Let’s begin with the “What?”:

1. There are really two categories of Jumbos. One lies within the existing Fannie Mae/Freddie Mac/FHA loan limits. It’s in the zone between the old loan limit ($417,000 in high cost areas) to the current loan limit ($729,250 in high cost areas). Often these loans are referred to as Non-Conforming. The second type of Jumbo is the loans that exceed the current loan limits….those above the $729,250 number. For the purpose of this discussion, there is little difference as to the changing market, but there is a difference in loan eligibility requirements and pricing.
2. When I refer to an increased appetite for these loans, I do not mean to say there is a lowering of qualifying standards. When we underwrite Jumbos, there are still firm guidelines as far as FICO scores, income ratios, down payment and reserve requirements. What we are seeing is that there are more people looking to lend on these loan products. More buyers of these types of loans (increased demand, more competition) have brought the cost of the loans down considerably (lower rates for borrowers).

Now to the “Why?”:

Historically, Jumbo loans perform well (which means their delinquency rates are low). With the stricter underwriting criteria, there is no reason to believe that won’t continue to be true.

While it is true that the call for Jumbos in the Mortgage Backed Securities world is still a bit lagging, many banks and other portfolio lenders are closing these loans and holding them in their own portfolio for primarily two reasons:

1. The rate of return is better than they can get elsewhere. Performing mortgages are delivering over a two percentage point return more than comparable treasury bills, for example.
2. When these loans prove their performance history, they will become more marketable in the MBS world. So when rates do climb in the future, these loans will be sold for a profit and the cash received will be reinvested in higher yielding products.

Finally, “How does this affect you?”:

With rates so attractive, homes are more affordable. Because Jumbo loans typically attract move up buyers (as opposed to first time buyers), the analysis of numbers can often demonstrate that home sellers can get a bigger or more expensive home for a manageable payment. That may even allow a home seller to accept a lower price on their current home to get into the new home NOW while rates are so attractive.

Thanks for this great post KCW

I have written extensively on the fact that real estate is still one of the best long term investments available. There is plenty of evidence that people believe owning a home is more advantageous than renting. There is no doubt that homeowners are more committed to the community. Homeownership is an integral part of the fabric of this country.

Yet, there are still those that argue against these points. My fear is that people in power are listening to these naysayers; people in position to make decisions that will impact the ability of families to purchase a home. The percentage of homeownership has already fallen to the levels of 1999. And now it seems that some in government are questioning the actual concept of homeownership.

USA Today in an article last week entitled Feds rethink policies that encourage home ownership reported:

Just how much should Uncle Sam do to help Americans buy their own homes? For 70 years — and for the last 15 in particular — the answer has been: Whatever it takes. Now, policymakers are pausing to reconsider. In the next few months, they’ll weigh whether there can be too much of a good thing when it comes to helping families finance the American Dream … Washington is preparing to rebuild the national mortgage market atop the ruins of Fannie and Freddie. The proposal, due early next year from the Obama administration, could make it harder to buy a home by reducing available credit or requiring bigger down pay-ments. Low-income renters might get more government help.

The National Association of Realtors has just put out an excellent research paper, Social Benefits of Homeownership and Stable Housing. In the report, which has over 40 citations to academic studies and reports, they do an excellent job of spelling out the social benefits of homeownership. Let’s make sure we hear both sides of the argument before we start changing our beliefs in what makes us the great nation we are.

The KCM Crew and I had the privilege to hear Colin Powell speak at a leadership conference last year. He explained to everyone in the room that, before we lose faith in what we are as a nation, we must remember:

“Every morning in every other country, there is a long line of people outside of every one of our embassies looking to come to America.”

That is because this country has always encouraged its people to dream. Homeownership is one of the grandest dreams of many Americans. Let’s not make this dream any harder to attain.

Thank you KCM for this great post.

Since April, rates in Utah have been on a downward path, spurring refinances in most markets and sparking the start of a Refi Boom.

Last week, 3 key stories played a role in falling rates:

1. Demand was strong for U.S. government debt
2. Emerging concerns of a Japan-style deflation in the U.S.
3. Personal Spending since late-2007 was shown to be less than previously thought

Of the three, it’s the measured drop in Personal Spending for which rate shoppers and home buyers in Utah should watch. Drops in spending slow down the economy which, in turn, tends to pull mortgage rates lower.

Long-term, deflation could be a drag on rates, too. For now, though, it’s just a conversation among academics and economists.

This week, mortgage rates could move up or down — a lot hinges on the results on July’s Non-Farm Payrolls report.

More commonly called “the jobs report”, Non-Farm Payrolls hits the wires Friday at 8:30 AM ET. Markets are expecting a 75,000 net loss of jobs last month. If the actual number is higher, mortgage rates should rise. If the actual number is lower, mortgage rates should fall.

With the jobs numbers not due until Friday morning, expect choppy trading through Thursday’s market close. There’s a handful of economic data set for release including Personal Consumption Expenditures (Tuesday), Pending Home Sales (Tuesday) and Jobless Claims (Thursday). Each has the potential to move mortgage rates.

The Refi Boom is ongoing but when it ends, it will end in a hurry. If you’ve been thinking about a refinance, contact your loan officer about your options sooner rather than later.

1. Loan Amounts 

The loan amounts available (especially in High Cost Areas, like mine) are on a par with Conventional Financing.  In the past, FHA programs were typically only made available to the more low-to-moderate housing price ranges.  Now, practically every community can enjoy the benefits of FHA financing.

2. Old Stigmas Are No Longer True 

It used to be that “FHA takes Longer” or “FHA loans are more expensive” or “FHA has tougher appraisal guidelines”.  Over the past few years, FHA has given more and more responsibility to its Direct Endorsed Lenders in the underwriting arena.  Additionally, the Secondary Market has worked to price Mortgage Backed Securities for FHA loans more aggressively.  There is now little difference in turnaround times, pricing, and appraisal issues between FHA and any other loan product.

 3. Minimum Down Payment 

On FHA loans, you can still put as little as 3.5% down.  Conventionally, even the 5% minimum down is very difficult to obtain without pristine credit and strong liquid reserves….more often than not, you need 10% down on most conventional loan products.  This is a huge consideration for first time buyers (who struggle with savings) and move up buyers (who have lost much of their equity over the past few years).

4. Source of funds 

While the FHA does require a minimum investment by the Buyer of 3.5%, all of those funds can be gift monies from a family member.  There are many potential home buyers who are unaware of this niche in FHA lending that can help people with sufficient credit and income, but limited cash accumulated, who have relatives looking to help them become homeowners.

5. For now at least, a 6% Seller’s Concession 

With so much available inventory, home sellers are more likely to structure transactions wherein they (the seller) will pay the closing costs and/or pre-paid expenses (like tax and insurance escrows) on behalf of the buyer.  The ability to reduce or even eliminate closing costs for a buyer is a terrific incentive for the buyer to choose one house over another.  Once again, less cash needed to close is a good thing!  FHA has proposed lowering the amount for sellers to pay from 6% to 3% (a BAD idea), but, for now, 6% is the most liberal sales concession in the market.

6. Leniency of Credit and Income Standards

In so far as the FHA is really a Federal Insurance Program that insures lenders in case of borrower default, the Program gives approved lenders the flexibility to make more common-sense underwriting decisions.  Historically, lenders are more understanding of past credit challenges and more aggressive in income ratios because the loans are insured by Uncle Sam which, in turn, helps get more borrowers approved. 

7. FHA Loans Are Assumable 

Five to seven years from now, when a home buyer is looking to become a home seller, nearly every expert in the world envisions higher (more “normal”) interest rates of 6.5%-7.5%.   An often overlooked feature of FHA loans is the fact that a new buyer can take over the seller’s loan at the seller’s interest rate (assuming they qualify based on their income, assets, and credit).  What that means is, if you close today on an FHA loan at 5%, you can sell your home with a 5% mortgage, while your “competition” of home sellers will be handicapped with higher rates.  That factor alone could make your home 5-15% more valuable (because home buyers buy more on monthly payment than they do on sales price).

I hope I opened your eyes today to some other things to consider when choosing your mortgage.  Now, FHA is not a perfect loan for everyone (largely due to the costs of the FHA insurance premiums); however, it is a great vehicle for many home buyers.

Thank you for this great post K CREW

Since the Federal Reserve’s release of its June 2010 meeting minutes Wednesday, mortgage rates are dipping even more and one of the main reasons why is because of some choice Fed words.

If you’ve never seen a Fed Minutes release, it reads academic. The document is page after page of stats, facts and figures about the U.S. economy, accompanied by an in-depth recap of the intra-Fed member debates that shape the nation’s monetary policy.

At 7,333 words, the June Fed Minutes is the unabridged version of the more well-known, post-meeting press release.  The corresponding press release was just 360 words.

As it turns out, Wall Street didn’t like what it read in the minutes.  Specifically:

1. The Fed expects below normal growth through 2012
2. The Fed’s outlook for employment has dipped
3. Credit conditions are easing only slowly

Furthermore, the Fed said its action may be needed if the economy were “to worsen appreciably”.

Overall, the economic optimism the Fed displayed earlier this year appears to be waning. The economy is moving forward — just not as quickly as expected.  That should bode well for mortgage rates and home shopping in Utah.

Mortgage rates were down Wednesday afternoon and Thursday and remain historically low. All it would take to reverse rates, however, is a run of positive news on jobs, growth, and consumer spending.  Therefore, if you know you need to lock a mortgage rate in the near-term, it may be a good time to make the call.

The KCM Blog frequently explains why the market has another bottom to reach (shadow inventory, bank-owned properties, interest rate fears, and such).  Today, I want to send out my plea to cyberspace for government preventive action rather than reactive action (after the decline resumes).

There are Three Primary Reasons for the government to reinstitute the tax credit:

1. Though the government gives $8000, it doesn’t cost them $8000.

It costs them about $3000.  Why?  Because the government is going to collect income taxes from all the people who receive income directly from the transaction.  On a typical $200,000 purchase, typical revenues approximate to be:

1. Real Estate Commission (5%) – $10,000
2. Mortgage Company Compensation including fees (3.5%) – $7,000
3. Homeowners Insurance Premiums, Appraisal Fees, Credit Reports, Settlement Company Fees, Home Inspections, Termites Reports, Etc. – $3,500
4. Non-HUD-1 Expenses (Attorneys, Moving Companies, Etc.) – $2,500
5. Say 1 in 6 Buyers spend $12,000 in home improvements, the average is $2,000

Most of these costs wind up contributing to payroll, either at the point of expense (like commissions) or being spent in overhead (like copy machines) who, in turn, hire employees.  If 80% of these expenses become payroll, and the average tax rate is 25%, the government is collecting $5,000 in increased tax revenue for each $8,000 expense.

2. Buyers Buy Stuff!

Especially when they have an $8000 refund on the way!  The economy is further buoyed by all the furniture, electronics, and knick knacks people buy when the close on a home.  That’s Sales Tax Income.  But, more importantly, it’s JOBS.  Jobs to manufacture stuff.  Jobs to sell stuff.  Rent that gets paid to support commercial landlords and real estate values.

3. What will be the cost of increased unemployment if we don’t?

Potentially hundreds of thousands of people could be applying for unemployment, if the real estate and mortgage industries contract because there are not enough deals being put together.  I don’t know the exact number of cost per person on unemployment, but I’ve got to believe it’s more than the $3000 the government is “losing” on a tax credit deal.

While I have never really supported government artificially supporting an industry, I have always been a proponent of tax credits because I believe money in the hands of the people will be spent more efficiently than money in the hands of the government.  It’s truly a “win” for liberals and conservatives, but more importantly, it’s a win for our economy and the American people.

Now, I believe we need to reinvigorate home buyers (we have already seen the drop off of activity at Open Houses).  Money is a good motivator.  Couple a newly packaged Tax Credit with today’s historically low interest rates, and you have a formula to possibly prevent the double dip (or at least have a more graceful decline).

Thanks to my good friends at KMC for this great post.

Reason #1: Real Estate is no longer a good investment.

Reason #2: Renters are happier than homeowners.

Reason #3: Limited mobility is harmful to the country.

Reason #4: Never buy a house while prices are falling.

We will cover the last reason today. Dumb Reason #5: You can’t trust a real estate professional to tell you the truth.

This one always gets me upset. Just because someone is in the business of helping you find your next home or helping you arrange financing doesn’t mean they will just tell you anything just to ‘get you to buy now’. Are there unscrupulous people in the real estate business? I’m sure there are. Just like there are immoral people that have become police officers, doctors and even clergy.

However, most real estate and mortgage professionals are good, hardworking members of the community dedicated to helping families attain their housing goals. Are they saying that this might be the best time to buy a home in the last 50 years? The knowledgeable ones are saying just that.

Why? Let’s not take their word for this. Let’s step away from the agents and loan officers and see what others are saying:

“It’s a great time to buy a home. With the real estate crash, prices are way down and mortgage rates have never been lower.”

An article U.S. News and World Report (July 2, 2010)

“It’s the best time to buy a house in America.”

A CNBC article quoting John Paulson, #45 on the Forbes list of the world’s wealthiest billionaires (June 25, 2010)

“We want to point out that the downside of investing in housing right now is about as low as you will ever see.”

John Burns, CEO of John Burns Real Estate Consulting, in a Housing Wire article (July 7, 2010)

Probably the best people to ask if buying a home makes sense are the people who currently own homes. A recent national poll commissioned by Bankrate.com found:

Ninety percent of homeowners say they don’t regret buying their home despite a nationwide tsunami of foreclosures, short sales and loan modifications.

The next time a real estate professional explains to you that it makes sense to purchase the house you just feel in love with, don’t question yourself or them. They are giving you great advice.