Mortgage applications at a 13 year low...so why is that important?

The Mortgage Bankers Association reported that demand for loans to purchase U.S. homes sunk to a 13-year low last week, and refinancing demand also slid despite near record-low mortgage rates. Requests for loans to buy homes dropped 3.1 percent in the week ended July 9, after adjusting for the Independence Day holiday, to the lowest level since December 1996, the Mortgage Bankers Assn. said....Rock-bottom borrowing costs are helping borrowers with pristine credit to buy and those who still have equity in their homes to refinance.

Take a look at this statistic and chart below: The refinance share of mortgage activity remained constant at 78.7 percent of total applications…so, at a 13 year low number, only 21% of the mortgage applications were for new purchases! On an unadjusted basis, the volume of purchase applications is 43% lower than the same week last year!



If even at sub-5% rates buyers are not interested, what’s going to happen to buying interest if (when) rates go up?

• Unemployed people do not buy homes.
• People who have had their hours or salary reduced 20-30% do not buy homes.
• People with a credit score of 599 or less (25% of the population) do not qualify to buy a home.
• People who lost 30% of their home equity can not sell their existing home to buy a new one.

Where I see the most activity (and a lot of multiple offer situations) is in the sub $150k range…where you can buy and have payments less than a comparable rental. Maybe this is what will happen going forward in all price ranges…activity and competition will greatly increase when the home price/mortgage rate equation delivers monthly payments at or close to what it would cost to rent a comparable home. And, it does not, necessarily have to come from lower prices or lower interest rates….if rental rates increase, that will be the ‘flip side’ of the equation. Rising rental rates, in my humble opinion, are quite possible given the scary statistic of sub 599 credit score Americans. Going forward I can see many, many more people throwing in the “credit score towel”…we will have a decade of renters (and this could raise rental rates)…income reduction, job loss, foreclosures, bankruptcy…some times up to ten years to clear/restore your credit without taking affirmative credit restoration steps.

If you’d like to discuss how this all affects your plans to sell or buy, please give me a call on my direct line at 561-602-1258.

Thanks for reading,
Steve Jackson

Mortgage Myths

So you think the historically low mortgage rates guarantee the cheapest home loan ever? Think again. Here are five common mortgage myths and the sobering reality.

• No. 5. Myth: 620 is the magic credit score. When evaluating loan applicants, lenders pull credit scores from the three major reporting agencies and use the middle score to gauge eligibility. Indeed, 620 is considered the minimum eligible score for most loans nowadays, but you should aim higher to avoid paying more. Thanks to loan-level adjustments from Fannie Mae and Freddie Mac, a 620, or even a 680, may result in additional fees. The adjustments result in higher mortgage rates, which raises monthly payments. Someone with a 675 credit score, who puts 20% down on a $500,000 house, will end up paying about $11,000 in additional fees when compared with someone who has a score in the high 700s.

• No. 4. Myth: Once the bank initially approves your file, you're home free and guaranteed a mortgage. Not so fast. Under new "Loan Quality Initiative" programs from Fannie Mae, as of June 1, lenders must make sure an applicant's credit doesn't change between application and closing. This means that even after an initial approval, banks will probably pull your credit again, at the last minute, sometimes right before closing. If your credit score has gone down, the bank may refuse to issue the loan, at the 11th hour -- in which case the sale of the house will fall through. We always counsel our buyers to be very careful with purchasing anything on credit between the time of pre-approval and closing.

• No. 3. Myth: For those with stellar credit scores, mortgage rates, and monthly payments, are historically low. Not if you're buying a condo. Buyers without a minimum 25% down payment may have to pay additional closing-cost fees equal to 0.75% of the loan, regardless of credit score, under rules that took effect last year. Those fees are often rolled into the mortgage, which raises monthly payments.

• No. 2. Myth: A good income guarantees a good loan. Not for the self-employed...it has become tougher and tougher. This is true for a couple of reasons. One, it's easier for a lender to evaluate a few years of steady W2 tax forms than it is an erratic stream of 1099 forms. Two, business owners and the self employed have a habit of deducting everything in sight to keep taxes down. That's great when April 15th rolls around, but not so great when a mortgage broker is evaluating an applicant based on taxable income.

• No. 1. Myth: Foreclosures are decreasing and mortgage money will be easier to get. Not so much. The delinquency rate for mortgage loans on residential properties increased to 10.1% of all outstanding home loans at the end of the first quarter 2010 (and almost 25% here in Florida), according to the Mortgage Bankers Association. The share of loans on which foreclosure processes started in the first quarter was 1.23%, up from the previous quarter. The total percentage of loans in foreclosure at the end of the first quarter was a record 4.63%.

If you are currently home (and mortgage) shopping, please give us a call to discuss your situation and goals...

BofA...feeling benevolent?

Late Tuesday, Bank of America, the largest mortgage servicer in the country, said it is giving some of its most troubled mortgage borrowers relief from the threat of foreclosure.

BofA said it will forgive up to 30 percent of some customers' total mortgage balance. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth. The borrowers who can take advantage of the Bank of America program must also qualify for the Obama administration's $75 billion mortgage loan modification program. Bank of America estimates that about 45,000 customers will qualify for its plan.

The plan is part of an agreement the bank reached with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp. The loans were made before Bank of America acquired the mortgage lender and Bank of America has since stopped making those loans.

Although the motivation for Bank of America's announcement was to resolve legal problems, it hopefully will set a precedent for other banks to also start forgiving principal on loans that are in danger of falling into foreclosure.

The Treasury Department, is developing similar plans for principal reductions at other mortgage servicers, according to industry officials speaking on condition of anonymity because they were not authorized to discuss the conversations. They said an announcement could come in the next few months.

Although this is a baby step in the proper direction to stemming the continuing decline in home values, this, in my humble opinion. is not the answer...but, here comes MY solution to the entire housing crisis...if you read it and concur; forward it on to your congressmen, the press and anyone else you can think of!

Framing the issue: We already know that the banks are willing to do 2 things with troubled loans; 1) foreclose,  and 2) short sell. The biggest trouble with both is that after a foreclosure sale or a short sale there is a new, LOW sale recorded in public records...which only serves to continue to drag down the value of all of the surrounding properties (ask any appraiser). Which causes MORE homeowners to be "upside-down", which then causes more short sales and foreclosures...a vicious cycle.

Now, obviously, the banks are willing to take (or have to take) the losses from the foreclosures and short sales, but my solution eliminates the losses AND the low public record sales price...maintaining surrounding home values, eliminating vacant and vandalized homes and minimizing bank losses.   

My Solution: Instead, the banks should use the same valuation/loss analytics they use to determine whether or not to accept a short sale and offer a solution to the current homeowner based upon that figure. For example...if a current owner owes $400,000 on a home that the bank would sell at a short sale or foreclosure for $250,000, the bank should re-amortize the current owners loan at the current interest rate at a principal balance of the same $250,000;

BUT, the big difference is the bank WILL NOT be forgiving or losing $150,000  because this is what they will do: the $150,000 will be a 2nd position lien on the home with NO payments due. The note for the $150,000 will include language that "writes down" the balance over 15 years. If the owners stay in the home 15 years and stay current on their loan every month, the note will be extinguished...if they decide to sell prior to 15 years, the remaining balance of the note will have to be paid off at that time. Also, NO adverse credit reporting to the credit bureaus would be allowed until and unless the owner fell into default.

The above solution addresses almost all of the problems incumbent in the current housing crisis:

1. No more low sales in public records continuing to pull down the housing market
2. Neighborhood stability
3. No more huge losses for the banks
4. No more credit-crippled 'lost generation'

This solution would give the bank, homeowner and  housing market in general time to 'catch-up' with home values without exaserbating the problem by continuing to sell homes at lower and lower prices. The market would stabilize, begin to appreciate, and the differential between home value and note balance will decline. The banks may have to write off the loss over 15 years rather than all at once...but maybe not.  If an owner were to sell before value and note balance evened out, there could be language in the agreement that converts the remaining balance of the 2nd lien note to an unsecured note payable over the remaining term at a pre-determined interest rate. But if the owners sell and the home has appreciated in value enough to pay the 2nd lien balance...NO loss for the bank..it gets paid back!


I have given this much thought and have a lot more of a detailed process, with options, that I would love to propose to anyone who could help...lets start a grassroots effort to get my soultion out there!


I'd love to hear your opinions.


Thanks for reading, Steve

How they sliced and diced bad mortgages and called them AAA rated

NEW YORK (Fortune) -- Back two years ago when the mortgage meltdown was heating up, we wrote an article called "Junk Mortgages Under the Microscope" dissecting a particularly wretched mortgage-backed securities issue peddled by Goldman Sachs.

We wanted to show how these complex securities really worked and how Moody's and S&P, the rating agencies, aided and abetted the process by giving two-thirds of an issue backed by ultra-risky second mortgages the same safety rating they gave to U.S. Treasury securities.

 To read the rest, click the text below: