Declining Market Areas

What is a declining market area?

If you are in the market for a new home, or refinancing your current mortgage, you may have run into this term with your lender.

Fannie Mae has issued new guidelines for properties that are in declining market areas – that is, areas where the value of homes is dropping. With the current credit crisis and the slowdown in the real estate market, many areas across the nation are seeing property values fall for the first time in a long time.

If your property is in a declining market, the maximum loan to value ratio (mortgage amount divided by the value) is decreased by 5%. So, if you are purchasing a home and the maximum LTV for the program is 95%, you must now have a down payment of 10% instead of only 5%.

There are two ways that your property can be listed in a declining market area. First, Fannie Mae is maintaining a database of areas that it designates as declining market areas. If this is the case, your lender will receive a message when they run your loan through automated underwriting that your property may be in a declining market area. Second, since all real estate markets are local, your appraiser may report on the appraisal that the property is in a declining market area. Either way, the 5% reduction in maximum LTV is required.

As far as an accurate value goes for properties in these areas, many lenders are adding appraisal requirements to make sure the property is worth the value listed on the appraisal. The lender may require additional comparable closed sale to be added to the appraisal or the lender pay require the appraiser to get information on properties actively listed in your properties markets.

This is another in a long line of added obstacles to obtaining a mortgage that you should be aware of in this difficult market. Unfortunately, the time to get a mortgage can be greatly increased if the appraiser has to add this information to his appraisal report. For the time being, my branch at WestAmerica Mortgage is requiring additional information on all appraisal reports from our appraisers just in case the property is in a declining market area or in case it will be added prior to closing. So far, this has helped us meet our scheduled closing dates.

Please take a look at other articles on my blog so you are informed about the changes in the mortgage market over the past 6 – 9 months.

Short Sales Now Widespread

Since I wrote the article, “What is a Short Sale,” in June 2007, short sales have become much more common. In fact, Inside Mortgage Finance reported that approximately 20% of all home sales closed in March 2008 were short sales. They also said that the number of short sales would have been dramatically higher except for the fact that they estimate about 1 out of every 3 short sales never close.

Why is there such a huge increase in short sales?

The main reason for the increase in short sales is the downturn in the housing market. Falling home values make it more likely that people will not be able to sell their home at a high enough sales price to cover the amount they still owe on the property. When a borrower owes more on the property than the property is worth, and they do not have the assets to pay the difference, they must turn to their lenders and hope the lender will accept less than the amount they owe.

Another issue that has made the increase in short sales so dramatic is the recent trend of purchasing a home with little to no money down. These risky loans have no cushion against property depreciation, since there was no down payment to being with. As soon as values stop rising and start falling, these properties are instantly worth less than the mortgage amount.

Also at issue here are questionable appraisals. There has been a lot of attention recently being placed on appraisal standards and acceptable practices. With the increase in foreclosures, the extra scrutiny placed on the appraisals of these properties has shown that many of the original appraisals were inflated. This was not a problem as long as property values continued to increase, but is a huge problem when they decrease.

Lastly, many lenders are desperately trying to work with homeowners to stem the increase in foreclosures we have seen over the past year. They are taking extraordinary steps to avoid foreclosing on a property, and one of these steps is to accept short sales more readily. The lenders would rather take a lesser amount when the homeowners have a willing buyer, than to go through the time and expense of a foreclosure, and risking losing even more.

Short sales take time.

If you are looking for a great deal by purchasing with a short sale be prepared to wait. Normally, you negotiate with the seller directly, and it may take several days. When it is a short sale, the lender or lenders have to approve the sale. This can take weeks. Expect to wait up to a month or more just to see if the deal is accepted. If you have the ability to wait - and are willing to walk away from a property if the deal is not acceptable to the lender(s) - then you can find a great deal with short sales. Make sure you have a loan officer, Realtor, and attorney who are well-versed in short sales. There will always be more headaches with a short sale but having an experienced team will help.

Sellers should be proactive

Instead of waiting for an offer and then hoping and praying that the lender(s) will accept the offer, many sellers are contacting their lender(s) before they market their properties. By negotiating with the lender beforehand, you can lessen the time it takes, and the headaches involved in these transactions, for everyone involved. Again, make sure you already have an experienced attorney and Realtor who are well-versed in short sales, as well as the local real estate market, before you contact your lender(s).

For more information on how short sales work, see my article, “What is a Short Sale?”

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Fannie Mae Further Tightens Lending Rules

Fannie Mae announced that they will now require a minimum FICO score for loans it buys on an individual basis. The new minimum FICO score will be 580. Up until now, Fannie Mae never set a minimum credit score.

They also announced that they will increase the time required after a foreclosure before a borrower is eligible to obtain a Fannie Mae mortgage from the current 4 year period to 5 years. But, Fannie Mae said that they will allow shorter periods for borrowers who can document extenuating circumstances that have forced the foreclosure.

These changes are just the latest in a long line of changes from Fannie Mae and Freddie Mac in response to the housing downturn and mortgage crisis. These changes come on the heals of two rounds of increasing loan-level pricing adjustments announced by Fannie Mae and Freddie Mac over the past several month (See see "How much will my credit score cost me on my next mortgage?" and "Credit Score Affects Interest Rates Even More").

This again shows how much more important credit scores are becoming and how vigilant all people must be about what is on their credit reports (See “Check your credit report every year – FREE!”).

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Check your credit report every year – FREE!

In my December 2006 blog article, “FREE Credit Reports,” I talked about obtaining your free credit report directly from the main credit repositories. Now, with the changes Fannie Mae and Freddie Mac have made recently (see "How much will my credit score cost me on my next mortgage?" and "Credit Score Affects Interest Rates Even More") your credit scores are more important than ever.

The Fair and Accurate Credit Transaction Act of 2003 (FACTA) was passed by Congress to, among other things, allow consumers to monitor their own credit reports from the three main credit repositories – Equifax, Experian, and Trans Union. These free credit reports may be obtained on the internet, over the phone, and through the mail through a centralized source that was established specifically for this purpose (you cannot obtain a free credit report by contacting the credit repositories directly.)On the internet, go to http://www.annualcreditreport.com/ to get copies of all three credit reports. You can also call 877-322-8228 to obtain the credit reports by phone or you can download a form to mail in at http://www.annualcreditreport.com/cra/requestformfinal.pdf

I get offers in my e-mail all the time for free credit reports – are these the same thing?

No. Many of these offers are from companies that offer other services such as credit monitoring or credit repair. They will give you a “free” copy of your credit report if you subscribe to and pay for their service. The credit report you receive will be from that company and not directly from the main credit repositories.

When you get it at http://www.annualccreditreport.com/, you will receive information about how to correct any problems you find directly with the repositories. By law, they have to remove any information that they cannot prove is accurate - and they will let you know the steps you need to take to make the corrections.

I haven’t taken out any new credit – why should I check it?

First, you want to make sure there are not any mistakes on the credit report. If you have ever had a collection you know that some collection agencies are not very good at updating the information when the collection has been paid off. This will continue to affect your credit score. And, if you wait until you are applying for new credit such as a mortgage, it is too late – your credit scores have already suffered.

Second, you want to know what accounts your credit report shows. If there are unfamiliar accounts, you will want to investigate to make sure you are not a victim of identity theft.

Is now a good time to buy?

You cannot imagine how often I hear this question nowadays. The answer I always give is a resounding YES! There are three main reason why this is a great time to purchase a home.

First, it’s a buyer’s market! Every day in the news we hear about how hard it is to sell a home and how far home prices have fallen. The buyer has a great opportunity to find the perfect home and negotiate a great deal for it.

Unfortunately, many would-be buyers have been scared out of the market by the falling home prices. They are afraid that the value of their home may continue to fall after they purchase it. This may be the case, but if you are looking at a home as a long-term investment, prices will stabilize and eventually rise giving you a nice return on your investment (There is a lot more risk if you are purchasing property as a short-term investment.). If this were any other purchase, falling prices and a wide selection would motivate people into buying now.

Second, mortgage interest rates are low. In the past few months, interest rates hit their lowest levels in the past few years. Low interest rates coupled with lower housing prices makes this market the most affordable home-buying market in years. Again, we hear in the news the problems in the mortgage market but the fact is, for borrowers, this is a great time to get a mortgage.

Third, nobody can predict the future. This is probably the biggest reason why I think now is the time to buy. Housing prices are low now – but for how long? Nobody can predict when the housing market will rebound. By the time we know, it is already begun to rebound. Trying to purchase at the exact bottom of a market is impossible – ask anyone who invests in stocks. And, housing markets are all local. Housing prices will rebound at different times in different parts of the country. Even neighborhoods within the same city will see their values move at different times. If there is a place you want to live, and you can afford it now, don’t wait until that changes.
Also, due to the problems in the mortgage market, it is getting more difficult and more expensive for many people to get a mortgage. Last year, if you had a 620 FICO Score and a 5% down payment, you would get the same rates as somebody with a 740 FICO Score and a 30% down payment. However, in the past few months, Fannie Mae and Freddie Mac have made a lot of changes that will increase the cost of people getting mortgage if they do not have a significant down payment and/or a great FICO Score. Please read "How much will my credit score cost me on my next mortgage?" and "Credit Score Affects Interest Rates Even More" for more information on this. If there continues to be problems in the mortgage market, these changes may continue. And, if you have credit issues and need a sub-prime loan, they are getting harder to find and more expensive all the time.

If you are ready, willing and able to purchase new home, now is the time to act. It has been a long time since housing has been so affordable and nobody knows how long it will last or how long it will be before it is this affordable again.

If you have been thinking about buying, I have a great tool that you can use to see the properties available in the areas you are interested in. It is free and there is no-obligation to use this service. Click on the link below for more information and to sign up.

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FHA Announces New Temporary Loan Limits

Earlier this month, HUD announced the new temporary loan limits for FHA Mortgages as a result of the economic stimulus package passed earlier this year. Like conventional mortgages, The maximum FHA loan amount is $729,750 but will be adjusted per housing market based upon the median home prices for that market.

In the Chicago MSA, the maximum loan limit for a single family home is now $410,000 up from $271,050 before the temporary increase. The new limits for 2- 3-, and 4-unit properties are $524,850, $634,450, and $788,450, respectively.

These increased loan amounts will make traditionally “jumbo” loans more affordable for more people and will hopefully allow many people who are currently in mortgages they cannot afford refinance to more affordable conventional and FHA loans (See FHA Offers Relief to Homeowners with FHA Secure).

These new loan limits will follow the same FHA guidelines as before. However, some lenders have already added some guidelines for these larger loan amounts. For example, one lender requires a second appraisal for any FHA loan that exceeds $417,000 and another lender requires at least a 580 FICO score for any FHA loan that exceeds the maximum mortgage amount before the temporary increase.

As I wrote in January 2008 (FHA Mortgages to Become More Popular) FHA loans will once again be a larger segment on the overall mortgage market than it has been in the past several years. The FHA Program has undergone many changes over the past couple years (see This is Not Your Father’s FHA)to better serve the mortgage needs of today’s market and bring it more into line with the conventional mortgage programs.

To see the new, temporary mortgage limits in your area, please go to: https://entp.hud.gov/idapp/html/hicostlook.cfm.

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Credit Score Affects Interest Rates Even More

On March 6, 2008, Fannie Mae came out with Announcement 08-04 which spells out the increased Loan-Level Price Adjusments (LLPAs). These LLPAs replace those discussed in my blog article “How Much Will My Credit Score Cost Me.”

An LLPA is an additional fee on top of any points and closing costs paid for a mortgage based upon the Loan to Value Ratio (LTV) and the borrowers’ credit score. So, the higher the LTV and lower the credit score the more you will have to pay for a mortgage. This can take the form of additional points and/or higher rates.

The new LLPAs are as follows:









1 These LLPAs do not apply to loans with amortization terms of 15 years or less, Expanded Approval®, Expanded Approval with Timely Payment Rewards®, MyCommunityMortgage®, and most Government loans. See LLPA Matrix for details.

CASH-OUT REFINANCES - FICO Score/LTV








Two- to Four-Unit Property LLPAs2
The two-unit LLPA below replaces the existing two-unit LLPA. The three- and four-unit LLPAs are new LLPAs.

• Two-Units: 0.50% LLPA applicable to all LTVs
• Three- to- Four Units: 1.00% LLPA applicable to all LTVs
2 These LLPAs do not apply to MyCommunityMortgage loans.

All LLPAs are cumulative unless otherwise noted.

These new LLPAs are effective with all mortgage delivered to Fannie Mae beginning June 1, 2008. Most lenders have already incorporated these new LLPAs into their current rate sheets. Your credit score is more important than ever in getting a good rate on a conventional loan. For information on credit scores please visit my blog article "Understanding Credit Scoring & Credit Repair.”

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Federal Reserve Cuts Federal Funds Rate by ¾%

Yesterday, the Federal Reserve Open Market Committee (FOMC or Fed)) voted to cut the Federal Funds Rate by .75% to 2.25% - the sixth time they cut rates in the past six months. These rate cuts are meant to stimulate the economy by making it cheaper for banks to borrow and lend money and for business to borrow to grow their business. This time, there was a lot of differing opinions on how large the rate cut would be. Some looked for the FOMC to cut by a full 1% while others were looking for only a .5% cut. The vote by the Fed was not unanimous – two members felt the cuts were too aggressive given the threat of inflation.

Cutting interest rates can be seen as inflationary. It stimulates the economy and also devalues the US dollar in relation to other currencies. This causes prices we pay to increase in the future and, as a result, many long-term interest rates, such as mortgages, actually increase when the Fed cuts rates.

Some homeowners with mortgages that are tied to the Prime Rate will see a decrease in their interest rates on these loans since banks tie their Prime Rate to the Federal Funds Rate – when the Fed cuts by .75%, banks cut their Prime by .75%. Usually, Home Equity Lines of Credit are based on the prime rate. These homeowners should see the new rates reflected on their next statement.

These rate cuts don’t seem to be working, the economy is still heading for recession

When the Fed cuts rates, it can take 6 – 9 months before they have an impact on the economy. Therefore, the economy is just now experiencing the rate cuts that the Fed put into effect when they began cutting rates in September 2007. The Fed tries to get in front of problems so they can prevent or lessen upcoming problems. The economy continued to grow through the end of 2007 and now the cuts are helping to prevent the economy from slowing further.

And what about mortgage interest rates?

This is an even more complicated question. The mortgage market is affected by the economy and, to some degree, the actions by the Fed. But, as I mentioned before, these rate cuts can be inflationary which will tend to increase mortgage rates. In addition to the economy, the mortgage rates are affected by the sub-prime mortgage crisis, the slowing housing market, and the resistance of investors to purchase the mortgage-backed securities (MBS) that fuel the mortgage market.

Today (3/19/08) the Office of Federal Housing Enterprise Oversight(OFHEO), the regulators for Fannie Mae and Freddie Mac, took a huge step today to increase the liquidity (Availability and accessibility of mortgage funds) of the mortgage market. The steps they took today will allow Fannie Mae and Freddie Mac to provide up to $200 billion in mortgage-backed securities liquidity. By purchasing these MBS, Fannie Mae and Freddie Mac will make a significant dent in the logjam of mortgages that have been unable to be securitized and purchased over the past several months. This logjam has led to MBS being less attractive and a widening of the spread between the yield on mortgages and US Treasury bills, notes, and bonds. This should increase the demand for MBS thus raising their prices and lowering their yields – this will in turn lower mortgage rates.

Fannie Mae & Freddie Mac Announce New, Temporary Loan Limits

As part of the economic stimulus plan signed into law last month (See Congress Agrees on Economic Stimulus Plan ... ) Congress authorized Fannie Mae and Freddie Mac to raise the maximum mortgage limit for conforming loans through the end of 2008. These temporary increases are to help the housing industry as well as make it easier for more people to refinance their mortgages. These increases will increase the liquidity of the mortgage market for many homeowners whose mortgages are above the current conforming limit of $417,000.

After much debate as to how many people these increases will help (See Will the Increase in Mortgage Limits Help?), the OFHEO has published the new limits. While critics had estimated that only 15 counties will be affected, it appears that over 100 counties and metropolitan areas across the country will experience an increase from the current maximum.

Unfortunately, my home market of Chicago, IL, as well as many other markets, will not see an increase in the limits for conforming loans.

To see a list of all the areas with increased limits click here!

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Down Payment Assistance Programs to Continue

On October 1, 2007, the Department of Housing and Urban Development (HUD) published a rule that would have eliminated the use of seller-funded down payment assistance programs for FHA loans effective October 31, 2007 (See FHA Bans “Gift” Down Payment Assistance Programs). On that date, Judge Friedman of the United States District Court for the District of Columbia issued a temporary injunction against HUD from implementing that rule (See HUD’s Ban on FHA Down Payment Assistance Programs on Hold). In the injunction, Judge Friedman agreed that there was a “substantial likelihood” that the regulation violated applicable law. Judge Friedman further stated that the regulation lacked a “reasoned analysis” and was based on “flimsy” support. Judge Friedman also questioned whether HUD acted appropriately in issuing the regulation in view of a published report that Secretary Jackson was committed to that course of action regardless of whatever public comments HUD would later receive.

On March 3, 2008 Judge Karlton of the United States District Court for the eastern District of California set aside the HUD rule, thus allowing down payment assistance programs to continue to help thousands of American families realize the dream of homeownership.

In addition to the various down payment assistance programs such as Ameridream, Inc and the Nehemiah Program, opposition to HUD’s rule included several members of Congress, the Mortgage Bankers Association, the U.S. Conference of Mayors, the National Association of Home Builders, the National Urban League, and over 15,000 individuals and families nationwide.

Down payment assistance programs have helped over 1 million families and individuals purchase a home. In addition to helping the home buyers, these programs also help to stabilize the neighborhoods in which they are utilized.

With all of the issues facing the housing industry over the past couple years, this is welcomed news. FHA will be an integral part of a housing turnaround. In addition to the recent changes to FHA guidelines (See FHA Mortgages to Become More Popular and This is Not Your Father’s FHA) as well as the temporary increase to FHA loan limits (See Mortgage Limits Increased), down payment assistance programs enable more people to afford a home.

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Will the Increase in Mortgage Limits Help?

As a part of the economic stimulus plan passed in February, Congress allowed for the temporary increase in mortgage limits for Fannie Mae, Freddie Mac, and FHA mortgages. However, many people have questioned how many people this will actually help. There are reports that only 15 counties across the country have median home prices high enough to qualify for the maximum mortgage limit of $729,725 – and, most of these counties are in Southern California.

While the National Association of Home Builders (NAHB) has estimated that mortgages on 3 million additional homes will be eligible for purchase by Fannie Mae and Freddie Mac others estimate that it will be half that amount. However, there will be several other counties across the country that do no necessarily qualify for the maximum limit but may still see an increase above the current $417,000 limit.

The changes to the FHA mortgage limits will have an even greater impact. All counties, regardless of median home price, will have a floor of at least $271,050 – up from $200,160. And, at least 85% of the 3,300 counties in the U.S. have median home prices high enough to result in an increase to the maximum FHA mortgage limit.

These changes may not help everyone, but they are not intended to. The reason for these increases is to increase the liquidity (availability and accessibility of money for mortgages) in the mortgage market to help repair the damage done by the sub prime mortgage mess and the slumping housing industry.

Keep checking back for the actual loan limits in your area – they should be available in the first half of March.

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Mortgage Limits Increased

As a part of the stimulus plan enacted by Congress and Signed by President Bush last month (see my blog entry on the economic stimulus program) the mortgage limits for Fannie Mae, Freddie Mac and FHA loan programs will increase for the rest of 2008.

As a result of the problems facing the housing industry and the sub prime mortgage crisis, jumbo mortgages (those greater than $417,000) have been harder to get and much more expensive. Traditionally, jumbo mortgages have used similar underwriting standards and were priced approximately .25% - .50% above conventional mortgages. Now, the underwriting standards are so tight that many people are unable to afford these types of loans. Additionally, jumbo loans have been as much as 1.5% higher than conventional mortgages making the much less affordable.

Loan limits for a single family home will increase from $417,000 to $729,750 or 125% of the median house price in the area. FHA limits will also increase. The current basic standard mortgage limits for FHA insured loans will increase from $200,160 to $271,050 (with limits up to $729,725 in the highest cost areas). Limits for 2 – 4 unit properties were also increased.

These mortgage limit increases are expected to help the beleaguered housing industry. It will make mortgages more attainable and affordable for more Americans. It will also allow more people to refinance their current mortgages to more favorable terms and rates and hopefully cut down on the mortgage defaults and foreclosures which hit record levels lately.

Check back for more information as to the actual mortgage limits you can expect for your area. As soon as I know them I will post them to this blog.

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Do I have an orphaned mortgage? What is that and should I care?

In the past a mortgage was “orphaned” when the loan officer who originated the mortgage left the company. Since the loan officer was the point of contact for the borrower for future mortgages, the loan was now orphaned. The branch manager of an orphaned mortgage would usually assign these mortgages to another loan officer who would send out a lender introducing themselves as the borrowers new point of contact.

However, truly professional loan officers have evolved these days and take a much more proactive approach to their customers’ financial situation. Professional loan officers take an advisory role to their customers and take into consideration current needs as well as future goals of their customers to make sure the mortgage product they take helps them achieve these goals.

A professional loan officer will usually offer to review their customers’ financial situation at least annually, free of charge, and make recommendations based upon their current and projected financial situation and changing financial goals and needs. These loan officers are not just trying to get another refinance when rates drop.

So, if you have a mortgage and never hear from your loan officer (except when rates drop and they want to refinance your mortgage) you have an orphaned mortgage.

If my loan officer keeps in touch with me it is only because they want more business for themselves - they really don’t care about my situation.

Unfortunately, this may be true of many loan officers. Many will mail you a postcard monthly so you have their contact information in case you need another mortgage. However, there are a lot of true professionals in the business who do really care about their customers. Yes, the loan officer will get more business by keeping in contact with you but you can benefit from his efforts as well.

Mortgages are just a commodity and I call around to get the lowest rate possible and go with that guy.

I know a lot of people who have said this and live to regret it. In fact, over the past several years there were a lot of people who made the decision to use another loan officer who I have heard from since. Many were convinced to take an exotic mortgage, such as a Pay Option ARM, that they neither fully understood or was the correct mortgage closed because the loan officer they ended up with was inexperienced. Some of them ended up with a higher rate because they did not lock in the rate when they should have. Some of them ended up paying exorbitant closing costs and fees that were never properly disclosed up front.

Remember, having the lowest rate on the wrong program is not a good deal. Getting a fair rate on the right program with a loan officer who understand and cares about your financial needs and goals is.

If I don’t hear from my loan officer, how does that cost me money?

Here are a couple ways:

Over the past 3 months there were several times when rates were at or below 5.500% for a fixed rate, 30 year mortgage depending on your credit score and LTV (See “How much will my credit score cost me on my next mortgage?” for more information on this). When this happened, all of my customers were notified and had to opportunity to lock in these rates. After rates had crept back up (these rock-bottom rates were available a very short time) the news started reporting rates at their lowest levels in years. I received several calls from people who read my blog about refinancing. Unfortunately, the rates were long gone by the time they had read about them, which is often the case.

Also, at the end of last year, Fannie Mae and Freddie Mac announced they were introducing delivery fees for mortgage with credit scores below 680 and LTVs over 70% (See “How much will my credit score cost me on my next mortgage?”). I contacted my customers that were in this situation and advised them to refinance before these changes took place. I was able to refinance several of them before the changes and saved them a lot of money – most of these customers would not have been able to save s much money on their refinances had they waited due to the increase in rates they would be subject to now.

Lastly, a customer of mine had contacted me in the fall. They had an ARM that adjusted up more than 2.5% in the spring and they had fallen behind on the payments due to the increase in payment. They had called a couple sub-prime lenders and were not going to be able to get a better rate and lower payment with them. They called me and I told them about the FHA Secure Program (See “FHA Offers Relief to Homeowners with FHA Secure” for more information on this program) and refinanced them to a lower rate and better payment. They haven’t been late on a payment since.

There are many other ways that having a loan officer you trust can save you money.

So, what do I do if I have an orphaned mortgage?

Find a professional loan officer, such as myself. I am happy to help people with their financial needs and determine what mortgage program is right for them. Even if you are not ready for a new mortgage right now, I will be happy to evaluate the loan you have in light of your needs and goals and make recommendations to you. I talk to many more people who do not need a new mortgage than I do to people that do need a new mortgage now. It is part of my job as a professional loan officer. If you have questions or about your mortgage please don’t hesitate to give me a call or send me an e-mail.

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Congress Agrees on Economic Stimulus Plan – Sends to President Bush for signature.

Last month the US House of representatives quickly came to an agreement on the size and scope of the economic stimulus package with the White House and approved the measure by an overwhelming vote of 385-35. The immediately called upon the US Senate, along with the white House, to adopt the House bill without changes.

However, the Senate Finance Committee, led by Democrat Max Baucus, D-MT, added over $40 Billion to the bill before sending it to the Senate for debate and vote. The new version of the bill, supported by both Barack Obama, D-IL, and Hillary Clinton, D-NY, would have added huge delays to the passage of the stimulus package as the House and Senate would need to agree on changes so that the bills matched. The republicans filibustered in the Senate that basically killed the bill by not letting it go to a vote.

The Senate then quickly acted to approve, by a vote of 81-16 (Obama and Clinton did not vote due to campaigning), a bill sponsored by Senator Mitch McConnell, R-KY, which was essentially the same as the House version except for the addition of some added benefits for Senior Citizens and Disabled Veterans. The house approved this bill hours later so it could be quickly sent to the President for his signature.

How much will I get?

Basically, if you make less than $75,000 ($150,000 for a married couple) you will get a check in May or June of this year. Single taxpayers will get $600 and a married couple will get $1,200. Plus, you will receive $300 per child (eligibility is the same as for a child that qualifies for the child tax credit on your tax returns) For those who make at least $3,000, but not enough to pay taxes, will receive a $300 rebate for individuals and $600 for married couples. This bill also covers up to 20 Million senior citizens living solely on Social Security and 250,000 disabled veterans.

What do I have to do to get this money?

The rebates will be based upon tax returns for 2007. So, as long as you file your tax return, you will automatically receive your rebate. You need to do nothing else. For those taxpayers who file for an extension on their tax returns, or file their tax returns late, their rebate checks will be delayed accordingly. Those who do not file a tax return will not receive their rebate checks.

Will this help the economy grow?

This is the big question. Many people feel that most of this money will go to savings or paying down debts. If this is the case, it will have a limited effect on economic growth. When we pay down debt with this money, we are paying for purchases that were made in the past. The purchases had an impact on the economy when they were made.

In my discussion with friend, family, and customers, I think most of them will spend at least some of the money they receive. Many people I have spoken with are looking to make home improvements or take a more expensive family vacation this summer with at least some of the money. A few of them are looking to use the money as a down payment on a new car. The more that is spent of this money the more it will help the economy.

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Are mortgage rates going down? Or up?

The Fed cut rates by ½% today, and ¾% last week. So, why are mortgage rates going up?

As I have said in numerous post before, the rates that the Fed controls directly (the Federal Funds Rate and the Discount Rate) have very little to do with the mortgage rates. One is a long-term rate (mortgages) and the others are short-term rates (Fed Funds and Discount).

Last week I could get 5.375% and now it is almost 6 %. That doesn’t seem logical.

Here is what happened. A week ago Monday was Martin Luther King, Jr. Day and the markets in the United States were closed, while the other markets of the world were open and trading. While we were closed and could not make any trades, the other major stock indices across Europe and Asia were taking a bath. All we could do in the US was watch and wait until we could dump our positions on Tuesday.

Then, before the opening bell on Tuesday, the Dow Futures were down almost 500 points and the Fed stepped in and made a surprise cut to the Fed Funds and Discount Rate by an unprecedented ¾%. When the market opened, the Dow was down over 400 points and the yield on the 10 year bond was down to about 3.3% (The mortgage rates are not tied to the 10 year bond but they tend to trend in the same direction).

So, mortgage rates tumbled to 5.375% for a conventional borrower with credit scores above 680 and/or LTV less than 70% (See my post "How much will my credit score cost me on my next mortgage?" for more information on this).

I called everyone I could about the rates, and many people happily locked in the lowest rate they could have gotten in about 3 - 4 years. Some people, however, already knew the Fed was going to meet this week and most likely lower rates again. They were going to hold out for even lower rates. Then, as often happens when the Fed cuts rates, investors got a good feeling about the future of the economy and, therefore, got a good feeling about the future of the stock market and began to purchase stocks. When this happens, money goes out of bonds lowering the cost of bonds and increasing the yield (rate) on bonds. By the end of the day, the 5.375% was but a distant memory.

The stock market continued to add points over the next week and the yield on the 10 year bond continued to rise as well as - you guessed it - mortgage rates.

But, with the fed lowering rates another ½% today, surely rates had to come down.

This week, in addition to the Fed meetings, there was a slew of economic data for the markets to consume. All of it pointed to the fact that maybe the economy isn’t as bad off as previously suspected. Durable goods orders are better than expected. ADP payroll figures are better than expected. GDP was horrible, but this is from December 2007, and the markets like to look to the future.

When the Fed cut rates again today, the stock market went up, as did bond yields and mortgage rates. The best thing that could have happened for mortgage rates would have been if the Fed didn’t cut rates at all, or if they had only cut by ¼ % (as some had suspected after the economic news from the week). The stock market would have sold off and money would have flowed back into bonds, increasing the price of the bonds and, thus, lowering the rates.

The bright spot for rates as I am writing this article is that the major stock indices all ended lower today, and that selling has continued into the Asia markets. If the selling continues back to the US, we may see rates ease with the falling stock market.

So, how can we ever know when to lock at the lowest possible rates?

If I had the answer to that question I would be retired on a South Pacific island, wearing a funny shirt, and listening to ukulele music instead of writing this blog article at 11:30 PM on a Wednesday night. :)

The answer I give to everyone is to make the decision when it is right for you. If 5.375% was good enough to refinance, take it and refinance. If rates continue to fall, you can refinance again, usually at reduced costs, and take advantage of the lower rates. That is what several of my customers did during the past refinance boom. Some of my customers actually refinanced 3 and 4 times in a year and saved money every time.

Unfortunately, the last refinance boom trained people to be greedy.

We have all read the articles about the greedy mortgage industry, greedy Wall Street banks, greedy investors, etc. but we don’t read about the greedy consumer. Before the past refinance boom, a customer would call and ask for the current rates. We would discuss the costs of the refinance and the new payment, and see if it was worthwhile to refinance. Then, we would lock the rate and close the loan. Now, everyone is looking to get the best possible rate and waiting themselves OUT of an opportunity to refinance.

There is one last thing I need to share with you, much to the chagrin of one of my best and oldest friends. At the end of the refinance boom he was finally ready to refinance. (Never mind that his rate was over 6% and he could have refinanced as low as about 5.0% during the refinance boom!) As rates began to rise, he was sure they would go back down. Even as the Fed began tightening (raising rates) he thought he would still have a chance to refinance. Well, he never got that chance. So, last week when the rates were at 5.375% do you think he locked his rate? You guessed it, he did not.

The moral of the story?
Next time you have the opportunity to refinance and save money, take it.

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Fed cuts key interest rates by 0.75%

In response to an economy that is heading for a recession, the Federal Reserve Board (Fed) chose to cut the Discount and Federal Funds Rate by 0.75% this morning before the market opened. It was a surprise move due to the fact that yesterday, while the U.S. markets were closed for Martin Luther King, Jr. Day, most other major stock markets across the world plunged at the prospect of a weaker US economy.

Does this mean that mortgage rates fell by 0.75%?

No. These rates are overnight rates that don't directly affect the mortgage interest rates. The Federal Funds Rate is the rate at which banks lend money to each other. The Discount Rate is the rate charged to banks that borrow money from the Central Bank. These rates are changed by the Fed in order to control the money supply and, thereby, influence the economy.

They are important, though, because they signal the direction of overall interest rates in the economy. Mortgage interest rates are determined by the rates offered on mortgage-backed securities (MBS) which are similar to bonds. The MBS’s generally move in the same direction as the ten-year bonds over the long run. So, when the Fed acts to lower rates, the overall trend for all interest rates is lower.

Before today’s action by the Fed, the markets were already anticipating a cut in rates of 0.5% and rates had already come down. Mortgage interest rates did head a little lower today and are approaching the all-time lows set during the refinance boom a few years ago.

Should I refinance now, or wait for rates to get even lower?

This is always the $64,000 question. If you can save money now, I always recommend doing it. If rates continue to fall, you can always refinance again.

When the Fed cuts rates, it is good for business. When business is good, people buy stocks hoping that the price will go up. When people buy stock, and the stock market goes up, money flows out of bonds and rates go up. In fact, many times when the Fed cuts rates, interest rates actually increase in the short term.

Today, the Dow Jones Industrial Average (Dow) opened almost 500 points lower. Because of the surprise rate cut by the Fed, the market rebounded and finished down about 128 points.

What should I do?

Contact me today to see how much you can save on your refinance, and to make sure a refinance makes sense for you. As I discussed in a previous article, “How much will my credit score cost me on my next mortgage?”, rates are determined by your credit score and LTV, as well as the market.

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FHA Mortgages to Become More Popular

FHA Mortgages are sometimes referred to as the “Original Sub-Prime Mortgage.” Before there was a sub-prime mortgage market, those with low down payments, shaky credit histories, etc. had to go with the FHA mortgage to purchase a home. In the 1980's and 1990’s, FHA loans accounted for about 25% - 40% of all mortgages originated in the United States. According to Wikipedia, that fell to less than 2% in 2006.

With the increase in the number of "No Money Down Loans" and loans for those with poor credit, FHA fell out of favor. It was much easier to get a sub-prime loan than it was to get an FHA loan. Unfortunately, it was usually a less-affordable option for the homeowner in the long-term.

Now, with the sub-prime mortgage market all but non-existent, and the credit standards much tighter for those programs that remain, FHA will once again become an important program for many homeowners.

AS I discussed in my blog article, “This is not Your Father’s FHA” from April 2007, FHA has already made a lot of changes to make them more user-friendly. FHA mortgages are much more like conventional mortgage than they have been in the past, and closing them can take about the same amount of time.

Recently, the US Senate passed some more changes that will make FHA mortgages a more viable option for more homeowners. Some of these changes are:

• Down Payment/Minimum Cash Investment has been reduced from 3% to 1.5%


• Mortgage limit (“floor”) will be raised from 48% to 65% of GSE (Fannie Mae/Freddie Mac) limit ($271,050)


• Mortgage limit for “high cost” areas: $417,000, which equals the maximum mortgage amount for conventional mortgages


• Condominium processing: It will facilitate FHA acceptance of GSE approved projects and possibly other projects depending on how FHA implements the provision


• Reverse mortgages: Raise the maximum loan limit to $417,000 and allow reverse mortgages to be used for home purchases


• The Senate also included a measure that puts a one year moratorium on HUDs effort to introduce risk based pricing to the FHA program

The US House of Representatives also passed similar legislation months ago with some differences:

• No down payment required


• Maximum mortgage amount of $725,000

When Congress returns late this month, they will have to hammer out the differences before the bill goes to President Bush for approval. There is a lot of pressure on Congress to get these changes enacted so look for new legislation quickly.

With the upcoming changes added to the changes already made, FHA Mortgages are better than ever and will become increasingly popular. But, beware of lenders and loan officers who are not experienced with FHA loans. There are still enough differences in the ways FHA loans are originated and processed that can cause delays if you work with someone not experienced with FHA loans.

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President Bush Signs a 3 Year Extension to the Income Tax Deduction for Mortgage Insurance

On December 20, 2007 President Bush signed into law legislation that will allow homeowners with mortgage insurance (those with less than 20% down payment) to deduct the cost of their mortgage insurance from their taxes. This deduction is for private mortgage insurance (PMI) on a conventional mortgage or Mortgage Insurance Premiums (MIP) on FHA loans.

In late 2006, Congress passed a law that allowed the income tax deduction on 2007 tax returns for loans originated in 2007 only. This new legislation extends that deduction for loans originated from 2007 – 2010 and is part of the Mortgage Forgiveness Debt Relief Act of 2007 approved last month by both the US House of Representatives and the US Senate.

The tax break is for families with an adjusted gross income (AGI) of $100,000 or less. Families with AGI greater than $100,000 up to $109,000 are eligible for a partial deduction.

With the collapse of the sub-prime mortgage market and the reduction of the amount of exotic mortgages that allowed for no money down and no income verification, more people will be using the more secure conventional and FHA mortgages with the protection of mortgage insurance. This deduction will save many low- and moderate-income families money and allow them to better afford their homes.

How much will my credit score cost me on my next mortgage?

Due to the mortgage market mess we have been experiencing, Fannie Mae and Freddie Mac are drastically changing the way they do business. Many people think these changes will help protect the corporations and the future of the mortgage market.

Until now, a credit score of 620 was the theoretical limit for obtaining a conventional loan. If your scores were above 620 you would get a rate the same whether your score was 620 or 800, as long as you had at least a 5% down payment. I say the 620 is theoretical because a lot more is considered when applying for a mortgage (e.g. credit history, down payment, cash reserves in the bank, debt-to-income ratios, etc.). Many people with credit scores below 620 have been approved for conventional loans and some with credit scores above 620 were denied.

Starting with loans delivered March 1, 2008, Fannie Mae and Freddie Mac are adding fees for any loans with a loan-to-value (LTV) greater than 70% and a credit score less than 680.

Following are the Loan-Level Price Adjustments (LLPAs) for loans with LTVs of 70.01% and greater:



These LLPAs are for single-family, owner-occupied properties and are adjustments to the points required on a loan, and not to the interest rate. There are other adjustments for 2-unit properties as well as mortgages with subordinate financing (2nd mortgages) such as 80/10/10s.

Borrowers will have to decide to pay for the LLPAs as points or accept a higher interest rate in place of the additional points. For example, for a borrower with a credit score below 620 and LTV greater than 70% they can expect to pay about 1.00% higher in their interest rate.

If you are planning to purchase or refinance a home in the future, make sure you contact your loan officer well in advance so you can check your credit scores and make any improvements necessary to increase your credit score. Please view my blog posting Understanding Credit Scoring and Credit Repair from August 2006 to see how you can improve your credit score.

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How to do a short sale

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

How does it work?

The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.

The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:
• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
• Bank statements to verify the borrowers’ assets
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.

When the lender reviews all of this they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect this shortage. As a condition of the short sale the lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. This is something that an attorney with expertise in this area of real estate needs to be consulted.

Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount. Again, for the specifics on this please consult a tax professional.