $417,000 loan limit remained and the difference between that and the increased limit became “Conforming Jumbo” (and FHA/VA Jumbo). So now we have Jumbo and Conforming Jumbo.

But a basic Jumbo mortgage often can only go to $1m to $3m. Enter the Super Jumbo, where loans are anywhere from $2 or 3m plus. Both Jumbo and Super Jumbo are loans that are kept on the investor’s books (portfolio), whereas Conforming Jumbo can be sold to Fannie/Freddie or through Ginnie Mae.

Confused yet?

Right, I commented on Jim’s blog about jumbo mortgage availability. While there are still jumbo mortgage programs out there, they have diminished quite a bit. We have access to a number of jumbo programs, and banks offer them directly, but the credit freeze that intensified in September and October has lenders cutting back on all types of loans that they can’t easily sell (like to Fannie/Freddie).

I suspect that there are a lot of homes in the Charlottesville MSA that need jumbo mortgages ($425k+), but I couldn’t give you any numbers. [To search this, go to, click "Property" and then fill in your parameters. The system only has "$400k" and "$450k" options, so the following numbers are only estimates, from $450K and higher: In Charlottesville/Albemarle there are 410 properties, up to $18M; in the entire Central Va MLS there are 805 - BB]

How hard has it been to get jumbos? Will it continue to be hard? Has it been hard b/c people don't qualify or b/c lenders are afraid of such large amounts, or both? Or are there just no buyers for properties that need jumbos right now?

Well, gone are the days of stated income/asset loans, low or no doc and option ARMs. These mortgage types weren’t only for Joe the Plumber - they also catered to the jumbo market. But those programs ceased to exist months ago. What I mentioned above is what’s really restricting the market – the credit freeze. Investment firms and banks have been the lenders of Jumbo money.

Now that the investment bank model is nearly dead (Goldman Sachs & Morgan Stanley are holding on), that leaves the Jumbo market up to the banks. And as you know, banks are pretty shy right now about putting anything on their balance sheet except for cash. But again, it’s not that jumbo mortgages aren’t available altogether, but the cost for them has risen (anything for a price, right?). I think you have it right – fewer qualify and fewer banks want to lend. ARM rates are in the high 6% for loan amounts up to $1m, in the 7-8%+ range for over $1m. Fixed rates are 7%+. Of course, you’ll need 20-30% down and 720+ credit scores.

9. To shift gears a little: There are apparently 11.5 Million people underwater in their mortgages, according to Mark Zandi of Moody's Economy. These people can't qualify for re-fi's w/no equity. Do you have any opinion you'd like to share about the mortgage mod programs? And any opinion on the fact that 50+% of loan mods re-default?

Your questions touch on this fact – that the problem is immense and complicated.

As FDIC Chair Sheila Bair puts it, “it all started with housing and I think it won’t end until we get the housing market corrected” (CNNMoney). I agree with her and join many others in believing that loan modifications are critical to helping stem the foreclosure crisis. But certainly the way a loan is modified makes a difference on the success rate. Modifications can be as simple as a new payment plan to get current, or as complicated as a rate and/or principle reduction. Payment plans can be worked out at the servicer’s level, but rate and principle reductions affect the owner of the loan and are much more difficult to do. Your Monday post about the investor suing BofA is an example of the problems with mortgage modifications. (Didn’t BofA see this coming?)

I think the only way to effectively deal with foreclosures related to underwater mortgages is with principal reductions. But how this would be done is the real rub. Forcing principle reductions is nearly impossible. So I have to hand it to Bair – she’s trying to work with the system she’s got.

10. Could you give an explanation of the new HUD form? [Housing and Urban Development - BB]

Sure, I wrote about the new HUD ruling on existing RESPA [Real Estate Settlement Procedures Act - BB] in a November post. HUD had been working on revamping the GFE (Good Faith Estimate) and HUD-1 (Settlement Statement) for a number of years and finally came out with their revised forms. The agency changed the forms in order to make the mortgage process easier and more transparent for consumers. The effective date of the new GFE and HUD-1 is still over a year away so it will be a while until we can see if borrowers view the changes favorably.

11. A basic question: How far ahead of buying a house should someone get "pre-qualified" or actually qualified? Is there a chance that the rates will go up again soon? Or is this the "new reality" for a while?

Getting qualified isn’t a difficult process – basically just completing a mortgage application and having your credit checked, to see if you meet the requirements of the loan program you want/need.

A pre-approval, which many realtors like to see, requires additional steps for your loan officer but provides a more solid statement of ability to get a loan.

When should you get a pre-qual or pre-approval? You should get one before you start looking for a home you want to buy. You need to know if you can get a loan, for how much and on what terms, before you drag your realtor out looking at houses.

Rates: yes, there is a chance they will go up. Like one of YOUR comments on your own post (“Why?”) - If I knew when and where rates would be in the future, I’d be the most sought after financial guru in the world (ahh…daydreaming….).

Here’s the deal – not only is the market trying to digest the daily financials and assess the risks of future inflation, but it’s also trying to absorb the news coming out daily from our FED and Treasury and other central banks around the world, about how they’re responding to this and that crisis.

Last Tuesday’s market reaction, when rates dropped over ¼%, was based entirely on news of the FED’s MBS purchase plan. Tomorrow we could see Initial Claims reported better than the expected 540k, which would be bad for MBS prices and send mortgage rates higher. [Unemployement rates were terrible; mortgage rates didn't go higher. - BB]

Are the lower rates (sub 6%) the new reality for a while? I actually think so, mostly due to the FED pumping money in the MBS. They are trying to lower rates, and so far their accomplishing it. And by “a while” I mean 3-6 months.

12. Do people in your industry expect this to stabilize housing prices, as the Government hopes, or might it just be, as Bloomberg news says, "spitting in the wind"?

Good question. I’m hearing a wide range of expectations, but in general I think folks recognize that reduced mortgage rates can only go so far and are only one part of the solution.

13. Is there anything we've missed? Or that you'd like to add? Or links that you'd suggest for reading?

First of all, I want to say that I appreciate the time and energy you put into your blog. [Thanks - BB] You and all the local bloggers and commenters are engaging in the flow of ideas and are a great example of the open, transparent and free market in process…working. We can inform ourselves through the media (newspapers, tv, etc.) and directly from the sources (press releases, financials), but the insight we receive from our neighbors (local blogs) can be invaluable. Because after all, the world and national economic issues affect all of us, at a local level. And while we’re not all journalists or experts in all the fields we discuss, we each have points of view from which we can learn. I’m just amazed at the meaningful dialogue that goes on in our small community.

Second, just a comment about the economic crisis and the officials who are leading us through it.

I really think it’s in all of our best interest that the foreclosure crisis is brought under control and the housing market comes to a stabilization point. Personally, I hate bailouts (who likes them?) and I believe that moral hazard (with individuals, corporations & governments) is a real and serious issue. But I’m of the opinion that we should be doing everything we can to deal with the problems that face us. While there’s plenty of blame to go around, and the mortgage industry can claim a bunch of it, we need to address what’s directly in front of us. Certainly there are good policies/solutions and there are bad ones. In relation to the economy, that determination often comes in hindsight. And economic theories are just that – theories. Not every economic policy works in every situation.

I respect the leadership of the FED, Treasury, FDIC, etc, because

1) they are working their tails off to find solutions to our extremely complicated problems,
2) many of them have the knowledge and experience that makes them highly qualified to steer the USS Economy.

Call me na├»ve. But when one considers the expectations that have been placed upon them and the scrutiny under which they work, it’s hard to imagine how anyone could effectively deal with it. So I give them major credit for getting paid a government salary to deal with the one of the most challenging economic periods in the last 80 years. Additionally, our expectations are misplaced if we think that there won’t be mistakes (and major ones in some cases) along the way. Finding out what doesn’t work is part of the process in finding out what does.

And lastly, shouldn’t we all be rooting for Obama and the rest of the new administration? I know it’s tough for us to get over our political, social, economic & religious differences. But we’re talking about the trying to avoid a major recession or worse. It’s critical to debate over appropriate policies, yet at the end of the day we’re all working for the same end. This kind of thing doesn’t help (saw ad on Drudgereport yesterday.)

Many Thanks to Jason. He'll take questions in Comments (or if you have a private question, you can email him: Current mortgage rates for 30 year fixed will also be updated over the next couple of weeks in the Comments section.


Montpellier said...

Nice interview, and Jason acquits himself well in his presentation and statements.

want to buy soon said...

I've been looking around at rates online. It seems there are some places offering as low as 5%. Is there any way that rates could go to 4.5% without intervention of the government?

Anonymous said...

My question to mortgage experts: Nowadays, if i have cash to buy a house what are the benefits of taking a mortgage?

don said...

Do you mean if you have ALL cash to buy a house?

Not an expert and interested in Jason's answer. But personally I wouldn't want to tie up a large amount of cash in anything. A house is a kind of asset though going forward it's going to be a small-returning asset. I'd want as much cash available right now and through the recession. Which may last a year or longer.

I think the mortgage answer is "tax deductions" and right now the $7500 tax credit (which is actually a loan) if you take a mortgage.

Again, though, interested in what Jason will say.

MY QUESTION: the Fed will supposedly lower the overnight lending rate by 1/2 percent on Monday 16th. Does this do anything to mortgages?

Jason said...

want to buy soon - no, we wouldn't be able to see the rates we're seeing without govt intervention, considering current market conditions. Rates are where they are strictly because our govt's actions. The FED is purchasing mortgage backed securities on a huge level. That demand is increasing MBS prices and lowering rates. And right now, there really isn't anyone (bond funds, sovereign wealth funds, other govts, etc) who could step to sustain current MBS prices if the FED pulled out.

Anonymous - Don is right about the tax advantages, as well as the fact that the $7500 1st time homebuyer (FTHB, in mortgage finance lingo) credit is really an interest free loan to be repaid over 15yrs. But the “credit” is for any qualifying FTHB, whether or not they get a mortgage. Info at IRS site:,,id=186831,00.html
If you have cash to pay for a home, it's my opinion that it would be worth your while to talk w/ your financial advisor about it, before you make that decision. Like Don said, a home is an asset (whether you live in it or not), and there are range of issues to consider (asset allocation, investment risk, etc).

Don – yes, in normal times mortgage rates usually benefit from reductions in the FED funds rate (rate at which banks lend to each other). But alas, we are not in normal times. Though the credit markets are thawing out across the globe, spreads (price/rate differences) between T-bills/bonds and other debt instruments are higher than central banks and issuers (corporations, municipalities, etc) would like. The FED has reduced the funds rate from 5.25% (June 2006) to the current 1% (Oct. 2008). Fixed mortgage rates have come down as well, but not as much as they typically do or have in the past. Hence the FED’s plan to purchase $500b in mortgage backed securities. Shorter term rates (like HELOCs, tied to Prime) have dropped along with the FED funds rate.

Laurie said...

I think this is a really really basic question, sorry, but I'm not finding the answer on google. Say I get qualified for a mortgage and the rate is 5%. But I don't find a house for 90 days, and the rate is back up to 6%. Is there a way to keep the mortgage rate from when I qualified, or do I now pay 6%?

And a similar question, if I qualify for a 5% loan tomorrow, make the offer and start the process but don't close for 90 days, and rates go up? Do I get 5% mortgage or whatever it has gone up to in 90 days?

Jason said...

Laurie - great questions. You're referring to the concept of locking/floating a rate. Try Googling "rate lock", and you'll get everyone from the FED to RealtyTimes giving you an explanation. Here's the FED's consumer guide about rate locks:

Most rate quotes are based on the typical 30 day rate lock period. Longer periods (like 60, 90, 120, 180, etc) are available for a fee, paid as points either at closing or up front (prior to lock). As you can imagine, the longer the lock the higher the fee. Here's example from one of our lenders: 90 day lock fee is .75pts due at closing, 180 day lock is 1pt due up front (at time of lock in) plus .75pts due at closing.

Locking and "floating" (waiting to lock) both carry risk/rewards. Locking - risk that rates go lower, but safety when rates go up. Floating - risk that rates go up, but payoff if they go down. However, if you lock and rates drop more than .25% you can work with your lender to renegotiate a lower rate (though it probably won't be the lowest available). But if rates go up, no lender can protect you from that.

So to answer your 2nd question - if you lock in at 5% for a sufficient lock period (to cover you to closing), you will secure that rate. If you wait to lock than you "float" with the market and can lock at a rate (higher or lower) before closing. There are a number of considerations in the lock/float decision, a significant one being your risk tolerance/aversion - are you comfortable with current rates, or do you want to play the market and "see what happens"?

hope that helps...