Thursday, March 26, 2009

Charlottesville Real Estate: Mortgage Information Spring 2009

A Q&A with Jason Crigler of Crown Mortgage LLC and The Mortgage Buzz Blog

It's the real estate buying and selling season here in the Charlottesville area, as it is nationwide, and mortgage rates are going down due to a recent announcement by the Federal Reserve. So as we have in the past, we turned to an expert to answer questions. For this edition of mortgage Q&A, we asked readers to submit queries.

Crown Mortgage loan officer Jason Crigler writes the blog The Mortgage Buzz, along with loan officer Michael Martin. 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.

Crown Mortgage is an "Upfront Mortgage Broker," which means they fully disclose their rates and approach before the mortgage is written. The association of Upfronts came about in response to concerns about mortgage brokers "taking advantage" of uninformed buyers during the Bubble; it's a consumer advocacy group.

Some of our earlier Q&As with Jason focused on the economy, credit freeze, availability and refinancing: October 2008 Mortgage Availability - December 2008 Mortgage Availability - January 2009 Mortgage ReFi's.

After the Fed's announcement last week, mortgage rates fell to lows "not seen in six decades," according to a Mortgage Banker's Association economist quoted in Housing Wire. Last week, refis were still the majority of new applications: 78.1%. Application purchases rose 4.2% for new purchases.

Just today, Housing Wire reported that rates are "lowest since the Eisenhower era."

Here at the Bubble Blog, as we've said in the past, we're not anti-buying. We're anti-bubble pricing. With low mortgage rates, an $8,000 tax credit for income-qualified purchasers, and a huge supply of properties, this area should definitively be a "buyer's market."
  • But will this season be the one that depletes the oversupply?
  • Will the First Time Home Buyers find properties that are priced for their income levels?
  • Will homebuyers looking to "move up" be able to unload their houses and find something in a desirable price range?
  • Will the luxury properties and farmettes start moving?
  • For how long will defaults and foreclosures, at all price points, continue rising in this area?
Or will 2010 be the year that the bubble correction takes place in this area and the sidelined buyers enter the market?

Questions, questions. We'll know part of the answer by July 1, when many real estate professionals believe the season is "essentially over." And we'll know definitively by September. Exciting times.

Among the readers who sent questions, several are buyers who are hoping to find something in the coming months; others are considering "moving up." Still others are devoted marketwatchers.

Jason was kind enough to take the time to answer the questions in detail. Bolding is ours.

1. Could you explain in layman’s terms what the announcement following the Federal Open Market Committee means for buyers?

The FOMC’s March meeting statement basically says that because of the recession and continual contraction of the economy, the FED will continue to support the credit markets to help foster recovery. The size of the support is staggering - $750 billion of additional funds will be used to purchase Agency (Fannie Mae & Freddie Mac) and Ginnie Mae (FHA, VA, USDA) MBS, the securities that directly influence mortgage rates. This $750 billion “investment” is on top of the $500 billion already pledged and partially used already this year. To say the least, the announcement was a bombshell and the MBS market reacted quite favorably to the news. Prices (demand) surged on the news bringing rates down about .25% on Wednesday.

Simply put, the FED is subsidizing the mortgage market in a big way to keep mortgage rates at all time lows, and they plan on doing it throughout 2009. The hope is that the low rates will incentivize home buying (as well as help folks refinance into more affordable mortgage loans) which will, fingers crossed, be one of the catalysts that stabilize the economy. Bringing an end to the decline (or at least precipitous decline) in home prices across the country is a critical part of shoring up confidence in our economy.

2. How low are rates expected to go? How long are they expected to stay (down) there?

As of Friday, the 30yr fixed was in the 4.5% range (with 1 point). A week ago it was a quarter percent higher. As I’ve mentioned in Q&As with the Bubble Blog before [links above], rates are currently where they are solely because of the FED’s activity in the MBS market.

They can’t set mortgage rates, but they can buy the securities that do and that’s how they’re keeping them low. As long as the FED does this (and the system complies – ie, other investors don’t dump them all at the same time), mortgage rates will continue to remain low. Are we going to see sub 4.5 or 4% rates? I don’t know, nor does 99.9% of the financial community. Most of it depends how the FED exercises the purchases - if they make very large purchases in a short period of time, we could see rates drop. But if they stagger the purchases out to make them last through the end of the year, then we may not see rates drop much below where we are now. So yeah, the FED could push them lower. But I think they have them in the range they want them and will keep them there as long as the money lasts.

3. From a mortgage professional’s point of view, do you have an opinion that you’d like to share on this kind of market subsidization?

There’s no question that over the last year our federal government has stepped into the financial markets in an unprecedented way. If one isn’t concerned with the government intervention and, may I say, market manipulation, one isn’t paying attention to what is going on. There are a number of things I agree with and a number I don’t, but I’m disturbed by all of it. Here’s my generalized backseat driver opinion on our current economic state – we need to stop spending (as much) and start saving (more). I’ll leave it at that :0).

4. Will this decision impact inflation? How soon?

The rate at which the FED & Treasury have been increasing the monetary base (pumping dollars into the system through lending & printing) would, under normal circumstances, have serious inflationary effects. But of course, we find ourselves in extraordinary circumstances at the present and they are doing everything they can to fight inflation’s destructive twin – deflation. I believe what FED chief Bernanke says, that inflation is nowhere near a problem in the short term (paraphrased, of course). But in the long term he suggests that the FED can reign in the money supply to stave off the long term inflation that would result in the vast expansion in the money supply we’ve seen. But just as it’s not that simple controlling deflation (easily), the same goes for inflation. I can only speculate and I’m not an economist, but I would expect inflation to tick up this year or next.

5. Do you expect even more refi activity, or does it seem like those who were going to refi have already “gotten the ball rolling”?

Yes, I do see continued refinance activity throughout 2009 while rates are low. While many have already refinanced since late 2008 we are continuing to receive calls and emails from past and new clients who have yet to refinance and plan to do so.

[See the Housing Wire link in the intro. Refi's apps surged on the Fed's announcement. Folks seem to be doing refi's in order to "improve their household balance sheets," as Calculated Risk would say, rather than to take cash out and spend it on "stuff." Commenter Nalle added this link, which indicates that new equity extraction has declined by minus $77 billion, or negative 2.9% of Disposable Personal Income for Q4 2008. ]

6. Are there people not qualifying for conforming loans who were one, two, three years ago?

Conforming/conventional loan (Fannie Mae & Freddie Mac – “the Agencies”) guidelines have definitely become more restrictive over the last year to year and a half. The Agencies have implemented a number of changes to their guidelines over this time, such as credit score and LTV (Loan-to-Value) requirements, that are disqualifying borrowers who would have previously been qualified. For instance, the Agencies eliminated their 100% LTV purchase program just last year – any borrower who would have needed a program like that to purchase a home no longer has the option through a Fannie Mae or Freddie Mac (USDA & VA are the last 100% LTV programs left). That’s one aspect.

The other is that now more folks have mortgage balances that either put them underwater (loan is greater than the value of the property) or close to it. As values were rising 3+ years ago and homeowners continued to “build” equity in their home, many qualified for refinances to payoff a 2nd mortgage or other debt. Now there are fewer who are qualifying for those refinances because their property has declined in value and their LTV is too high. (The Making Home Affordable refi program is meant to address some of this since the refinance program allows 80-105% LTV).

7. Could you give a couple of real time mortgage mod examples?

Modifications vs. Refinances:
Loan modifications are when the rate, term or balance/principal are changed by the loan holder (lender/bank) or servicer to make the loan & monthly payment more affordable to the borrower, without going through the refinance process. Since they are not newly originated loans, loan originators like myself aren’t involved with the modification process. The Making Home Affordable (MHA) plan has a two pronged approach – modifications and refinances.

The refinance part of the plan is where we come in. The Obama Administration is using Fannie Mae and Freddie Mac to help refinance those who have their respective mortgages to refinance into a lower cost (lower rate) loan. The MHA refinance program is still in the process of rolling out, but we’re getting interest in it and expect to start several of them soon.

8. Do you have any info on local default rates or know where to get that data in this area?

The Federal Reserve Bank of New York maintains a dynamic map of mortgage delinquencies (90+ days late) for each county: Credit Conditions Map.

I don’t if there’s a source for finding servicers in particular areas. Even if a list existed with a government agency or private company, I doubt it would be public info (in the private company’s case, they’d charge you a significant sum to access it).

9. Are people who purchased 2 years ago at 80pct ltv with conforming rates able to refi into conforming rates without having to put up additional equity? ( ie do banks/appraisers think values in this area have gone down yet?)

Values have definitely come down over the last 18+ months – current sales (and appraised values) show that. If a homeowner’s loan is over 80% of the value of their home, they can still refinance (up to 95% for a rate/term refi under current guidelines, 105% under the Making Home Affordable program) but without having to bring cash to the closing table – but mortgage insurance will be required (Making Home Affordable has one exception), and that’s an idea that makes most folks cringe. But cash out refis (where you're taking out cash to pay off debt, etc) go to a maximum of 85% LTV.

10. For jumbo purchase prices (houses over $520k or so) are buyers putting up more equity to get conforming rates, or are they content to pay higher jumbo rates? What are jumbo rates this week?

Jumbo rates, I am happy to say, have come down quite a bit for us. For several months in late 2008 and early 2009 jumbo products were being cut back and rates jacked up. As of Friday, our jumbo 30yr fixed rate was 6.0% with .75 points. Compared to the mid/upper 4% range for the conforming 30yr fixed, that ain’t cheap. But previously they were in the 7%+ range.

Agency jumbo, which is for a loan between the conforming limit of $417k up to $437k for the Charlottesville MSA, is about one ¼ % higher than the conforming fixed rate. Jumbo mortgages are for loan amounts above $437k. Our jumbo programs go to a max LTV of 80%.

I don’t think buyers or homeowners are happy paying higher rates for jumbo loans, but the fact that they’ve come down to 6% is certainly helping those who are buying or refinancing.

11. What kind of jumbo spreads are typical for this area today vs. bubble time [2006]?

Looking at a rate sheet from March 2006, the prevailing 30yr fixed jumbo rate was 6.0% with 1 point. So the jumbo rates were about the same 3 years ago, but we also have to consider the fact that banks are borrowing money at a fraction of the cost. The FED funds rate is currently 0-.25%. In March 2006 it was 4.5%. Lenders are charging MUCH more for jumbo loans today, comparatively speaking.

12. What's the level of re-finances in the area? I would be curious to understand if people are actually refinancing or if they aren't, why not? How many applications are being denied by the appraisers. . .how many people are just waiting for a better rate. If you refinance you can stay. . if you have an ARM and can't refinance. . . you will be forced to sell. Is this correct?

Over the last 3 to 4 months the mortgage lending industry has been very busy with the refi boom that started when mortgage rates dropped late last year. Our area is no exception to the national refi surge, and many local homeowners have been taking advantage of the low rates by refinancing their higher rate loans. To give it a rough number, we have seen refinance activity increase by 300 to 400% compared to last year. Even folks who purchased a year or two ago are considering refinancing, since their current rate is in the high fives or more.

The role the appraiser plays in the lending process is to issue an appraisal report and value. Appraisers are independent of the decision to approve a loan, but their reports/values have a significant impact on whether or not a loan is approved. An underwriter has the final say on loan approval (based on established guidelines according to the loan program). How many apps are being denied? Tough to say exactly, and I’m not sure if that information is fully aggregated and/or available.

A large part of my job as a loan officer is to qualify/pre-approve borrowers based on the guidelines underwriters use, so by the time the loan file goes to the underwriter it’s already been vetted. It’s very rare for us to see a denied loan. But I guess about 10% of those who come to us looking for mortgage financing do not qualify. It seems that most folks, by the time they contact us, already know if they are in a position to get financing.

There are quite a few people waiting for a specific (better) rate. When you hear about 4% rates in the news, but in reality they’re not there, many think it’s just a matter of time before rates come down and that the government has more control over rates than they really do. Unfortunately for them, time doesn’t guarantee anything (except change) and the FED can’t just set mortgage rates.

Having an ARM (adjustable rate mortgage) does not mean you have to sell, or refinance, or anything else. With an ARM, the rate is fixed for a particular period of time (such as 3, 5, 7, or 10) and then it becomes adjustable for the remainder of the term. For instance, if you have a 5/1 ARM, your rate is fixed for the first 5 years and adjusts once a year on the anniversary date each year thereafter for the remaining 25 years of the term (30 year term). The adjusted rate is based on an index (usually LIBOR) plus a margin (ie. 2.25% or 2.75%, etc) and contains a rate cap (ie. 5/1/5 – max 5% up or down in the first year, max 1% thereafter, 5% max up or down over life of loan).

Many people with ARMs don’t like the idea of getting to their adjustment period and letting the rate adjust, so they want to refinance or sell before that happens. And if the soon-to-be adjusted rate is higher than the borrower’s fixed rate, the increased cost of interest could make it difficult for the borrower to make mortgage payments. But in a low rate environment like we’re in, sometimes the adjusted rate can be less or close to the prevailing market rate. Although the adjusted rate can often be higher, it’s not necessarily always the case. Fixed rate mortgages are ideal for those who want (or need) the safety of a set rate for the life of the loan, and now with sub 5% 30yr fixed rates, it’s a no brainer for those who are refinancing or purchasing.

13. Is the pipeline overrun with new loans/refinancing given the recent FED downward pressure on interest rates? Will lenders lock rate and for how long?

I wouldn’t say “overrun”, but the process has definitely gotten longer. Prior to the refi boom underwriting turn times were less than 24 hours. Now we’re looking at up to a week or more. Appraisal turn times have also increased from around 2 days to sometimes a week. You can definitely lock a rate, and 30 days is still a sufficient lock period, but you want to get rolling on it quickly after you lock (if for 30 days).

We suggest that you work with your loan officer to get an appraisal done, in some cases even before application is made (in the case of a refinance) – if LTV could be a problem, an appraisal will let you know early in the process. If you know there are going to be delays, or if the purchase/refi is a bit more complicated, you may want to lock for a longer period. Locks are available for 30, 45, 60, 90+ days (30 days is standard and there are fees associated with extended locks).

14. How long is the estimated wait for approval and closing of a new loan? What are the average terms conventional borrowers can expect in regards to points, fees, fixed rate loan period, etc.

A normal purchase or refinance can easily close in 30 days, which is the typical lock period for quoted rates. Extended locks are available for additional costs.

The rates/points combination for a particular loan program depends on the mortgage company with whom you’re working. The terms, if you’re looking at a conventional (Fannie Mae & Freddie Mac) or government (FHA, USDA, VA) loan, will be the same no matter who you use. A 30yr fixed conventional loan is the same at Company A as it is at Company B. So shop around, and ask your friends and family who they recommend.

15. Given the difficulty with lending institutions, are there preferred lenders out there that process more efficiently?

We work with a number of banks and mortgage lenders and we choose among them for various reasons such as rates, program offerings and underwriting turn times. And yes, since banks/lenders are made up of people (and their processes), there are those that are better at some things and not at others.

16. [A First Time Home Buyer asks....] I've always been confused by bank appraisals. Are appraisals in this area higher like the assessments, or are they more reflective of the general economic market? In other words, are recent comps used for appraisals as well? I think that the whole "recent comp" song and dance is muddying the waters.

Though I’m no appraiser, I do know that comparables (comps) are an integral part of the appraising process and are critical to the final value given by the appraiser. In the mortgage lending world, appraisals are performed by an independent appraiser (so technically they’re not “bank appraisals”) and the report is provided to the bank/lender for evaluation by the underwriter. Recent comps (0-90 days) are very important since they help establish a value for a particular house. In real estate markets where values are not steady over 3-6 months, recent comps are much more useful and accurate than older comps.

[From the Bubble Blog point of view, prices are starting to fall here and should continue to fall, just based on supply and demand, as well as the fact that this is now one of the most priciest areas in the state based So if a Realtor offers a comp pre 9/08? Or even pre 1/09? Is that older comp really something a buyer is going to want to use as a pricing tool? Is that older comp something a seller should use as a realistic pricing tool in a market that has such an oversupply of properties? See this post.]

17. [A responsible homeowner who bought before the Bubble and made a 20% downpayment, as in the good ole days, and now looking to move, asks....] Are appraisers doing anything differently in this market given they contributed to the bubble prices to the same extent as homeowners, Realtors and mortgage companies?

The mortgage, real estate and certain financial industries shoulder much of the blame. If that point of view is the same as the buyer’s, than we’re in agreement.

I can’t speak for appraisers or the appraisal industry, but I think their goal is to remain as independent of the lending process as possible. Appraisers need to be in a position where they are not pressured or manipulated to perform (arrive at a certain value). If it means more (or less?) regulation to be effective, so be it. The ideal appraisal system, like mortgage/financial system, is one where there is no fraud and people follow the rules (there are plenty existing ones). How we get there and stay there, I don’t know.

18. Charlottesville is designated a "declining market" by some private mortgage insurance companies, but not all (Genworth, RMIC, for example). Some, like RMIC even have downloadable economic reports. Why is there a difference? Are the rates different?

MI companies maintain their own policies regarding what they consider declining or distressed markets. MGIC and PMI don’t list Albemarle as “restricted” or “distressed”. But RMIC shows Albemarle as declining, according to their own policy. I don’t know if it’s about the losses they have incurred as much as it is that they’re trying to avoid future losses. I assume that information (why have the policy they have) is not made public. Each MI company has different rates, particularly at higher LTVs (90%+) but it’s not unusual to find similar rates at different companies.

[Private Mortgage Insurer RMIC economic for Charlottesville MSA is available here. State overview is here. Link to 100 markets here.]

Many thanks to Jason for taking the time to answer questions. He'll be checking comments for additional questions or to follow up on data.

Related Reading:

Jim at RealCentralVA has posted localized market data from the Virginia Housing Development Authority, presented at the Charlottesville Area Association of Realtors Ecomic Summit today, March 26.


Nalle said...

Thanks Jason, this is great information and I hope people take the time to read this.

I would add one addition comment for folks waiting for that sub 4%. Look at Jason's comments on comps (0-90 days). The longer you wait, the more likely that distressed (or realistic) sales will take place in your neighborhood and reduce the value an appraiser can stick to your house. If you bought in the last five years then you have not paid down much principal and can't afford to have your house value fall too much before you can't get refinanced. If you are refinancing because you aren't planning on moving now (or never were) and want to lock in a good rate. . you might want to get around to it, 4.5% is a fantastic rate and waiting carries risk.

JK said...

Thanks for the post. Very informative.

Robert said...

Appreciate all the info.

Bloomberg news is reporting that Freddie mac interim chief exec thinks that mortgage rates are "close to bottoming out"....Freddie tracked it to 4.85 for a 30 yr fixed, lowest on record.

Does Jason have a comment on this? Has he seen any lower? And will the rates stay near this level (in his opinion) through August?


Buyer said...

Do Option ARMs still exist?

If so have the options been modified"

Do no income loans exist?

What's the highest level of interest you've seen this year, and for what kind of loan?

Enjoyed the q&a. Thanks.

jason said...

Robert - I believe you're referring to the Freddie Mac weekly rate survey of the average rate/points mortgage rates for that week. It's a compilation of rates from Monday - Wednesday and is posted on Thursdays:

To answer your question: yes, rates have been lower than 4.85%. Right after the FED announced an additional $750b in MBS purchases (week of March 16), rates dropped to the mid 4% range. Currently rates are back in the upper 4% range.

Before the FED announcement I would have said "no" to rates remaining at 4-5% beyond June, based on the fact that the current $500b MBS purchase plan was set to end that month. Up to that point the FED had provided no additional guidance or promises (at least publicly). Now we're told that the MBS purchase plan will total $1.25 trillion and will continue through the remainder of 2009. Barring any major market developments (credit crunch worsens, foreign central banks and/or countries tire of MBS, establishment of a new world currency, etc) the FED should be able to achieve their goal to keep mortgage rates where they are.

I agree with Nalle, and not just because I'm in the mortgage business :-)

All of this economic stimulation, and in particular the FED's multi-trillion dollar rate manipulation program, doesn't come without a cost. But I guess that's for our kids and creditors to worry about, or anyone who’s savings are dollar denominated (I’m in that boat. That’s NOT investment advice).

Thanks for the comments!

jason said...

Buyer - Option ARMs aren't sold anymore, but there are plenty that are still outstanding. The 5th slide of the presentation posted on Jim's site (CAAR economic summit, March 26) provides a sobering outlook for Option ARM resets:

I don't know the stats of how many have been modified.

No income and no income verification loans are dead, too. But like Options ARMS, there are borrowers out there who still have them. These are considered Alt-A loans (assuming the borrower had prime, or A, credit).

The highest conforming (Fannie/Freddie) rate this year is ~5.5% with no points for the best loan scenario. Depending on the type of loan required (investment property, jumbo, etc), rates have been 6%+.

Anonymous said...

Good stuff here. Can Jason comment on question #9 some more? Under this home affordable program, what happens to the ones who did put 20% down several years ago only to have lost value? Will they have to get mortgage insurance if they qualify for a refinance? If they do, that would kinda defeat the purpose/reason to refinance in the first place, yes?

Anonymous said...

FHA: more delinquincies up.

I know Jason doesn't do FHA loans. But this is apropos mortgage info.

This means tax payer carries bigger burden. (What a surprise)

jason said...

Anon - under the Making Home Affordable (MHA) plan, Fannie Mae and Freddie Mac waive the mortgage insurance (MI) requirement for new refinances in which the previous loan did not have MI. So for those who purchased or refinanced in the past and did not need MI then (had 20% downpayment or equity at that time), they would not be required to have MI under the MHA program, even if their new appraised value pushes them over the 80% LTV threshold (which would normally trigger the MI requirement).

This "benefit" of the MHA program will allow many more homeowners to refinance into a lower monthly payment than would be able to otherwise.

Anonymous said...

Wall Street Journal -- No Relief for Falling Prices:

Refinance Mortgage said...

Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness.