In the summer of 2005, sub-prime mortgage lending was at its peak.  Rates were relatively low and lending guidelines were relatively loose.

At the time, the “standard” sub-prime mortgage product was the 3/27 ARM.

The 3/27 had a few basic traits:

• A fixed, 3-year “starter rate”
• Every six months thereafter, the mortgage rate changed
• The formula by which it changed was (4.999 percent + the 6-month LIBOR rate)

If the loan was interest only, it usually converted to principal + interest at the first adjustment, too.

Because the summer of 2005 was the peak of sub-prime lending, it makes sense that the summer of 2008 is the peak of sub-prime adjusting.

For homeowners with adjusting sub-prime loans, there is some (relative) good news out there.

Today, the 6-month LIBOR hovers near 3.15 percent, meaning that an adjusted mortgage rate will be in the neighborhood of 8.15 percent.

This is versus the rate of 10.30 percent that sub-prime borrowers faced last summer when LIBOR was much higher than it is today.

Adjustments of any size can strain a household budget, though, so if you’re a sub-prime borrower and your pending adjustment will cause financial strife, be proactive — talk to your lender before you miss a payment. 

Lenders are often more willing to talk with “current” borrowers than with delinquent ones.

(Image courtesy: Washington Post)

Let Tyler Ford and Todd Abelson help you for all your mortgage needs.

The rate drop is the result of how mortgage markets interpreted the Federal Reserve’s Wednesday press release.

In it, the Fed said:

1. Inflation pressures should lessen soon
2. Growth should remain steady this year
3. The credit market is currently fragile

Separately, none of this was news to the markets.  But considering all three statements together, investors grew nervous of leaving money in the stock market — specifically in financials. 

Post-Fed announcement, there was a wave of selling that dropped the Dow Jones Industrial Average nearly 20 percent from its October 2007 high.

As stocks sold off, though, mortgage shoppers were benefiting. 

Rates ticked down in the Fed announcement’s wake because the mortgage bond market acted as a “safe haven” for traders.  More demand for mortgage-backed bonds caused rates to fall, accented by a favorable run very late in the day Friday.

This week, the momentum may continue, or it may not.  There is a lot to capture traders’ attention in this holiday-shortened, four-day work week.

The biggest data release of the week will undoubtedly be Thursday’s Unemployment Report, but there are also two Fed speakers stumping, as well as Treasury Secretary Paulson speaking about the economy.

As the week goes on, more and more traders will be leaving for the long weekend so expect rates to move with greater force as Thursday afternoon gets nearer.  And, if stocks haven’t regained favor with investors by then, expect that mortgage rates will have a good week.

Often called a HELOC, these equity-based credit lines function very much like credit cards:

• The rate is adjustable, tied to Prime Rate
• There is a minimum monthly payment
• There is a pre-set spending/credit limit

But different from credit cards is that a HELOC is “guaranteed” by real estate and with real estate values in question nationwide, many banks are exercising a little-known clause in the HELOC contract. 

With alarming frequently, banks are reducing the pre-set spending limits on their active equity lines.  Via USPS, lenders are notifying homeowner with $100,000 HELOCs that their new HELOC limit is $25,000, for example. 

And the banks aren’t being discriminate based on payment history or local real estate conditions, either — it’s happening everywhere with equal force.

The good news is that banks will accept appeals on HELOC reductions on a case-by-case basis. 

One way to appeal a HELOC reduction is:

1. Call your lender’s Customer Service line.  Do not send an email.
2. Politely ask why the HELOC limit was reduced.  Listen carefully to explanation.
3. Explain why you would like your HELOC reinstated.  Acceptable reasons may include home improvement projects or improper home valuation by the lender.
4. Be prepared to write a formal letter, if asked.  Address the issues explained in #2.

Banks will typically not reinstate a HELOC if a borrower has been delinquent on payments, or lives in a severely depressed neighborhood.  However, because lenders rely on computer models to assess risk, it’s always a good idea to ask.

Sometimes the Human Element of an appeal can work in your favor.

Please note that effective with all new FHA loans (defined as new Case number assignments) on/after July 14th, HUD is implementing new “risk based premiums” on both the up-front and monthly mortgage insurance. The chart is based upon FICO scores and Loan-to-Value (LTV).

In some cases the up-front premium is actually lower and in most typical cases the monthly premium is slightly higher. As a comparison, currently the typical 3% down, 30-year loan carries an up-front premium of 1.50% and monthly premium on .50% (150/50).

Please be aware that these changes will affect both the final loan amount AND the monthly payment.

If you are working with a buyer that might be negatively affected by these changes, get them in process before July 14th!

There are other key points addressed in the FHA announcement.

For detailed guides click on the link below.

FHA CHANGE GUIDELINES

RealtyTrac

The underlying data tells a different story, however.

More than half of the country’s foreclosure activity in May 2008 was tied to just 4 states in the union:

1. California (28 percent)
2. Florida (14 percent)
3. Arizona (5 percent)
4. Michigan (5 percent)

In other words, the majority of mortgage defaults are coming from a small minority of states.

See, between 2002 and 2006, California, Florida and Arizona were very popular with real estate speculators, many of whom over-extended themselves on real estate; and Michigan’s economy has been decimated by job losses in the auto and manufacturing industries.

In addition, these 4 states are among the nation’s most populous.  It makes sense that they are distorting the national statistics.

On a local level, the news is not so grim.  Not only did 20 states show a reduction in monthly foreclosure activity, but many more fell below the national foreclosure average.  That type of story, though, doesn’t make for good headlines, is all.

Search the full May 2008 foreclosure report for yourself on RealtyTrac’s Web site.

NOW IS A GOOD TIME TO BUY AND TAKE ADVANTAGE OF THE MANY GOOD DEALS THAT EXIST!

Mortgage rates are now as high as they’ve been since October 2007.

Because inflation devalues mortgage bonds, market players are quick to unload them when signs of inflation are present.  

Last week, there were several such signs:

1. The American Consumer is spending undettered despite economic uncertainty
2. The Cost of Living is rising faster than expected
3. The Federal Reserve reports that some business are passing higher costs on to consumers

Hence, the higher mortgage rates.

This week, only Tuesday registers as a “big data day” with reports on housing, productivity, and Producer Price Index — the “Business Cost of Living” report.  

There will be four members of the Federal Reserve speaking, though, and that will add some volatility to the market.  Fed Chairman Bernanke is among the speakers, addressing Congress this morning at 10:00 A.M. ET.

So, expect mortgage rates to continue to jump and dip this week, taking their cues from inflation.  More inflation means higher rates and a slowing economy should cause rates to retreat. 

(Image Courtesy: LA Times)

When you read the newspaper, listen to the news on TV, have a discussion with friends, family and colleagues it becomes clear there are many factors influencing our economy. You hear concerns about the price of gas, slow economy, housing market, interest rates, inflation and 2008 Presidential election.

There is one thing for certain, we have little or no control over change and change is inevitable. So why not make the best of change? Educate yourself and prepare for the ups and downs of the market and take advantage of opportunity.

There are many good books on the subject of money and finances. I am a big reader and am always looking for ways to improve my situation and grow as a person. For those of you that like to read and educate yourself a great book on the subject of finance is Rich Dad Poor Day by Robert Kiyosaki.

I am a contrarian. In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong. Now is a good time to buy and take advantage of some great deals that are available that won’t last forever!!!

There has been some positive data in the Tucson’s housing market put out by the Tucson Association of Realtors® Multiple Listing Service, Inc (MLS). If you would like a copy of the full residential sales report put out by the MLS give me a call and I will email it to you. It is worth looking at. Below are some highlights of the report.

• Pending Contracts Increase by 27.11% in the month of April
• Active Listings Decrease by 15.20% to 8,808 in the month of April
• New Listing Decrease by 20.87% in the month of April
• Home Sale Units Increased 8.1%. In April there were 973 homes sold.

This is good news for the Tucson housing market. Inventory levels are staring to come down. It is all about supply and demand and getting the inventory levels back to an equilibrium which is slowly starting to happen.

“Live Frugally” while being grateful for life. Live within your means and save money.

“Stay Liquid” Have cash available to prevent the need for credit and to take advantage of opportunity when it presents itself.

“Buy Income Producing Assets” put your money to work for you rather than having to work for money.

Make it a great day! You deserve it!   

Tyler Ford

www.TucsonMortgages.com

FREE APPRAISAL!

Use Tyler Ford or Todd Abelson for your mortgage needs and we will pay for your appraisal during the months of May and July  2008.

Realtors® you can use the above FREE APPRAISAL coupon for your clients.

To learn more about Tyler and Todd visit: www.TucsonMortgages.com

PMI provides a cash payment to lenders in the event of a homeowner defaults.

But because PMI policies are designed for high LTV loans only, they usually contain cancellation options for when home equity percentages reach 20 percent or more.

In other words, PMI can be temporary.

There is a caveat, however: Lenders will not automatically remove mortgage insurance when LTV falls below 80 percent — the onus is on the homeowner to initiate a formal request.

Earlier this decade — when home values were soaring — many PMI-paying homeowners recognized their equity growth and successfully petitioned out from PMI. 

Many other homeowners, however, forgot.

So today, as home values stagnate or depress in different U.S. markets, homeowners eligible for cancellation may find that both their home equity and their right to cancel have vanished.

PMI helps makes high LTV loans possible, but there’s no reason to pay it longer than necessary.  If your current mortgage requires PMI payments and your loan-to-value lurks below 80 percent, contact your mortgage lender to start the PMI cancellation process.

Or, if you’re unsure about your home’s value and the 80 percent threshold, call or email Tyler Ford or Todd Abelson anytime and we can help you connect with somebody to give you the answers you need.

This is a counter-intuitive development because increases to the Fed Funds Rate are typically associated with periods of rapid economic expansion. 

Lately, we’ve seen anything but. 

Witness:

• High levels of unemployment
• Reduced consumer spending
• Falling consumer confidence

Despite the downbeat news, though, multiple Fed members are taking a hard line on inflation, adding that a strong dollar support the economy and help to offset high oil prices. 

A rate hike could help accomplish that goal.

If the Federal Reserve votes to raise the Fed Funds Rate, Prime Rate will rise in tandem.  Prime Rate is the basis of interest rates for credit cards and home equity credit lines.  Holders of each debt type, therefore, would face higher monthly payments.

Mortgage rates, by contrast, would be expected to fall, but how the market would actually react to a rate hike is anyone’s guess.

The Federal Reserve meets 8 times annually.  Its next meeting is a two-day affair beginning June 24.

(Image courtesy: The New York Times)