Are low mortgage rates hurting the purchase market?

  For the last few months, I have seen lots of chatter on this subject.  Twitter comments, articles in major newspapers, etc.  It seems that more and more people are asking this question-are mortgage low mortgage rates hurting the housing market?  My answer has been and will continue to be absolutely not.  Here are some of the arguments that I have seen:

1.  By announcing low rates through 2013, you give buyers the ability to sit and wait until the market hits bottom. 

   On the surface, its sounds logical and plausible but let me explain why I think this holds no water.  Put yourself in the shoes of a potential buyer these days.  Here is what they are worried about:

      a.  Losing their job to cut backs due the lousy economy.
      b.  Not getting their bonus this year.  Something they always count on.
      c.  Rising credit card debt.  The bills never stop and they don't get smaller.
      d.  College education bills.
      e.  If I lose my job, what are the prospects that I will get another quickly, or at all?

  I ask you, will a few hundred dollars in lower mortgage payments or the prospect that real estate values may drop within the next 2 years be a big enough influence to make people buy something?  Not a chance.  People are frozen by fear because the economy is in the toilet.

2.  Everyone is refinancing to a lower rate and in order to recover closing costs fees, the borrowers feel the need to stay where they are for several years.

   I have never once heard a borrower say something like that to me.  If they see a new house that they want, a few thousand in closing costs will never stand in their way.
  
   I think you would be hard pressed to find someone who doesn't think that the Fed lowered rates to spur the purchase market.  That is, other than myself.  The Fed knows that consumer sentiment is in the tank and that people are scared to buy.  They did it because they wanted to put as much money in people's pockets as they could.  Short of a tax cut, refinancing a home loan is the single greatest way to accomplish that.  Call it the "homeowner tax cut".  Any people that are still buying in this environment could gain from it as well but its intended target are existing homeowners.

What changes mortgage rates?

  It's truly amazing how volatile the mortgage market can be.  I always tell my clients that rates are like the stock market.  They go up and down and can do so several times within a day.  It's like trying to hit a moving target.  There are many factors that change mortgage rates but  I want to stick to a timely topic-The stock market in relation to the EU crisis. 

  I will start by saying I am not an economist and don't claim to be one.  Nor do I play one on TV.  Besides, why would the lay person want an intricate explanation anyway? Here it goes:

   As a general rule, when the stock market does well, mortgage rates tend to go up and when the market does poorly, mortgage rates tend to drop.

    Why is that?  The bond market control mortgage rates.  When people feel good about investing in the stock market, there is a tendency to move away from the more conservative bond market. More demand for stocks lowers the demand for bonds.  When the demand for bonds goes down, their prices go down and their yield goes up.  Higher bond yields means higher mortgage rates.  The EU crisis is a perfect example of this.  Yesterday was a good day for mortgage rates because there were rumors that the talks to put an aid package together was falling apart.  If they did, people knew that the market would tank and thus be afraid to invest in the market and thats exactly what happened. There was a "flight to safety" in bonds and mortgage rates dipped.

  Once the aid package was announced, a sense of balance and relief was felt by the markets and people felt more secure about investing in the market.  Therefore, the demand for bonds dissipated and rates when up today.

  Sentiment drives market changes.  How people feel about what may happen can and will move markets and of course that includes the mortgage market.

What's it like trying to process and close mortgage loans these days.

  To the best of my ability, I am going to try and explain what its like trying to get a mortgage loan closed these days.  My clients never hear this side of the story as I do a good job of shielding them from the day to day nonsense of dealing with banks in 2011.  Frankly, if I told my clients everything I deal with, they would be suicidal and probably not believe half of what I tell them anyway.

  Just getting the loan to the bank is much more difficult and paper intensive than it used to be.  It used to take me about an hour to put a file together.  It takes 3 times that now. The lenders have added (and continue to add) new disclosure forms all the time. Mostly, they are due to new legislation or amendments to current legislation.  When we receive them, we most often are not sure exactly how to fill them out and we get very little direction from the banks on how to do it.  Added to that, we can speak to 3 different people at the bank and get 3 different answers.  Its crazy but a most of the time, the banks are getting no direction from the regulators because the laws are all subject to interpretation.  Its the blind leading the blind. The politicians pass the laws and its like the wild west after that.  Good examples of this would be the Good Faith Estimate and the Mortgage Broker Disclosure Form.  The updated GFE is more than a year old and I still have a hard time explaining to clients how it is structured.  Here are some more examples o wha i deal with getting a file to the bank:

1. Most of the dates on the paperwork must match. 

2. If some of the documents are not filled out properly, the bank may cancel the loan and the interest rate lock.

3.  If you submit bank statements that comprise a hundred pages and the last page of the statement is missing, some banks will suspend the file pending receiving that last page.

    Getting the commitment letter can take 2-3 weeks.  In a normal environment, it would be 2 days.  The appraisal process is a disgrace and that's not an understatement.  It used to be that I could order an appraisal through an independent appraiser who I knew and trusted and that appraisal would be good at any lender.  Now, the bank orders the appraisal and I am not even allowed to speak to the appraiser.  In some cases, I am 3 people removed from the appraiser.  What should take a few days, is taking weeks.

   We are seeing more bizarre conditions now than ever before.  I had 1 bank tell me that he borrower needed to change the address on their drivers license because it didn't match their home address and that they needed to explain why their bank statements were coming to their primary residence.  How do you explain this type of stuff to a client?  I have seen banks sign off on appraisals and then weeks later ask for additional comparables right before closing.  Moving files into the closing department is like pulling teeth.

   The positive in all this is that my clients know almost none of this as I do a good job shielding them from the nonsense.  Most of the time, all they know is that it takes a little longer to close a loan and there are more documents to sign than before.  Their experience is very different from mine but that's the way I want it.

Another refinance boom?

   Boy, its been a while since my last post.  I have been saying for weeks that I need to write something, anything new.  But, I have been so busy with new applications, that I have not had a chance.  I guess its good news, but it actually has some downside to it as well.  You would think that not having a minute to spare in the last 45 days would mean I have a hundred loans.  Well, the answer is no.  It is taking 2-3 times longer now to prepare a file for the bank.  Additional  disclosures, Good Faith Estimates that need to be perfect, making sure the file will get approved at the bank.  Loan officers are working much harder now and for less money (but that is a discussion for a different day).  It just feels like I have done the work of a hundred loans.

   Rates fell below 4% for a 30 year fixed conforming and the rates for ARMs (even the jumbo loan) are off the charts good.  In some instances, the rates are below 3%.  I recently closed a loan of $900,000 on a 5 year ARM at 2.5%.  After the tax deduction, its like free money!!!

   There is also a very good government program out there called HARP for those that are underwater or close to being underwater.  No its not a perfect program but I think many people don't realize that they can benefit from it.

   With Operation Twist in full swing, rates will stay low for a while.  The key is to make sure you are prepared.  What does that mean?  Make sure that you work with your loan officer to have a package ready to go to the bank at a moments notice.  Rates are very volatile and can go up and down quickly.  If you have the package ready to go, you can lock the rate and get it off to the bank quite quickly.  If you lock the rate before having a package ready for the bank, trust me, you will not close within the lock period.  Banks are overwhelmed and understaffed.  A lethal combination.

How to benefit from lower mortgage rates

  Wow.  The last 2 weeks have been crazy!  A tremendous number of inquiries and lots of people taking advantage of the lower rates.  I have seen banks below 4% for the first time in my 10 years in the business and from all indications, these are the lowest rates in history.

  Anyone who has a mortgage rate of 5%, regardless of the type of loan it is, has the ability to save money on a monthly basis.  But its crucial to make try and check every aspect of your deal before submitting your file to the bank.  Here are some things that you must think about prior to submission:

1.  Type of property- If its a single family home, then its simple.  If its a co op or a condo, make sure the building is checked.  Just because the bank did a loan in the building 2 months ago, does not mean the building is still approved.

2.  Income, assets and credit-  Everyone should know this one.  Make sure you meet the credit and debt ratio requirements of the bank.

3.  Home value- With values continuing to fall, you must be careful and try to assess the value as best you can prior to the appraisal.  Federal law no longer allows the appraisal to be ordered before you submit your file to the bank.  A law that I believe has hurt the real estate market.  Too many people have spent money on an appraisal only to find out the value isnt there and the refinance dies.

  If you are thinking about refinancing, now is the time to do it because short of a tax cut, there is no better way to put money in your pocket.  Just make sure you have done your homework with an experienced loan officer before moving forward.

Mortgage rates are down. Refinance activity up

   I must say that I am really starting to love twitter.  The instantaneous information is terrific but the downside is that its quite hard to make coherent statements in 140 letters.  Thank goodness for the blog.

  Unless you have been under a rock for the last 10 days, you know that the stock market has tanked.  You probably also know that mortgage rates have come down.  The typical rule of thumb is that when the stock market declines, there is a flight to safety to bonds and that causes mortgage rates to go down.  Talk about the definition of mixed emotions!  We are seeing 30 year fixed rates at about 4.125% for a conforming loan and 4.875% for a jumbo.  Adjustable rate mortgage are just at obscene numbers.  5 year ARMs in the low 3% range and in some cases, below 3%.  Even a 10 year ARM is at 4%.

  Several months ago, we actually saw the 30 year fixed below that at 4% and it was always my contention that if it ever hit 4%, there would be a massive refinance boom in which the whole world would take lower rates and put money in their pocket. Well, I was wrong on that one.  I will explain that in a bit.  Some thought the purchase market would take off and get those that were on the fence, off it.  I thought that to be total hogwash and on that one I turned out to be right.  My feeling was and is that people prioritize what's important.  Will I have my job in 3 months?  Will I get a bonus this year?  How will I pay for my kids college education?  A lower interest rate simply is not enough incentive to overtake the other questions and jump in and buy.

  Let's get back to the qyuestion as to why people didnt refinance when the rates hit 4%.  I think the answers may tell us why it might not happen again:

  1.  Much tougher underwriting guidelines knocked many out of the box.  Although the financial pedigree may be good, there is a line the banks will no longer cross and too many people were sitting on that line.

2.  Many people already had rates in the low to mid 5's because they either bought when rates were really good or they refinanced between 2002 and 2004 when the rates were just as good.

3.  Declining home values knocked so many people out of the box.  Think about it simply.  Many, many people bought their homes with 20% or less as a down payment.  Now, values are down 20% to 30% in some cases through no fault of their own.  So you start the refinance application and when the house is reappraised, you are hit with a lighting bolt.  The house you bought in 2006 for $600,000 with a mortgage of $480,000 is now valued at $500,000.  Your loan to value just went from 80% to 96%.  That's when you get a disturbing phone call from your loan officer telling you that the loan won't close.

4.  Condominium and co op building approval guidelines have gotten much tougher.  I can't tell you how many people I turned away because I couldnt even take them back to the same bank only months after the purchase.  The argument that they would use with me was sound-"I don't understand.  The bank did my loan and approved the building 6 months ago.  Why in the world would they say no now?"  It wasnt even a question of being qualified because they all were.  It was that the building no longer met the guidelines.

  So where will rates go?  Will they go below 4%?  Don't know but I am getting a lot of inquiries.  Here is the best advice I can give when rates start to plummet:

• Don't have paralysis by analysis.  If you like the rate you are quoted, take it.  Overanalyzing will do you no good.
• Don't get greedy.  You may wait because you think rates will continue to fall but you are taking a risk.
• Be prepared to strike at a moments notice.  If you are interested in refinancing, contact your loan officer and ask them to prepare a package for you ahead of time.
• Getting loans to the bank and closed is much more laborious than it used to be.  Be prepared to be efficient but have patience once the loan is submitted.

How to make the mortgage process a pleasant one

  My father taught me a long time ago that you cannot do a job properly unless you use the right tool.  At the time, I pondered the statement and finally said to myself "no duh"!  It wasn't until I got older, went into the workforce, got married and had children that I realized this wasn't just a simple saying but rather one that could be applied to all aspects of life.  In my case, the mortgage business and for me, the right tool is infomation.  Who needs this information?  The borrower, the real estate agent and the attorney. 

Information that the borrower needs:

  1.  How much can I afford?
  2.  Do I have the proper down payment funds?
  3.  What are my closing costs?
  4.  Whom am I allowed to get a gift from?
  5.  Where are current rates?
  6.  Is a fixed rate or ARM product best for me?
  7.  What are the steps in the process?
  8.  What is my monthly payment?

Information the real estate agent needs:

  1.  Is my borrower qualified?
  2.  Is the co op or condo nuilding I want to show the potential buyer a viable one?
  3.  Do they have the post closing reserves to meet the requirements of the board?
  4.  Can the borrowers afford the house I want to show them?
  5.  Can my buyers buy the house before they sell their current one?

Information the attorney needs:

  1.  When will we receive the commitment letter?
  2.  Are there any conditions in the commitment that are of concern?
  3.  When will the appraisal be ordered?
  4.  When will the bank be ready to close?

  Closing a loan these days feels like trying to coordinate the Super Bowl.  Understanding that, the proper tool to achieve the goal is information and processing it properly.  Just think about this-how many times have you called someone needing a price quote or information necessary to get a job done and not received a phone call back?  Or, received a phone call after days or weeks?  If you have the same experience as me, it happens all the time.  Frankly, it amazes me how some people stay in business and thrive.  delivering quick and efficient information is the key to a pleasant mortgage experience for al involved.