The Treasury has finished it’s initiative to purchase $1.25 Trillion of Mortgage Back Securities in an effort to bring down mortgage rates for borrowers. As most of you know, this program began in December of 2008 and helped a tremendous number of homebuyers and homeowners in reducing their mortgage payments through purchases and refinances.. The following article explains a more technical side to this event and hopefully it helps fill in some of the blanks regarding this program. From my reading and investigation, there are currently no plans to restart or extend this program and we will need to watch closely what happens with mortgage rates. The California Homebuyer Tax credit will undoubtedly have a positive effect in our state, at least until all the committed funds are used up. Please remember that the State has issued a Dollar commitment as opposed to a time or date commitment.

(Bloomberg 4/1/10)

Yields on Fannie Mae and Freddie Mac mortgage securities jumped by the most relative to benchmark rates in five weeks as the Federal Reserve’s unprecedented buying of housing debt drew to a close today. Spreads on agency mortgage bonds will widen “a bit” and become more volatile after the end of the Fed’s daily purchases, though they probably won’t expand more than 0.2 percentage point, Curtis Arledge, chief investment officer of fixed income at New York-based BlackRock Inc., said today in an interview with Bloomberg Television. “It’s been one of the more telegraphed changes we’ve seen in a long time,” said Arledge, who oversees about $590 billion at the world’s largest money manager. “The marketplace has positioned itself for the Fed to be absent.” The Fed’s $1.25 trillion of purchases in the $5.4 trillion market of mortgage securities guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae had helped drive yield premiums to the lowest on record. The difference between yields on Fannie Mae current-coupon 30-year fixed-rate securities and 10-year Treasuries increased 0.05 percentage point today to about 0.65 percentage point as of 4 p.m. in New York, according to Bloomberg data. The spread reached 0.59 percentage point on March 10, the lowest since at least 1984, after the gap averaged 1.32 percentage point from 2000 through 2009. The yields, which guide rates on new home loans, today climbed 0.02 percentage point to 4.5 percent, matching the highest level since January. Buying Home Loans The U.S. central bank began buying home-loan bonds in January 2009 to restrain financing costs amid the worst housing slump since the 1930s. Home prices in 20 metropolitan areas tumbled 33 percent from July 2006 through April 2009, then rose for five months before declining by a lesser amount over the next four, according to an S&P/Case-Shiller index. “The program was a major success and kept home prices from really collapsing,” Scott Simon, head of mortgage-backed securities at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund, said today in an e-mail. “They did make MBS become expensive (they probably didn’t need to buy the last $400 billion), but money managers and others are now underweighted and will repurchase if MBS underperform,” he said. About 53 percent of more than 150 mortgage investors surveyed by JPMorgan Chase & Co. in the middle of this month held less of the debt than found in benchmark bond indexes. Asian Investors “When I was in Asia a few months ago, visiting maybe 30 clients, they were saying, when is the Fed going to stop buying mortgage-backed securities, because we’d like to,” Brian Lancaster, the head of asset- and mortgage-backed securities strategy at Stamford, Connecticut-based RBS Securities Inc., said today in a Bloomberg Television interview. The Fed today is also scheduled to stop buying the corporate debt of Fannie Mae, Freddie Mac and the Federal Home Loan Bank system, after $172 billion of purchases, according to data compiled by Bloomberg. The central bank ceased obtaining Treasuries in October, after acquiring $300 billion. On a so-called option-adjusted basis, which takes into account the possibility of prepayment, spreads for the securities backed by Washington-based Fannie Mae against interest-rate swaps had already widened, according to Bloomberg data. Option-adjusted spreads rose today by 0.04 percentage point to 0.14 percentage point, the highest since September, after climbing from negative 0.22 percentage point on Dec. 21. Mortgage-Bond Returns Agency mortgage securities returned 1.67 percent this quarter, the most since the third quarter, according to Bank of America Merrill Lynch’s Mortgage Master Index. Through yesterday, the debt returned 0.59 percentage point this month more than Treasuries that have maturities similar to the securities’ projected average lives, the most since October, according to Barclays Capital index data. The average rate on a typical 30-year fixed-rate mortgage was 4.99 percent in the week ended March 25, according to McLean, Virginia-based Freddie Mac. That was up from a record low of 4.71 percent in the week ended Dec. 3, and down from a high last year of 5.59 percent in June.

Have a prosperous day and a wonderful April!

Chet Gohd

Branch Owner and Senior Loan Consultant

In the past 2 days, mortgage rates have climbed the equivalent of .25% and it would appear that the end of Treasury’s program of purchasing $1.25 Trillion of Mortgage Back Securities is setting the stage for a move higher in mortgage interest rates. After all, I’ve been writing about this program since December of 2008 and at every chance, letting everyone know that it is set to end on March 31^st…I know that most, if not all of you already know this, but the end of this event is upon us. It is essential that we stay informed as we hit the new “Treasury-lite” territory, without the aid of their extensive program. The truth is that no one knows exactly what rates will do, but these past 2 days appear to be an indication and it may be a good idea for you to encourage your clients to revisit their lender’s to review their preapproval status and check payments at higher rates. I’ve been preapproving clients more conservatively this past month in preparation for the likelihood of higher rates as I’m not a fan of big surprises, especially when it comes to a buyer trying to buy a home!

As usual, I’ll do what I can to keep you informed as the news is available and update rates for you as well.

Please don’t hesitate to write or call, at any time..As you know, I will respond and though my response may come at 11pm or on a Saturday at 8am, rest assured that it will come!

Always here to help, have a prosperous day!

The FHA reported in January that they had suffered greater losses than previously expected and have made 2 primary changes;

a) The first is a change in acceptable condominium properties where in order to get financing; the entire project must be approved buy HUD. Previously, a condo unit could be financed by itself as long as it met certain guidelines which were relatively easy to meet. The very low number of projects currently approved by HUD indicates that they will be inundated with requests by projects to become approved. Currently, this process takes about 2 months and it’s expected to widen to 4-6 months very soon.

b) FHA increased its upfront mortgage insurance premium is scheduled to increase to 2.25% on all new loans after April 5^{th, 2010. It’s currently 1.75%}

2) Condo’s

With the changes in the FHA for condo’s and the stringent guidelines for mortgage insurance as needed for a borrower with less than 20% down, condo’s are bearing the brunt of limited funding sources. It would seem that going forward, the condo market will suffer more than the single family market and will be slower to correct as well. For conventional financing, this is how it works with 20% down; The project needs to qualify – no litigation, no single entity owns more than 10% of the units, no more than 15% of unit owners are delinquent on HOA dues, at least 51% owner occupied if it’s an investment purchase transaction in established project, it needs to be at least 70% owner occupied.

3) Mortgage Back Securities purchase program

The Treasury’s program adopted in 12/08 to purchase $1.25 Trillion of Mortgage Back Securities in an effort to lower mortgage rates will end in 5 weeks at the end of March. If we look at the affect of this program, we saw borrowers being able to purchase and refinance mortgages at the lowest rates in decades. Once this program ends, rates are forecasted to rise near and longer term. We don’t know what, if any programs will be adopted to cushion the rise but if we look back to the day before the program began, 30 year fixed rate loans were at 6%.today, the same loan sits at 5%. The net affect of returning to the previous rate environment will have an impact, intensified by the tightening of the qualifying ratios now imposed by Fannie Mae and Freddie Mac.

4) Homebuyer’s Tax Credit

The two Homebuyers Tax Credit programs are slated to end for purchases which go into contract by April 30th and close by June 30th. Based upon the number of clients who are preapproved and making offers today, this program ending will have an affect on the motivation for many homebuyers’ willingness to pay up to purchase their new home.

5) Unemployment

Unemployment is thought to be the single driving force in keeping a wet blanket on our current economic recovery. The government has thrown a tremendous amount of money at our recovery but it has yet to result in creating more jobs than are being lost.

6) Foreclosures/defaults

Foreclosures and defaults remain a challenge and have yet to make any significant move downward. This will continue to pose a threat to an overall recovery and there is a huge quantity of shadow inventory (foreclosed properties, owned by the bank and not yet on the market) which has yet to be offered to the buying public and will likely swell inventory at some point.

So, in a nutshell, there are confluences of energies which will inevitably play a major role in how the Real Estate and Mortgage market rolls through the balance of this year. It is my hope that our governmental leaders are well informed and realize the significance of what we are facing so as not to allow our slowly building recovery to stall and lapse into a double dip housing recession.

My suggestion is that you stay well read, be choosy about who you take council from and always feel free to call on me for opinions and direction. There are many in the lending world that work part time, don’t stay up on the constantly changing guidelines, or do not explain the appraisal conundrum properly and we are seeing transactions fall apart with other lenders on a weekly basis, resulting in me getting a call from a frantic buyer asking if I can help.

Have a great week!

In other news, we read in economic reports this week  about an increase in the wave of foreclosures and delinquencies. It was reported that for the first time, prime loan delinquencies are outpacing those of Sub Prime loans. It was also reported that the FHA is coming under scrutiny for going below its mandatory reserves and may need to make some changes. There was an article in this morning’s New York Times which doesnt help it’s plight. In my opinion, the FHA is the right loan at the right time and I’m not the only persone of that opinion. I will offer substantive data in my next blog as to why this is so.

Have a great weekend!

A) Ask the Loan Officer to rebut the appraisal by providing a list of similar properties which have sold in the previous 3 months. This information is given back to the appraiser for review and then to decide whether it warrants a change in their opinion of value.

B) Change the loan by adjusting the down payment in relation to the new value. This will likely mean digging deeper in the buyer’s pockets to close the transaction. For example, if the property is being purchased for $400k and is appraised at $380k, the loan is based upon the $380k value and it’s likely that the buyer will need to come in with an extra $20k.

C) Exercise the financing contingency and terminate the contract.

D) Change lenders and have a new appraisal done.

Regarding D ( changing lenders), there is no guarantee this will magically change the outcome but here is an example of when it did. I was referred a first time home buyer who wanted to be pre approved to buy her 1st home. I met with the buyer in person(which I recommend)and fully explained the process, products and historical background of mortgage financing as I do in this meeting. We discussed, the differences between the FHA and conventional loans with PMI(private mortgage insurance) as she had a down payment of less than 20%. When she found a property to offer on, the seller’s agent called and asked questions about the buyer’s qualifications and inquired about our company’s appraisal process. After this, the seller liked the buyer’s offer and sent back a counter offer with a condition that the buyer use the selling agent’s preferred loan officer relationship. In the seller’s agent’s mind, this would effectively control the appraisal process and secure a problem free appraisal and transaction. Well, not so fast here…the buyer’s agent was on top of this like a good realtor would be and felt it was a good idea to proceed with me as well in light of this peculiar situation. After all, the buyer was comfortable and confident with my work and credibility and that meant much to me. The seller’s agents loan officer proceeds and orders their appraisal and I do the same. The other broker’s appraisal comes in low and its an FHA appraisal which means that this value will be what is used if there is an FHA loan done whomever the mortgage company will be. I’m not sure where the appraiser came from or how well he knew the nuances of the local market but their value came in well below the purchase price. My appraisal is then done by a local, skilled and accredited appraiser who has met the stringent requirements of our AMC(appraisal management company). Our appraisal comes in okay and we proceeded with structuring the financing to our buyer’s satisfaction and the transaction closed successfully. It was a very challenging loan to close due to time constraints and the appraisal conundrum, but the buyer ‘s agent did a wonderful job collaborating with me and keeping our communication going at all times, leading to the positive solution.

The financing process is complicated these days and don’t let anyone tell you differently. I estimate that the average transaction takes 2.5 times the effort than it took 2 years ago, yet the fees and margins have not changed. Maybe this is why many mortgage professionals have abandoned the industry in search of an easier and more profitable career. 

The moral to this story is this: the appraisal process today can make or break a deal, be it purchase or refinance. Be very careful when you begin either process and try to get a handle on where the appraiser is coming from( city, state, planet) as this will have an impact on your result. Our company appraisers come from a solid group of local talent and as we know, the closer to the local market, the more likely they to know the nuances and deliver a solid appraisal value.

Now, the FTHB credit, currently scheduled to end on November 30th. There was gaining support these past 2 weeks for an extension, then comes a report of widespread abuses leading to the IRS review of these misuses, including one claimant who is 4 years old..Now folks, if we are to hope for continued governmental assistance for our real estate marketplace, the last thing we need to do is give them more reasons NOT to do it…My new fear is not that our leaders will abandon these programs for the homeowner and home buyer, it’s that they will create a regulatory body to establish regulations that substantially hinder our ability to make good things happen for our clients. 

I’ll keep you posted..As for rates this week, lets see how much appetite there is for another boatload of Treasury debt auctions in the coming days. I have no doubt that rates will rise, it’s when that I’m unsure of..

We saw some encouraging news this morning with the Fed’s Beige Book report, its somewhat of a glass half-full scenario with a hole in the bottom of the glass ..First the CNN report, then the Chet update;

The economy has shown signs of stabilizing or modestly improving in recent weeks, according to the latest Federal Reserve snapshot of regional economic conditions. “Reports of gains in economic activity generally outnumber declines,” the Fed said Wednesday in the latest edition of its Beige Book. “But virtually every reference to improvement was qualified as either small or scattered.” The Beige Book, published 8 times a year, is a summary of economic conditions in the central bank’s 12 districts. It precedes, by about two weeks, the central bank’s scheduled policy meeting at which interest rate movement is discussed. The housing market and manufacturing activity, which have been improving since the summer, were two bright spots in the October report. However, commercial real estate remains a concern, with all 12 districts reporting weak or deteriorating conditions in that sector. (end of story).  For example, the section at Home Depot where they sell “For Lease” signs is sold out and on back order!

It’s often challenging to see much improvement on a day-to-day basis. It’s easier and usually more reliable to use the data coming from various metropolitan areas throughout the country where the measurements can be weighed and scaled. We are in a complicated situation here..The Fed realizes that they see improvements but they are very small and thus we are vulnerable to falling backward( as opposed to falling forward). For this reason, they are not looking to pull the stimulus infusions back just yet. It’s my opinion that part of the government has their fingers crossed that we eek out of this depression,(recession by definition but depression in reality) and begin the march of forward progress. When I only say part, I mean that there is also a part who would just as soon see our recovery falter so that there can be a new blame placed on the current programs..too costly, not enough job growth, etc…Those of you who know me, know I dont get too involved in politox(my name for political toxicity) which is why I tend to talk more about what is going on in the mortgage finance and Real Estate world than in Washington, except for when the two collide, like now. We have seen improvements in the local Real Estate market since the beginning of the year, from entry level up to about $900k. This in large part due to the government stimulus( low mortgage rates, first time buyer programs, all explained at length in earlier posts) and an increasing appetite for a good deal! Afterall, many real estate markets are seeing values similar to 2003. 

We are now facing a very crucial time. The programs which helped bring buyers to our markets are set to expire soon and unless extended, we’ll likely see setbacks in the market’s progress.  We need our leaders to do whats necessary for a  continued recovery in the Real Estate market as it will lead to less shortfall for Property Tax revenue and hopefully less shortfall for our local school budgets and a slowdown in unemployment. Our school systems are our community lifeblood. It sure would be great to see the pendulum begin to swing back the other way towards better school funding and lead to higher student enrichment..Afterall, these kids are our future. Teach them well and let them lead they way. I think those words are from the  70′s movie titled ”The Greatest” and always resonated with me..

Have a great day and I will be continuing the discussion about the dilemma with the current Appraisal process in the coming days so please check back.

Thanks for staying with me on this, now the interesting part where DESIRE MEETS REALITY…a client gets excited about a home and wants to make an offer. There are multiple offers on the property and this buyer overbids the $450k listing, up to $525k..They are excited and the seller is pleased..onward they march with the loan application and the bank sends in the order for the appraisal. The appraiser comes from an office , possibly in a different county where the properties are more homogenous and does the appraisal. Then the shocker! The bank comes back to the realtor and excited buyer with the news that the appraisal has come in at $475k which is $50k below the agreed upon price.. What’s the buyer to do now?   Stay tuned..

Deadline is nearing for government stimulus programs help in home buying

BY CHET GOHD

RPM MORTGAGE

You may want to pay close attention to the

fact that as of today, we have four main government

programs aiding homeowners and

home buyers and the deadline for participating

is rapidly approaching:

1) First time home buyer $8,000 tax credit;

2) $1.25 trillion purchase of mortgage backed

securities; 3) High balance loan limits to

$729,750 and 4) Modern FHA-insured loans.

First Time Buyer $8,000 Tax

Credit

The First-Time Homebuyer Tax Credit offers

an $8,000 Tax Credit ( dollar for dollar)

for first time home buyers who close escrow

prior to Dec. 1, 2009, which is less than 2.5

months away from today. Being that it takes

our office 25 days to close an escrow, this

leaves approximately six weeks to find a

property and have your offer accepted if

you intend to take advantage of this program.

This program has produced tremendous

results and doesn’t require the credit

to be paid back as with the 2008 program.

$1.25 Trillion Purchase of

Mortgage Backed Securities

The Federal Reserve’s initiative of purchasing

$1.25 trillion of mortgage backed securities

is the only reason we have enjoyed lower

mortgage rates this year. This initiative is approximately

75 percent complete and will end

on March 31, 2010. It was scheduled to end

this year, but government offi cials decided

to “ration” these purchases in an attempt to

keep the program going for a longer period

of time. With this change, you are likely to

experience a more gradual rise in mortgage

rates in the coming months, followed by an

even more signifi cant increase after March,

2010. For those of you who are dependant on

today’s low rates to qualify for your purchase,

OR you intend to keep your home for an extended

period of time, I strongly recommend

you look very closely at your options now before

they are no longer available, period.

High Balance Loan Limits to

$729,750

When the government passed the fi rst Stimulus

Bill in 2008, a program was instated allowing

for an increase in the loan amounts which Fannie

Mae and Freddie Mac (Government Sponsored

Agencies) could buy. These “conforming”

loans offer lower rates as they are readily bought

by these agencies. The stimulus allowed for an

increase in these loan limits from $417,000 to a

high of $729,750 in certain higher cost areas such

as the Bay Area. These limits expired at the end of

last year and then were re-introduced this year after

the 2009 Stimulus Bill was passed. These loan

limits are set to expire at the end of this year and

there is no certainty that they be extended again.

A loan above the conforming amount is called a

Jumbo loan which is less readily available, comes

with a much higher interest rate and requires a

larger down payment.

Modern FHA Insured Loans

The Federal Housing Administration (FHA)

was created in 1934 to help the U.S. recover from

the GreatDepression and became a part of Housing

and Urban Development (HUD) in1965. Historically,

loan amounts offered were relatively low,

but the program was successful due to low down

payment requirements for fi rst time home buyers.

Today, the loan amounts have been increased to

the same as conforming loans, currently maxing

out at $729,750. FHA loans are partially insured

by the government and offer less of an initial cost.

FHA loans today make up 25 percent of the purchase

loans being done today, up from 3 percent

five years ago.

There are still conventional programs for

those with excellent credit profi les, allowing the

borrower to put down as little as 10 percent, but

there are more restrictions due to the need for

Private Mortgage Insurance (PMI) in these scenarios.

The FHA has become the “right loan” at

the “right time”.

As you see, our government has introduced a

number of signifi cant programs in an attempt to

help home buyers buy homes and refi nance their

existing loans to much lower rates, thus making

home ownership more affordable. Our industry

has no idea of what additional stimulus, if any,

will be introduced to our marketplace after these

government programs disappear; nor should we

make our current decisions by banking on the

unknown that lies in the future.

Chet Gohd is the owner and branch manager

of RPM Mortgage, 1385 Shattuck Ave., Berkeley.

Contact him at 510-647-5333, or visit www.chetloans.

com or follow his blog at chetsmortgageblog@

wordpress.com.

J4 201 SUNDAY, OCTOBER 4, 2009

As an FYI, I’ve decided to become part of new information age and have started a Blog where I will contribute information as often as I can. Feel free to drop me a comment or 2 about items you think which would be beneficial to you as well as homebuyer’s and homeowners. You can find it at

chetsmortgageblog.wordpress.com

Now, the Fed statement:

From CNN—

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased.

Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.

The Committee will maintain the target range for the federal funds rate at 0% to 1/4% and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.

The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Current trends with FHA Financing

1. Chances are good that you’ll come across one. During the heyday of no-money-down lending, you were unlikely to have a buyer using a government-insured Federal Housing Administration (FHA) loan, which lets borrowers purchase a home with a down payment of as little as 3.5%. Now FHAs are the only game in town for anyone who can’t put down the minimum 10% many banks require for conventional financing and the stricter Private Mortgage Insurance.

About a third of buyers have 10% or less saved for a down payment, according to a recent Zillow.com survey. No wonder FHA loans have skyrocketed from 3% to 25% of the market. While you may not need to take out an FHA mortgage to purchase your next home, there’s a good chance you’ll be selling to someone who does.

2. Borrowers can qualify with any income. Historically FHA loans have gone mostly to low-income borrowers. But, in fact, there’s no cap on what someone can earn. “The overriding factor that we look at is the ability to make payments,” says Lemar Wooley of the Department of Housing and Urban Development.

Borrowing limits may be higher than you think too: Currently, the max is $729,750 in high cost areas like here in the Bay Area and New York and down to $271,050 in areas where real estate is inexpensive.

3. Expect a tough appraisal. The home will need a clean bill of health from a government-approved appraiser, and any issues pertaining to the health and safety of the property will need to be remedied before a buyer can close on the loan. A few years ago the FHA eased up on repair requirements for minor problems like missing handrails or cracked windows. But it still won’t budge on leaky roofs or mold damage.

If you’re selling, know that an FHA appraisal stays on record for six months, even if the deal goes kaput or the buyer switches lenders. “Get one low FHA appraisal and you’re stuck with it,” says Dallas realtor Bruce Lynn.

4. These loans are a little pricier than they seem. Interest rates on FHA mortgages are comparable to those on conventional loans. But there are fees on the FHA loan which increase the cost. There’s a 1.75% upfront charge which can be added onto the base loan amount as well as a monthly Mortgage Insurance  premium for five years and until the principal balance hits 78% of the sales price or the home’s appraised value.

As in any Real Estate Transaction, these fees and costs are negotiable and we’ve seen sellers participate in the costs to aid the buyer in obtaining good financing. According to FHA rules, sellers can pay closing costs up to 6% of the home price.

5. They’ve gotten easier to obtain. FHAs once had a well-deserved rep for onerous paperwork and a longer, more difficult closing than conventional loans. But thanks to a new automatic underwriting system and our RPM Berkeley processing system, FHA mortgages take us only a few days longer than conventional loans to close at most.

Keep in mind that FHA loans still require written documentation of income, including pay stubs and tax returns. But stricter underwriting across the board means that you will probably need such paperwork no matter what type of loan you get.  

Taken in part  from Money Magazine –