Thursday, January 15, 2009

The Good News in Real Estate: Mortgage Refi's

It's January, typically a slow month in RE sales, which is certainly true in our area. Nationwide, we're in a recession, unemployment is rising, and the outlook remains grim for some months to come. But there IS some good news for homeowners.

Mortgage rates
have been falling since late November, when the Federal Reserve announced a plan to buy $500 billion of mortgage securities (MBS). Demand for the securities has a huge impact on rates mortgage lenders charge to consumers. While purchases are still slow, locally, as nationally, there'ss a "refi boom." And the ability to refinance is great news for household balance sheets.

Last December, we had a Q&A about mortgage rates and availability with Jason Crigler, a loan officer at Crown Mortgage Services LLC in Charlottesville (see the Q&A: Part I and Part II). Jason is also the VP/president-elect of the Central Virginia Association of Mortgage Professionals. And he, along with loan officer Michael Martin, writes The Mortgage Buzz blog.

Jason pointed out the savings of a refi in a recent DP story: "For qualifying homeowners, refinancing can save a significant sum of money. If a homeowner with a $200,000 mortgage loan with 6.5 percent interest refinances to 5 percent, for example, the homeowner could save an estimated $130 to $150 per month and a total $30,000 to $50,000 over the life of the loan."

For this post, we asked Jason questions about refi's from the homeowner's point of view, and also asked him for opinions on the mortgage landscape through 2009. Bolding is ours.

1. What kind of refi's are you seeing, that is, at what price points? What kind of properties are you seeing?
What about Jumbos?

Jason: The majority of refis we’re seeing fit within the conventional conforming fixed rate mortgages guidelines. That is, they are mostly Agency (Fannie/Freddie) fixed rate loans that don’t exceed the $417k loan limit. It’s about even between rate/term refis (just changing the rate and/or term of the 1st mortgage) and cash out refis (debt consolidation beyond the current 1st mortgage and/or taking additional cash out from existing home equity).

We have been receiving jumbo mortgage inquiries/requests, but at a lower volume – maybe 10-15% of all inquires. As of Jan. 1, the new “Agency Jumbo” (goes by other names like Agency Plus, Super Conforming, etc) limits went into effect. For the Charlottesville MSA (Metropolitan Statistical Area), the Agency Jumbo limit is $437k.

We’ve seen very little demand for it so far – maybe because guidelines are a bit more restrictive or some lenders are pricing them higher, or both. And we’re seeing a few VA requests. But that’s just our experience.

Detached homes, along with attached townhomes, are the typical property type. Condo refi requests have been coming in, but since fewer condo projects are eligible, not as many condos are eligible for conventional or government mortgage financing.

2. What are the lowest rates you've seen?

Jason: The lowest 30yr fixed rate that we’ve seen so far was 4.375% paying 1 point (rate/term refi at 80% LTV). That was on an 11am rate sheet on December 17th, 2008. But the MBS market was quickly deteriorating by 11:30am and by 12pm rates were already increasing. Most of our lenders issued three rate sheets that afternoon, each one progressively worse. By the end of the day rates were back up .375-.5%. The market that created those rates came and went so quickly that very few folks were able to take advantage of it.

Our lowest 30yr fixed rates last week were posted on Wednesday, January 7:

4.5% with one point at 60% LTV

4.625% with one point at 80% LTV

How much higher are refis rates for jumbos?

Agency Jumbo rates: It depends on the lender, but rates similar to the conforming 30yr fixed can be found.

Non-Agency Jumbo rates: Since Non-Agency Jumbo programs are “portfolio” (held by the bank/lender, not eligible for sale to Fannie/Freddie), availability and rates will vary widely. In fact our 30yr fixed Non-Agency Jumbo rates are so high (8%+) that we don’t even post those rates. We have several Jumbo ARM programs that are in the 6-7% range.

3. How long does the refi process usually take, from completion of application to new mortgage? Is the appraisal process any different for a refi?

Jason: As I’ve mentioned on our blog, we’re in a refinance boom (mini boom, really). All the new business has had a major impact on the mortgage industry. All of a sudden, lenders and brokers are experiencing volume that hasn’t been seen in several years. This has put quite a strain on the lending system, and loan processing times have gone from a previous 2 week period to just under 4 weeks.

Some of our lenders are now taking over 30 days to close. Since the typical rate lock period is 30 days, that can be problematic. Rate locks can be extended for a cost, but those are costs that borrowers and lenders want to avoid. At this point, though, we are still closing refinances within a 30 day period.

Of course purchases are a different story. Purchases are on a closing deadline are therefore put at the front of the line. Closing a purchase within a 3 week period is not a problem, even with all the refinance volume.

Regarding the appraisal: The appraisal process for purchases and refinances are essentially the same. Fanne/Freddie used to have more lax requirements for rate/term refis (like allowing exterior only, property inspection waivers, etc) but now require full appraisals, just like on purchase mortgages.

As a side note: Appraisers are busier now, too. Turn times on appraisals have increased from a couple days several months ago to a week or more at this point.

4. We've read in NYT and elsewhere that mortgage professionals expect rates to stay at 5 or below through 2009. Do you have any reason to doubt this? What could change this?

Jason: I’m not as confident about sub 5% rates for all of 2009. Why? The FED announced that they will purchase $500b in MBS “by the end of the second quarter 2009.” Unless they change their plan, the purchase program will end halfway through 2009. Sure, they could extend the purchase program. But no one (as far as I can tell) sees that happening, especially considering the new administrations lofty goal of a $1T+ infrastructure plan.

Actually, I’m quite concerned about what happens AFTER the purchase program ends. Once the FED takes their hand out of the cookie jar, then what? Who’s going to take their place? With THE major buyer out of the market in mid 2009, the MBS market will look to the “normal” supply/demand function. And this time, Japan and China might not be there to back it up. One would expect MBS prices to drop and rates to rise, even as the economy worsens. To paraphrase Rumsfeld, these are the known knowns and known unknowns.

Yet there are also unknown unknowns. As we’ve all witnessed over the last 6 months, markets can change on a dime after government announcements for intervention, crises in other parts of the world, etc. The MBS market, like any other, functions on investor knowledge and expectations in the moment. When circumstances change, markets change.

(Historically, bad economic news often strengthens bond markets, including MBS. As investors flee the stock market, they look to safer havens such as bonds. Increasing unemployment numbers, low or negative growth expectations and other signs of a deteriorating economy typically make bonds and MBS more attractive. So as money flows into MBS, prices rise and rates fall. That’s how it often works. But months ago, as news of a worsening economy increased, investors were rushing to Treasury bonds, not MBS. And that had government officials concerned – hence the FED’s $500b MBS purchase plan, aka the MBS Bailout.)

I mentioned in a post that Jim Cramer thinks we’ll see 3.5% rates. Maybe he knows something most everyone else doesn’t, but I doubt it. [Seeking Alpha seems to think 3.5% is coming, too...but it's speculation. -- BB]

Trying to time the bottom on mortgage rates is not unlike trying to time the bottom in stocks – getting in on the bottom can happen for a few lucky investors. For many, though, the bottom is usually observed in hindsight, after it’s come and gone. And the fact is, mortgage rates just don’t get to levels we’re seeing on their own, under normal market forces. These rates will only last as long as the FED/Treasury keeps their heavy hand in the market, and even then they’re not guaranteed.

5. Do you care to make any comment on cram-downs? Citi has agreed to stop blocking federal legislation. And Tanta at CalculatedRisk, a former mortgage loan officer, supported them. [We posted recently about cramdowns here; basically, a "cramdown" is the ability of a bankruptcy judge to change the terms of a mortgage for a primary residence - BB]

Jason: I think both sides, for and against, have good points. If it truly helps out those that need/deserve it (not the speculator) and the collateral damage can be minimized (increased costs to banks/securitizers, passed on to consumers) I’m all for it. At this point folks can only speculate as to how effective or damaging it will be.

6. What (if anything) does it mean for the consumer when banks exit wholesale mortgage lending? (that is, does it impact rates & how quickly) The Mortgage Lender implode-o-meter has a list of entities potentially exiting the market.

Jason: Let me give my disclaimer before I answer your next question: As a broker I am of course biased towards the broker model. I think mortgage brokers are a valuable part of the mortgage financing landscape - our competitive mortgage financing options and services are beneficial to consumers and the real estate market. [We appreciate the transparency...and we agree with this, which is why we're glad to have a mortgage broker, rather than a banker representing just one entity, aswering mortgage questions -- BB]

As the Implode-o-Meter shows, there are hundreds of wholesale mortgage lenders that are gone. Most of the “imploded” lenders specialized in subprime or alt-a mortgages, while a smaller number were wholesale channels of national or regional banks/lenders.

Wholesale lending is the channel through which mortgage lenders and banks work with brokers and correspondent lenders (lenders who fund loans through their own means, but then transfer/sell them immediately).

I do think as more lenders exit the wholesale lending channel, consumers will be hurt through reduced competition and financing options. But the wholesale channel is still alive and kicking as quite a few banks and mortgage lenders still have strong, profitable wholesale lending operations.

7. Do you have any opinion you'd like to share about what Treasury Secretary Paulson said recently said about the need for Fannie & Freddie to become "utilities," that is, regulated like for example electric companies, plus this paragraph:

"Among other options, he said the government might buy a massive number of home loans through Fannie and Freddie in an effort to bring down the rate for a 30-year fixed mortgage to 4 percent."

Jason: Does he mean that the FED will continue its MBS purchase program? Or is he saying that there will be a new plan from Treasury or elsewhere? If Paulson is suggesting that Treasury might purchase MBS, on top of the FED’s current program, that could very well continue to keep mortgage rates low and for a longer period of time.

And as far as the Fannie/Freddie utility concept is concerned – I’m in agreement that they need to be one or the other, public (govt owned) or private. I’d prefer to see them as a private organization.

I probably don’t have the issues with Paulson that you may have. However, the Goldman Sachs/White House relationship is WAY too cozy. And the irony with it all (Paulson’s term, Bush’s administration, Republican rule – free marketers who expanded gov't to historic proportions) has not been lost on me.

I’m really looking forward to our new President and administration, with the full understanding that it will be rough for a number of years.

[BB: ditto and amen to your last sentiment....]

A related article in the WSJ is here; it discusses issues some homeowners may have in qualifying.

MANY THANKS to Jason Crigler for taking the time to answer these questions.


FindAHomeDirect said...

Great article, and thanks Jason for your input…

mls gta said...

Perfect article, I think it's time for all financial and real estate professionals to take the responsibility and help homeowners to fight with problems! Because homeowners' problems are our problems too. Here on Toronto real estate market (and generally in Canada, but Ontario is the most important) the situation with mortgages is calm, but with rising unemployment and price decline we can find refinancing very important soon too...
Best wishes
Take care

mike said...

always like it when jason comes on. makes the whole mortgage thing much less confusing.